e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file Number 001-35066
IMAX Corporation
(Exact name of registrant as specified in its charter)
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Canada
(State or other jurisdiction of
incorporation or organization)
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98-0140269
(I.R.S. Employer
Identification Number) |
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2525 Speakman Drive,
Mississauga, Ontario, Canada
(Address of principal executive offices)
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L5K 1B1
(Postal Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting Company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares of each of the issuers classes of common stock, as of the
latest practicable date:
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Class |
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Outstanding as of June 30, 2011 |
Common stock, no par value
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64,567,556 |
IMAX CORPORATION
Table of Contents
2
IMAX CORPORATION
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this quarterly report may constitute forward-looking
statements within the meaning of the United States Private Securities Litigation Reform Act of
1995. These forward-looking statements include, but are not limited to, references to future
capital expenditures (including the amount and nature thereof), business and technology strategies
and measures to implement strategies, competitive strengths, goals, expansion and growth of
business, operations and technology, plans and references to the future success of IMAX Corporation
together with its wholly-owned subsidiaries (the Company) and expectations regarding the
Companys future operating, financial and technological 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; including the length and severity of the current economic downturn, the
opportunities (or lack thereof) that may be presented to and pursued by the Company; competitive
actions by other companies; the performance of IMAX DMR films; conditions in the in-home and
out-of-home entertainment industries; the signing of theater system agreements; changes in laws or
regulations; conditions, changes and developments in the commercial exhibition industry; the
failure to convert theater system backlog into revenue; risks related to new business initiatives;
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; risks related to foreign currency
transactions; risks related to the Companys prior restatements and the related litigation; 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®, IMAX® Dome, IMAX® 3D, IMAX® 3D Dome, Experience
It In IMAX®, The IMAX Experience®,
An IMAX Experience®, An IMAX 3D
Experience®, IMAX DMR®, DMR®, IMAX MPX®, IMAX think
big® and think big® are
trademarks and trade names of
the Company or its
subsidiaries that are registered or otherwise protected under laws of various jurisdictions.
3
IMAX CORPORATION
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
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Page |
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The following Condensed Consolidated Financial Statements are filed as part of this Report: |
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5 |
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6 |
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7 |
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8 |
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4
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
In accordance with United States Generally Accepted Accounting Principles
(In thousands of U.S. dollars)
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June 30, |
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December 31, |
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2011 |
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2010 |
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(unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
23,232 |
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$ |
30,390 |
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Accounts receivable, net of allowance for doubtful accounts of $1,534 (December 31,
2010 $1,988) |
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44,243 |
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39,570 |
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Financing receivables (notes 3 and 17(c)) |
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79,558 |
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73,601 |
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Inventories (note 4) |
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17,746 |
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15,275 |
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Prepaid expenses |
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3,934 |
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2,832 |
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Film assets |
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2,752 |
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2,449 |
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Property, plant and equipment (note 5) |
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89,097 |
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74,035 |
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Other assets (notes 17(d) and 17(e)) |
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13,896 |
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12,350 |
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Deferred income taxes (note 13(a)) |
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56,155 |
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57,122 |
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Goodwill |
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39,027 |
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39,027 |
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Other intangible assets (note 6) |
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2,492 |
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2,437 |
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Total assets |
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$ |
372,132 |
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$ |
349,088 |
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Liabilities |
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Bank indebtedness (note 7) |
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$ |
34,583 |
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$ |
17,500 |
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Accounts payable |
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30,070 |
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20,384 |
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Accrued liabilities (notes 8(a), 8(c), 9, 14(b), 16(a), and 16(c)) |
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55,104 |
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78,994 |
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Deferred revenue |
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81,589 |
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73,752 |
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Total liabilities |
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201,346 |
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190,630 |
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Commitments, contingencies and guarantees (notes 8 and 9) |
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Shareholders equity |
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Capital stock (note 14) common shares no par value. Authorized unlimited number. |
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Issued and outstanding 64,567,556 (December 31, 2010 64,145,573) |
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300,282 |
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292,977 |
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Other equity |
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12,506 |
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7,687 |
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Deficit |
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(140,387 |
) |
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(141,209 |
) |
Accumulated other comprehensive loss |
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(1,615 |
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(997 |
) |
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Total shareholders equity |
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170,786 |
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158,458 |
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Total liabilities and shareholders equity |
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$ |
372,132 |
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$ |
349,088 |
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(the accompanying notes are an integral part of these condensed consolidated financial statements)
5
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
In accordance with United States Generally Accepted Accounting Principles
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)
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Three Months |
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Six Months |
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Ended June 30, |
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Ended June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenues |
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Equipment and product sales |
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$ |
19,750 |
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$ |
16,363 |
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$ |
39,981 |
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$ |
27,994 |
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Services (note 10(c)) |
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26,993 |
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28,792 |
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45,267 |
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69,023 |
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Rentals (note 10(c)) |
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9,015 |
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9,352 |
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14,066 |
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29,203 |
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Finance income |
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1,474 |
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1,091 |
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2,828 |
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2,161 |
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Other |
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250 |
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57,232 |
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55,598 |
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102,392 |
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128,381 |
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Costs and expenses applicable to revenues |
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Equipment and product sales (note 10(a)) |
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9,661 |
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8,019 |
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20,512 |
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16,153 |
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Services (notes 10(a) and 10(c)) |
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17,525 |
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18,210 |
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28,902 |
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32,177 |
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Rentals (note 10(a)) |
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3,744 |
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2,329 |
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6,010 |
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4,712 |
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Other |
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20 |
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30,930 |
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28,558 |
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55,444 |
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53,042 |
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Gross margin |
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26,302 |
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27,040 |
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46,948 |
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75,339 |
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Selling, general and administrative expenses (note 10(b))
(including share-based compensation expense of $4.6
million and $8.5 million for the three and six months ended June
30, 2011, respectively (2010 - recovery of $3.8 million and
expense of $5.6 million, respectively)) |
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19,470 |
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11,133 |
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36,338 |
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30,662 |
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Provision for arbitration award (note 9(c)) |
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2,055 |
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Research and development |
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2,117 |
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1,219 |
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3,985 |
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2,462 |
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Amortization of intangibles |
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116 |
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115 |
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228 |
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245 |
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Receivable provisions, net of recoveries (note 12) |
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151 |
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353 |
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359 |
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366 |
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Income from operations |
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4,448 |
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14,220 |
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3,983 |
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41,604 |
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Interest income |
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13 |
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13 |
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31 |
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297 |
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Interest expense |
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(551 |
) |
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(535 |
) |
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(994 |
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(1,187 |
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Income from operations before income taxes |
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3,910 |
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13,698 |
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3,020 |
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40,714 |
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Provision for income taxes |
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(1,634 |
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(396 |
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(1,325 |
) |
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(831 |
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Loss from equity-accounted investments |
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(451 |
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(873 |
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Net income |
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$ |
1,825 |
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$ |
13,302 |
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$ |
822 |
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$ |
39,883 |
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Net income per share basic and diluted: (note 14(c)) |
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Net income per share basic |
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$ |
0.03 |
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$ |
0.21 |
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$ |
0.01 |
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$ |
0.63 |
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Net income per share diluted |
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$ |
0.03 |
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$ |
0.20 |
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$ |
0.01 |
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$ |
0.60 |
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Comprehensive income consists of: |
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Net income |
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$ |
1,825 |
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$ |
13,302 |
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$ |
822 |
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$ |
39,883 |
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Amortization of actuarial loss on defined benefit plan (note 16(a)) |
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53 |
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107 |
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Unrealized hedging gain (loss) (note 17(d)) |
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49 |
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(387 |
) |
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|
351 |
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|
(179 |
) |
Realization of hedging (gains) losses upon settlement (note 17(d)) |
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(466 |
) |
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7 |
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(724 |
) |
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(542 |
) |
Unrealized change in market value of available-for-sale investment (note
17(e)) |
|
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(488 |
) |
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(488 |
) |
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Tax effect of movement in comprehensive income (note 13(b)) |
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164 |
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136 |
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Comprehensive income, net of income taxes |
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$ |
1,137 |
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$ |
12,922 |
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$ |
204 |
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$ |
39,162 |
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(the accompanying notes are an integral part of these condensed consolidated financial statements)
6
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In accordance with United States Generally Accepted Accounting Principles
(In thousands of U.S. dollars)
(Unaudited)
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Six Months |
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Ended June 30, |
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2011 |
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2010 |
|
Cash (used in) provided by: |
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Operating Activities |
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Net income |
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$ |
822 |
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$ |
39,883 |
|
Items not involving cash: |
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Depreciation and amortization (note 11(c)) |
|
|
12,183 |
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|
|
10,696 |
|
Write-downs, net of recoveries (note 11(d)) |
|
|
370 |
|
|
|
578 |
|
Change in deferred income taxes |
|
|
1,104 |
|
|
|
|
|
Stock and other non-cash compensation |
|
|
8,944 |
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|
|
6,050 |
|
Provision for arbitration award (note 9(c)) |
|
|
2,055 |
|
|
|
|
|
Unrealized foreign currency exchange (gain) loss |
|
|
(97 |
) |
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|
729 |
|
Loss on equity-accounted investments |
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|
873 |
|
|
|
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|
Gain on non-cash contribution to equity-accounted investees |
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|
(404 |
) |
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|
Change in cash surrender value of life insurance |
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|
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|
47 |
|
Investment in film assets |
|
|
(6,288 |
) |
|
|
(5,725 |
) |
Changes in other non-cash operating assets and liabilities (note 11(a)) |
|
|
(30,002 |
) |
|
|
(12,335 |
) |
|
|
|
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|
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|
Net cash (used in) provided by operating activities |
|
|
(10,440 |
) |
|
|
39,923 |
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Investing Activities |
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Purchase of property, plant and equipment |
|
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(2,227 |
) |
|
|
(2,808 |
) |
Investment in joint revenue sharing equipment |
|
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(14,886 |
) |
|
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(2,325 |
) |
Investment in new business ventures |
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(760 |
) |
|
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(667 |
) |
Cash surrender value of life insurance |
|
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|
3,179 |
|
Acquisition of other assets |
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|
(39 |
) |
Acquisition of other intangible assets |
|
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(504 |
) |
|
|
(298 |
) |
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|
|
Net cash used in investing activities |
|
|
(18,377 |
) |
|
|
(2,958 |
) |
|
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|
|
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|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Increase in bank indebtedness (note 7) |
|
|
49,583 |
|
|
|
|
|
Repayment of bank indebtedness (note 7) |
|
|
(32,500 |
) |
|
|
(25,208 |
) |
Credit facility amendment fees paid |
|
|
(259 |
) |
|
|
|
|
Common shares issued stock options exercised (note 14(d)) |
|
|
5,095 |
|
|
|
5,057 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
21,919 |
|
|
|
(20,151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash |
|
|
(260 |
) |
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents during the period |
|
|
(7,158 |
) |
|
|
16,927 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
30,390 |
|
|
|
20,081 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
23,232 |
|
|
$ |
37,008 |
|
|
|
|
|
|
|
|
(the accompanying notes are an integral part of these condensed consolidated financial statements)
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
IMAX Corporation, together with its wholly-owned subsidiaries (the Company), reports its
results under United States Generally Accepted Accounting Principles (U.S. GAAP).
The condensed consolidated financial statements include the accounts of the Company, except
for subsidiaries which the Company has identified as variable interest entities (VIEs) where the
Company is not the primary beneficiary. The nature of the Companys business is such that the
results of operations for the interim periods presented are not necessarily indicative of results
to be expected for the fiscal year. In the opinion of management, the information contained herein
reflects all adjustments necessary to make the results of operations for the interim periods a fair
statement of such operations.
The Company has evaluated its various variable interests to determine whether they are VIEs as
required by the Consolidation Topic of the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC or Codification). The Company has 8 film production companies that
are VIEs. For two of the Companys film production companies, the Company has determined that it is
the primary beneficiary of these entities as the Company has the power to direct the activities
that most significantly impact the respective VIEs economic performance and has the obligation to
absorb losses or the right to receive benefits from the respective VIE that could potentially be
significant to the respective VIE. The Company continues to consolidate these entities, with no
material impact on the operating results or financial condition of the Company, as these production
companies have total assets of $nil (December 31, 2010 $nil) and total liabilities of $nil as at
June 30, 2011 (December 31, 2010 $nil). For the other 6 film production companies which are
VIEs, the Company did not consolidate these film entities since it does not have the power to
direct activities and does not absorb the majority of the expected losses or expected residual
returns. The Company equity accounts for these entities. As at June 30, 2011, these 6 VIEs have
total assets of $12.7 million (December 31, 2010 $11.1 million) and total liabilities of $12.7
million (December 31, 2010 $11.1 million). Earnings of the investees included in the Companys
condensed consolidated statement of operations amounted to $nil and $nil for the three and six
months ended June 30, 2011, respectively (2010 $nil and $nil, respectively). The carrying value
of these investments in VIEs that are not consolidated is $nil at June 30, 2011 (December 31, 2010
$nil). A loss in value of an investment other than a temporary decline is recognized as a charge
to the condensed consolidated statement of operations.
The Company accounts for investments in new business ventures using the guidance of the FASB
ASC 323 Investments Equity Method and Joint Ventures (ASC 323) and the FASB ASC 320 -
Investments in Debt and Equity Securities (ASC 320), as appropriate. At June 30, 2011, the
equity method of accounting is being utilized for an investment with a carrying value of $3.3
million (December 31, 2010 $1.6 million). The Company has determined it is not the primary
beneficiary of this VIE, and therefore it has not been consolidated. In addition, during 2010, the
Company made an investment in preferred stock of another business venture of $1.5 million which
meets the criteria for classification as a debt security under ASC 320 and is recorded at its fair
value of $1.0 million at June 30, 2011 (December 31, 2010 $1.5 million). This investment is
classified as an available-for-sale investment. The total carrying value of investments in new
business ventures at June 30, 2011 is $4.3 million (December 31, 2010 $3.1 million) and is
recorded in Other Assets.
All significant intercompany accounts and transactions, including all unrealized intercompany
profits on transactions with equity-accounted investees, have been eliminated.
The year-end condensed consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by U.S. GAAP.
These interim financial statements should be read in conjunction with the consolidated
financial statements included in the Companys 2010 Annual Report on Form 10-K for the year ended
December 31, 2010 (the 2010 Form 10-K) 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 Companys financial statements for the year ended
December 31, 2010, except as described in note 2.
8
2. New Accounting Standards and Accounting Changes
Changes in Accounting Policies
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)
(ASU 2009-13) which amends ASC 605-25, Revenue Recognition: Multiple-Element Arrangements. ASU
2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting and how to allocate consideration to each unit of accounting in
the arrangement. This ASU removes the fair value criteria for determining separate units of
accounting and replaces all references to fair value as the measurement criteria with the term
selling price and establishes a hierarchy for determining the selling price of a deliverable.
Consideration in a multiple-element arrangement is allocated at the inception of the arrangement to
all deliverables on the basis of the relative selling price. When applying the relative selling
price method, the selling price for each deliverable is determined using vendor-specific objective
evidence (VSOE) of the selling price, or third-party evidence (TPE) of the selling price. If
neither VSOE nor TPE of the selling price exists for a deliverable, the Company will use its best
estimate of the selling price (BESP) for that deliverable. ASU No. 2009-13 also eliminates the
use of the residual value method for determining the allocation of arrangement consideration.
Additionally, ASU 2009-13 requires expanded disclosures and is effective for fiscal years beginning
on or after June 15, 2010. On January 1, 2011, the Company adopted the accounting requirements in
ASU 2009-13 prospectively for revenue arrangements entered into or materially modified after the
date of adoption. As described below, the adoption of these updates did not have, nor are they
expected to have, a material effect on the Companys financial condition or results of operations.
The amended standard with respect to multiple-element arrangements is not expected to
materially change the allocation of arrangement consideration to the Companys units of accounting.
The pattern and timing of revenue recognition for those arrangements entered into or materially
modified after the date of adoption may be affected as a result of the adoption of the amended ASC
605-25 requirements. The Company will be required to develop a selling price for each deliverable
using VSOE, TPE or BESP and allocate consideration amongst deliverables and to recognize revenue
using that allocated consideration for the delivered units of accounting in the current period. For
arrangements entered into or modified prior to the adoption date, the Company defers all
consideration received and receivable under arrangements for which the selling price of an
undelivered item has not yet been established.
In October 2009, the FASB issued ASU No. 2009-14, Software (Topic 985): Certain Revenue
Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force)
(ASU 2009-14). ASU 2009-14 amends ASC 985-605, Software: Revenue Recognition, such that
tangible products, containing both software and non-software components that function together to
deliver the tangible products essential functionality, are no longer within the scope of ASC
985-605. It also amends the determination of how arrangement consideration should be allocated to
deliverables in a multiple-deliverable revenue arrangement. The amendments in this update are
effective, on a prospective basis, for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. On January 1, 2011, the Company adopted the
accounting requirements in ASU 2009-14. The application of this amended standard does not have an
impact on the Companys condensed consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value
Measurements, (ASU 2010-06) to amend topic ASC 820 Fair Value Measurements and Disclosures, by
improving disclosure requirements in order to increase transparency in financial reporting. ASU
2010-06 requires that an entity disclose separately the amounts of significant transfers in and out
of Levels 1 and 2 fair value measurements and describe the reasons for the transfers. Furthermore,
an entity should present information about purchases, sales, issuances, and settlements for Level 3
fair value measurements. ASU 2010-06 also clarifies existing disclosures for the level of
disaggregation and disclosures about input and valuation techniques. The new disclosures and
clarifications of existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements for the activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim periods within those
fiscal years. On January 1, 2010, the Company adopted the disclosure amendments in ASU 2010-06,
except for the amendments to Level 3 fair value measurements as described above, and has expanded
disclosures as presented in Note 17. On January 1, 2011, the Company adopted the disclosure
amendments in ASU 2010-06 pertaining to Level 3 fair value measurements and has expanded
disclosures as presented in note 17(b).
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20). The
objective of ASU 2010-20 is to provide financial statement users with greater transparency about an
entitys allowance for credit losses and the credit quality of its financing receivables. Under
9
ASU 2010-20, an entity is required to provide disclosures so that financial statement users
can evaluate the nature of the credit risk inherent in the entitys portfolio of financing
receivables, how that risk is analyzed and assessed to arrive at the allowance for credit losses,
and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 is
applicable to all entities with financing receivables, excluding short-term trade accounts
receivable or receivables measured at fair value or lower of cost or fair value. It is effective
for interim and annual reporting periods ending on or after December 15, 2010. Comparative
disclosures are required to be disclosed for those reporting periods ending after initial adoption.
On December 31, 2010, the Company adopted the disclosure requirements in ASU 2010-20 and has
expanded disclosures as presented in note 17(c).
In December 2010, the FASB issued ASU No. 2010-28, Intangibles Goodwill and Other (Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts (ASU 2010-28). The objective of ASU 2010-28 is to address questions
about entities with reporting units with zero or negative carrying amounts. The amendments in ASU
2010-28 modify Step 1 of the goodwill impairment test for reporting units with zero or negative
carrying amounts. For those reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a goodwill impairment exists by
considering whether there are any adverse qualitative factors indicating that an impairment may
exist. ASU 2010-28 is applicable to all entities that have recognized goodwill and have one or more
reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment
test is zero or negative. For public entities, the amendments are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2010. On January 1, 2011, the
Company adopted the accounting requirements in ASU 2010-28. This amended standard does not have an
impact on the Companys condensed consolidated financial statements at this time as the Company
does not have any reporting units with zero or negative amounts for goodwill impairment testing
purposes.
In January 2011, the FASB issued ASU No. 2011-01, Receivables (ASC Topic 310): Deferral of
the Effective Date of Disclosures about Troubled Debt Restructuring in Update No. 2010-20 (ASU
2011-01) which delays the effective date of disclosure requirements for troubled debt
restructurings in ASU 2010-20 for public entities. This guidance is effective immediately. The
adoption of ASU 2011-01 did not have a material impact on the Companys condensed consolidated
financial statements.
Recently Issued FASB Accounting Standard Codification Updates
In April 2011, the FASB issued ASU No. 2011-02, Receivables (ASC Topic 310): A Creditors
Determination of Whether a Restructuring is a Troubled Debt Restructuring in Update No 2010-20
(ASU 2011-02). ASU 2011-02 clarifies which loan modifications constitute troubled debt
restructurings and is intended to assist creditors in determining whether a modification of the
terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for
purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In
evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must
separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist:
(a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial
difficulties. For public entities, the amendments in ASU 2011-02 are effective for the first
interim or annual period beginning on or after June 15, 2011, with retrospective application to the
beginning of the annual period of adoption. Early application by public entities is not permitted.
The amendments in ASU 2011-02 do not have an impact on the Companys condensed consolidated
financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (ASC Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs (ASU 2011-04). The standards set forth in ASU 2011-04 supersede most of the accounting
guidance currently found in Topic 820 of the FASBs ASC. The amendments will improve comparability
of fair value measurements presented and disclosed in financial statements prepared with GAAP and
International Financial Reporting Standards (IFRS). The amendments also clarify the application
of existing fair value measurement requirements. These amendments include (1) the application of
the highest and best use and valuation premise concepts, (2) measuring the fair value of an
instrument classified in a reporting entitys shareholders equity and (3) disclosing quantitative
information about the unobservable inputs used within the Level 3 hierarchy. For public entities,
the amendments are effective for interim and annual periods beginning after December 15, 2011 on a
prospective basis. Early application by public entities is not permitted. The Company is currently
evaluating the potential impact of ASU 2011-04 on its condensed consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation
of Comprehensive Income (ASU 2011-05). The amendments contained within this update require that
all nonowner changes in shareholders equity be presented either in a single continuous statement
of comprehensive income or in two separate but consecutive statements, eliminating the option to
present the components of other comprehensive income as part of the statement of changes in
shareholders equity. The objective of this amendment is to improve the comparability, consistency,
and transparency of financial reporting and to increase the
10
prominence of items reported in other comprehensive income. For public entities, the
amendments are effective for interim and annual periods beginning after December 15, 2011, on a
retrospective basis. Early application by public entities is permitted. The Company is currently
evaluating the potential impact of ASU 2011-05 on its condensed consolidated financial statements.
3. Financing Receivables
Financing receivables, consisting of net investment in sales-type leases and receivables from
financed sales of theater systems are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Gross minimum lease payments receivable |
|
$ |
35,897 |
|
|
$ |
49,977 |
|
Unearned finance income |
|
|
(11,175 |
) |
|
|
(15,158 |
) |
|
|
|
|
|
|
|
Minimum lease payments receivable |
|
|
24,722 |
|
|
|
34,819 |
|
Accumulated allowance for uncollectible amounts |
|
|
(2,592 |
) |
|
|
(4,838 |
) |
|
|
|
|
|
|
|
Net investment in leases |
|
|
22,130 |
|
|
|
29,981 |
|
|
|
|
|
|
|
|
Gross financed sales receivables |
|
|
81,570 |
|
|
|
62,127 |
|
Unearned finance income |
|
|
(24,076 |
) |
|
|
(18,441 |
) |
|
|
|
|
|
|
|
Financed sales receivables |
|
|
57,494 |
|
|
|
43,686 |
|
Accumulated allowance for uncollectible amounts |
|
|
(66 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
Net financed sales receivables |
|
|
57,428 |
|
|
|
43,620 |
|
|
|
|
|
|
|
|
Total financing receivables |
|
$ |
79,558 |
|
|
$ |
73,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net financed sales receivables due within one year |
|
$ |
7,734 |
|
|
$ |
6,166 |
|
Net financed sales receivables due after one year |
|
$ |
49,694 |
|
|
$ |
37,454 |
|
As at June 30, 2011, the financed sale receivables had a weighted average effective interest
rate of 8.8% (December 31, 2010 8.8%).
4. Inventories
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Raw materials |
|
$ |
3,542 |
|
|
$ |
4,693 |
|
Work-in-process |
|
|
2,708 |
|
|
|
2,293 |
|
Finished goods |
|
|
11,496 |
|
|
|
8,289 |
|
|
|
|
|
|
|
|
|
|
$ |
17,746 |
|
|
$ |
15,275 |
|
|
|
|
|
|
|
|
At June 30, 2011, finished goods inventory for which title had passed to the customer and
revenue was deferred amounted to $7.4 million (December 31, 2010 $3.2 million).
Inventories at June 30, 2011 include provisions for excess and obsolete inventory based upon
current estimates of net realizable value considering future events and conditions of $4.3 million
(December 31, 2010 $4.4 million).
11
5. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2011 |
|
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
Cost |
|
|
Depreciation |
|
|
Value |
|
Equipment leased or held for use |
|
|
|
|
|
|
|
|
|
|
|
|
Theater system components(1)(2) |
|
$ |
98,740 |
|
|
$ |
35,762 |
|
|
$ |
62,978 |
|
Camera equipment(5) |
|
|
6,355 |
|
|
|
6,048 |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,095 |
|
|
|
41,810 |
|
|
|
63,285 |
|
|
|
|
|
|
|
|
|
|
|
Assets under construction(3) |
|
|
12,719 |
|
|
|
|
|
|
|
12,719 |
|
|
|
|
|
|
|
|
|
|
|
Other property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
1,593 |
|
|
|
|
|
|
|
1,593 |
|
Buildings |
|
|
14,723 |
|
|
|
9,157 |
|
|
|
5,566 |
|
Office and production equipment(4) |
|
|
28,051 |
|
|
|
23,671 |
|
|
|
4,380 |
|
Leasehold improvements |
|
|
8,774 |
|
|
|
7,220 |
|
|
|
1,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,141 |
|
|
|
40,048 |
|
|
|
13,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
170,955 |
|
|
$ |
81,858 |
|
|
$ |
89,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
Cost |
|
|
Depreciation |
|
|
Value |
|
Equipment leased or held for use |
|
|
|
|
|
|
|
|
|
|
|
|
Theater system components(1)(2) |
|
$ |
86,249 |
|
|
$ |
33,775 |
|
|
$ |
52,474 |
|
Camera equipment(5) |
|
|
6,355 |
|
|
|
6,008 |
|
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,604 |
|
|
|
39,783 |
|
|
|
52,821 |
|
|
|
|
|
|
|
|
|
|
|
Assets under construction(3) |
|
|
8,305 |
|
|
|
|
|
|
|
8,305 |
|
|
|
|
|
|
|
|
|
|
|
Other property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
1,593 |
|
|
|
|
|
|
|
1,593 |
|
Buildings |
|
|
14,723 |
|
|
|
8,906 |
|
|
|
5,817 |
|
Office and production equipment(4) |
|
|
27,172 |
|
|
|
23,454 |
|
|
|
3,718 |
|
Leasehold improvements |
|
|
8,603 |
|
|
|
6,822 |
|
|
|
1,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,091 |
|
|
|
39,182 |
|
|
|
12,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
153,000 |
|
|
$ |
78,965 |
|
|
$ |
74,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in theater system components are assets with costs of $18.7 million (December 31,
2010 $19.9 million) and accumulated depreciation of $17.9 million (December 31, 2010
$19.0 million) that are leased to customers under operating leases. |
|
(2) |
|
Included in theater system components are assets with costs of $75.8 million (December 31,
2010 $62.8 million) and accumulated depreciation of $15.1 million (December 31, 2010
$12.0 million) that are used in joint revenue sharing arrangements. |
|
(3) |
|
Included in assets under construction are components with costs of $10.9 million (December
31, 2010 $6.2 million) that will be utilized to construct assets to be used in joint
revenue sharing arrangements. |
|
(4) |
|
Included in office and production equipment are assets under capital lease with costs of $1.3
million (December 31, 2010 $1.5 million) and accumulated depreciation of $1.3 million
(December 31, 2010 $1.4 million). |
|
(5) |
|
Included in camera equipment is fully amortized equipment still in use by the Company. |
12
6. Other Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2011 |
|
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
Cost |
|
|
Amortization |
|
|
Value |
|
Patents and trademarks |
|
$ |
7,570 |
|
|
$ |
5,078 |
|
|
$ |
2,492 |
|
Other |
|
|
250 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,820 |
|
|
$ |
5,328 |
|
|
$ |
2,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
Cost |
|
|
Amortization |
|
|
Value |
|
Patents and trademarks |
|
$ |
7,289 |
|
|
$ |
4,852 |
|
|
$ |
2,437 |
|
Other |
|
|
250 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,539 |
|
|
$ |
5,102 |
|
|
$ |
2,437 |
|
|
|
|
|
|
|
|
|
|
|
The Company expects to amortize approximately $0.2 million of other intangible assets for the
remainder of 2011 and $0.3 million for each of the next 5 years, respectively. Fully amortized
other intangible assets are still in use by the Company.
During the six months ended June 30, 2011, the Company acquired $0.3 million in patents and
trademarks. The net book value of these patents and trademarks was $0.3 million as at June 30,
2011. The weighted average amortization period for these additions was 10 years.
During the three and six months ended June 30, 2011, the Company incurred costs of $0.1
million, respectively, to renew or extend the term of acquired other intangible assets which were
recorded in selling, general and administrative expenses.
7. Credit Facility
On June 2, 2011, the Company amended and restated the terms of its existing senior secured
credit facility (the Prior Credit Facility), which had been scheduled to mature on October 31,
2013. The amended and restated facility (the Credit Facility), with a scheduled maturity of
October 31, 2015, has a maximum borrowing capacity of $110.0 million, consisting of revolving
asset-based loans of up to $50.0 million subject to a borrowing base calculation (as described
below) and including a sublimit of $20.0 million for letters of credit, and a revolving term loan
of up to $60.0 million. The Prior Credit Facility had a maximum borrowing capacity of $75.0
million. Certain of the Companys subsidiaries serve as guarantors (the Guarantors) of the
Companys obligations under the Credit Facility. The Credit Facility is collateralized by a first
priority security interest in all of the present and future assets of the Company and the
Guarantors.
The terms of the Credit Facility are set forth in the Second Amended and Restated Credit
Agreement (the Credit Agreement), dated June 2, 2011, among the Company, Wells Fargo Capital
Finance Corporation (Canada), as agent, lender, sole lead arranger and sole bookrunner (Wells
Fargo), and Export Development Canada, as lender (EDC, together with Wells Fargo, the Lenders)
and in various collateral and security documents entered into by the Company and the Guarantors.
Each of the Guarantors has also entered into a guarantee in respect of the Companys obligations
under the Credit Facility.
The revolving asset-based portion of the Credit Facility permits maximum aggregate borrowings
equal to the lesser of:
(i) $50.0 million, and
(ii) a collateral calculation based on the percentages of the book values of certain of the
Companys net investment in sales-type leases, financing receivables, certain trade accounts
receivable, finished goods inventory allocated to backlog contracts and the appraised values of the
expected future cash flows related to operating leases and the Companys owned real property,
reduced by certain accruals and accounts payable and subject to other conditions, limitations and
reserve right requirements.
13
Two years after entry into the Credit Facility any outstanding borrowings under the revolving
term loan portion of the Credit Facility convert to a term loan to be repaid in accordance with the
terms of the Credit Facility, any undrawn amounts under the revolving term loan are cancelled and
the Company may not request any further advances under the revolving term loan.
The Company borrowed $29.6 million from the revolving term loan portion of the Credit Facility
to repay $15.0 million in outstanding indebtedness under the revolving portion of the Prior Credit
Facility and $14.6 million in outstanding indebtedness under the term loan portion of the Prior
Credit Facility. The Company subsequently borrowed another $5.0 million under the revolving term
loan portion of the Credit Facility. Under the Prior Credit Facility, the effective interest rate
for the three and six months ended June 30, 2011 for the term loan portion was 4.03% and 4.04%,
respectively (2010 4.04% and 4.03%, respectively) and 2.97% and 2.97%, respectively for the
revolving portion (2010 4.50% and 3.56%, respectively).
The revolving asset-based portion of the Credit Facility bears interest, at the Companys
option, at (i) LIBOR plus a margin of 2.00% per annum, or (ii) Wells Fargos prime rate plus a
margin of 0.50% per annum. The revolving term loan portion of the Credit Facility also bears
interest at the Companys option, at (i) LIBOR plus a margin of 2.00% per annum, or (ii) Wells
Fargos prime rate plus a margin of 0.50% per annum. Under the Credit Facility, the effective
interest rate for the three and six months ended June 30, 2011 for the revolving term loan portion
was 2.19% and 2.19%, respectively (2010 n/a). There was no amount drawn on the revolving
asset-based portion of the Credit Facility.
The Credit Facility provides that the Company will be required to maintain a ratio of funded
debt (as defined in the Credit Agreement) to EBITDA (as defined in the Credit Agreement) of not
more than 2:1. The Company will also be required to maintain a Fixed Charge Coverage Ratio (as
defined in the Credit Agreement) of not less than 1.1:1.0. At all times under the terms of the
Credit Facility, the Company is required to maintain minimum Excess Availability of not less than
$5.0 million and minimum Cash and Excess Availability of not less than $15.0 million. These amounts
were $49.2 million and $72.4 million at June 30, 2011 respectively. The Company was in compliance
with all of these requirements at June 30, 2011.
The Credit Facility contains typical affirmative and negative covenants, including covenants
that limit or restrict the ability of the Company and the guarantors 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.
The Credit Facility also contains customary events of default, including upon an acquisition
or change of control or upon a change in the business and assets of the Company or a Guarantor that
in each case is reasonably expected to have a material adverse effect on the Company or a
guarantor. If an event of default occurs and is continuing under the Credit Facility, the Lenders
may, among other things, terminate their commitments and require immediate repayment of all amounts
owed by the Company.
Bank indebtedness includes the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Term Loan (under the Prior Credit Facility) |
|
$ |
|
|
|
$ |
17,500 |
|
Revolving Term Loan |
|
|
34,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,583 |
|
|
$ |
17,500 |
|
|
|
|
|
|
|
|
Total amounts drawn and available under the Credit Facility at June 30, 2011 were $34.6
million and $69.6 million, respectively (December 31, 2010 $17.5 million and $40.0 million,
respectively).
At June 30, 2011, the Companys current borrowing capacity under the revolving asset-based
portion of the Credit Facility was $44.2 million after deduction for the minimum Excess
Availability reserve of $5.0 million (December 31, 2010 $40.0 million) and borrowing capacity
under the revolving term portion of the Credit Facility was $25.4 million. Outstanding borrowings
and letters of credit and advance payment guarantees were $nil as at June 30, 2011.
In accordance with the loan agreement, the Company is obligated to make payments on the
principal of the revolving term loan as follows:
14
|
|
|
|
|
2011 (six months remaining) |
|
$ |
|
|
2012 |
|
|
|
|
2013 |
|
|
|
|
2014 |
|
|
|
|
2015 |
|
|
34,583 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
34,583 |
|
|
|
|
|
Wells Fargo Foreign Exchange Facility
Within the Credit Facility, the Company has a $10.0 million sublimit to cover the Companys
settlement risk on its purchased foreign currency forward contracts and/or other swap arrangements
as defined in the Credit Facility. The settlement risk on its foreign currency forward contracts
was $nil as at June 30, 2011 as the fair value exceeded the notional value of the forward
contracts. The Company can enter into such arrangements up to a notional amount of $50.0 million,
of which $39.0 million is remaining at June 30, 2011.
Bank of Montreal Facility
As at June 30, 2011, the Company has available a $10.0 million facility (December 31, 2010
$10.0 million) with the Bank of Montreal for use solely in conjunction with the issuance of
performance guarantees and letters of credit fully insured by EDC (the Bank of Montreal
Facility). As at June 30, 2011, the Company has letters of credit and advance payment guarantees
outstanding of $1.2 million (December 31, 2010 $2.4 million) under the Bank of Montreal
Facility.
8. Commitments
(a) The Companys lease commitments consist of rent and equipment under operating leases. The
Company accounts for any incentives provided over the term of the lease. Total minimum annual
rental payments to be made by the Company as at June 30, 2011 for each of the years ended December
31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
|
Capital Leases |
|
2011 (six months remaining) |
|
$ |
2,760 |
|
|
$ |
12 |
|
2012 |
|
|
5,380 |
|
|
|
23 |
|
2013 |
|
|
2,089 |
|
|
|
21 |
|
2014 |
|
|
899 |
|
|
|
|
|
2015 |
|
|
510 |
|
|
|
|
|
Thereafter |
|
|
1,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,450 |
|
|
$ |
56 |
|
|
|
|
|
|
|
|
Rent expense was $1.0 million and $2.2 million for three and six months ended June 30, 2011,
respectively (2010 $1.2 million and $2.3 million, respectively) net of sublease rental of $nil
and less than $0.1 million, respectively (2010 $0.1 million and $0.2 million, respectively).
Recorded in the accrued liabilities balance as at June 30, 2011 is $3.8 million (December 31,
2010 $4.2 million) related to accrued rent and lease inducements being recognized as an offset
to rent expense over the term of the lease.
Purchase obligations under long-term supplier contracts as at June 30, 2011 were $18.8 million
(December 31, 2010 $13.6 million).
(b) As at June 30, 2011, the Company has letters of credit and advance payment guarantees
secured by the Credit Facility of $nil (December 31, 2010 $nil) outstanding. As at June 30,
2011, the Company also has letters of credit and advance payment guarantees outstanding of $1.2
million as compared to $2.4 million as at December 31, 2010, under the Bank of Montreal Facility.
(c) The Company compensates its sales force with both fixed and variable compensation.
Commissions on the sale or lease of the Companys theater systems are payable in graduated amounts
from the time of collection of the customers first payment to the
15
Company up to the collection of the customers last initial payment. At June 30, 2011, $1.3
million (December 31, 2010 $1.5 million) of commissions have been accrued and will be payable in
future periods.
9. Contingencies and Guarantees
The Company is involved in lawsuits, claims, and proceedings, including those identified
below, which arise in the ordinary course of business. In accordance with the Contingencies Topic
of the FASB ASC, the Company will make a provision for a liability when it is both probable that a
loss has been incurred and the amount of the loss can be reasonably estimated. The Company believes
it has adequate provisions for any such matters. The Company reviews these provisions in
conjunction with any related provisions on assets related to the claims at least quarterly and
adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of
legal counsel and other pertinent information related to the case. Should developments in any of
these matters outlined below cause a change in the Companys determination as to an unfavorable
outcome and result in the need to recognize a material provision, or, should any of these matters
result in a final adverse judgment or be settled for significant amounts, they could have a
material adverse effect on the Companys results of operations, cash flows, and financial position
in the period or periods in which such a change in determination, settlement or judgment occurs.
The Company expenses legal costs relating to its lawsuits, claims and proceedings as incurred.
(a) In March 2005, the Company, together with Three-Dimensional Media Group, Ltd. (3DMG),
filed a complaint in the U.S. District Court for the Central District of California, Western
Division, against In-Three, Inc. (In-Three) alleging patent infringement. On March 10, 2006, the
Company and In-Three entered into a settlement agreement settling the dispute between the Company
and In-Three. Despite the settlement reached between the Company and In-Three, co-plaintiff 3DMG
refused to dismiss its claims against In-Three. Accordingly, the Company and In-Three moved jointly
for a motion to dismiss the Companys and In-Threes claims. On August 24, 2010, the Court
dismissed all of the claims pending between the Company and In-Three, thus dismissing the Company
from the litigation.
On May 15, 2006, the Company initiated arbitration against 3DMG before the International
Centre for Dispute Resolution in New York (the ICDR), alleging breaches of the license and
consulting agreements between the Company and 3DMG. On June 15, 2006, 3DMG filed an answer denying
any breaches and asserting counterclaims that the Company breached the parties license agreement.
On June 21, 2007, the Arbitration Panel unanimously denied 3DMGs Motion for Summary Judgment filed
on April 11, 2007 concerning the Companys claims and 3DMGs counterclaims. The proceeding was
suspended on May 4, 2009 due to failure of 3DMG to pay fees associated with the proceeding. The
proceeding was further suspended on October 11, 2010 pending resolution of reexamination
proceedings currently pending involving one of 3DMGs patents. The Company will continue to pursue
its claims vigorously and believes that all allegations made by 3DMG are without merit. The Company
further believes that the amount of loss, if any, suffered in connection with the counterclaims
would not have a material impact on the financial position or results of operations of the Company,
although no assurance can be given with respect to the ultimate outcome of the arbitration.
(b) In January 2004, the Company and IMAX Theatre Services Ltd., a subsidiary of the Company,
commenced an arbitration seeking damages 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 EMLs affiliate, E-City Entertainment (I)
PVT Limited (E-City), seeking damages as a result of E-Citys breach of a September 2000 lease
agreement. An arbitration hearing took place in November 2005 against E-City which considered all
claims by the Company. On February 1, 2006, the ICC issued an award on liability finding
unanimously in the Companys favor on all claims. Further hearings took place in July 2006 and
December 2006. On August 24, 2007, the ICC issued an award unanimously in favor of the Company in
the amount of $9.4 million, consisting of past and future rents owed to the Company under its lease
agreements, plus interest and costs. In the award, the ICC upheld the validity and enforceability
of the Companys theater system contract. The Company thereafter submitted its application to the
arbitration panel for interest and costs. On March 27, 2008, the Panel issued a final award in
favor of the Company in the amount of $11.3 million, plus an additional $2,512 each day in interest
from October 1, 2007 until the date the award is paid, which the Company is seeking to enforce and
collect in full. On June 24, 2011, the Company commenced an application to the Ontario Superior
Court of Justice for recognition of the final award.
(c) In June 2003, Robots of Mars, Inc. (Robots) initiated an arbitration
proceeding against the Company in California with the American Arbitration Association pursuant to
arbitration provisions in two film production agreements entered into in 1994 and 1995 between
Robots predecessor-in-interest and a discontinued subsidiary of the Company (Ridefilm), asserting
claims for breach of contract, fraud, breach of fiduciary duty and intentional interference with
the contract. The Company discontinued its Ridefilm
16
business through a sale of the Ridefilm business and its assets to a third party in March 2001.
Robots sought an award of over $5.0 million in damages including contingent compensation that it
claims was owed under two production agreements, damages for tort claims, and punitive damages. The
arbitration hearings of this matter occurred in June and October 2009. The arbitrator issued a
final award on March 16, 2011, awarding Robots $0.4 million in damages and $0.3 million in
pre-judgment interest to date on its claim for breach of one of the Ridefilm production agreements.
The arbitrator found in the Companys favor on Robots tort claims, and awarded Robots no damages
on its claim for breach of the second production agreement. Despite finding in the Companys favor
on the vast majority of Robots claims, the arbitrator awarded Robots $1.2 million in attorneys
fees and costs pursuant to the attorneys fee provision set forth in the production agreements.
Robots initiated two separate proceedings in California state court and in Ontario, Canada, to
confirm the award. The Company removed the California state court proceeding to the United States
District Court for the Central District of California, and stayed the Ontario, Canada proceeding
pending resolution of the California proceeding. The Company opposed confirmation of the award and
sought to have it vacated in the California proceeding. On July 13, 2011, the California district
court granted Robots petition to confirm the award, and denied the Companys petition to vacate
the award. The Company intends to appeal the district courts denial of its petition to vacate to
the United States Court of Appeals for the Ninth Circuit. In addition, the Company will oppose
confirmation of the award and will seek to have it vacated in the Ontario, Canada proceeding. The
Company has accrued a liability of $2.1 million in respect of the arbitration award in this action.
(d) The Company and certain of its officers and directors were named as defendants in eight
purported class action lawsuits filed between August 11, 2006 and September 18, 2006, alleging
violations of U.S. federal securities laws. These eight actions were filed in the U.S. District
Court for the Southern District of New York. On January 18, 2007, the Court consolidated all eight
class action lawsuits and appointed Westchester Capital Management, Inc. as the lead plaintiff and
Abbey Spanier Rodd & Abrams, LLP as lead plaintiffs counsel. On October 2, 2007, plaintiffs filed
a consolidated amended class action complaint. The amended complaint, brought on behalf of
shareholders who purchased the Companys common stock between February 27, 2003 and July 20, 2007,
alleges primarily that the defendants engaged in securities fraud by disseminating materially false
and misleading statements during the class period regarding the Companys revenue recognition of
theater system installations, and failing to disclose material information concerning the Companys
revenue recognition practices. The amended complaint also added PricewaterhouseCoopers LLP, the
Companys auditors, as a defendant. The lawsuit seeks unspecified compensatory damages, costs, and
expenses. The defendants filed a motion to dismiss the amended complaint on December 10, 2007. On
September 16, 2008, the Court issued a memorandum opinion and order, denying the motion. On October
6, 2008, the defendants filed an answer to the amended complaint. On October 31, 2008, the
plaintiffs filed a motion for class certification. Fact discovery on the merits commenced on
November 14, 2008. On March 13, 2009, the Court granted a second prospective lead plaintiffs
request to file a motion for reconsideration of the Courts order naming Westchester Capital
Management, Inc. as the lead plaintiff and issued an order denying without prejudice plaintiffs
class certification motion pending resolution of the motion for reconsideration. On June 29, 2009,
the Court granted the motion for reconsideration and appointed Snow Capital Investment Partners,
L.P. as the lead plaintiff and Coughlin Stoia Geller Rudman & Robbins LLP as lead plaintiffs
counsel. Westchester Capital Management, Inc. appealed this decision, but the U.S. Court of Appeals
for the Second Circuit denied its petition on October 1, 2009. On April 22, 2010, the new lead
plaintiff filed its motion for class certification, defendants filed their oppositions to the
motion on June 10, 2010, and plaintiff filed its reply on July 30, 2010. On December 20, 2010, the
Court denied Snow Capital Investment Partners motion and ordered that all applications to be
appointed lead plaintiff must be filed within 20 days of the decision. Two applications for lead
plaintiff were filed, on January 10, 2011 and January 12, 2011, respectively. On April 14, 2011,
the Court issued an order appointing The Merger Fund as the lead plaintiff and Abbey Spanier Rodd &
Abrams, LLP as lead plaintiffs counsel. The merger fund filed a motion for class certification on
June 3, 2011, and on July 1, 2011, the Company filed its opposition. The Company is not able to
estimate a potential loss exposure at this time. The Company will vigorously defend the matter,
although no assurances can be given with respect to the outcome of such proceedings. The Companys
directors and officers insurance policy provides for reimbursement of costs and expenses incurred
in connection with this lawsuit as well as potential damages awarded, if any, subject to certain
policy limits and deductibles.
(e) A class action lawsuit was filed on September 20, 2006 in the Ontario Superior Court of
Justice against the Company and certain of its officers and directors, alleging violations of
Canadian securities laws. This lawsuit was brought on behalf of shareholders who acquired the
Companys securities between February 17, 2006 and August 9, 2006. The lawsuit is in an early
procedural stage and seeks unspecified compensatory and punitive damages, as well as costs and
expenses. As a result, the Company is unable to estimate a potential loss exposure at this time.
For reasons released December 14, 2009, the Court granted leave to the Plaintiffs to amend their
statement of claim to plead certain claims pursuant to the Securities Act (Ontario) against the
Company and certain individuals and granted certification of the action as a class proceeding.
These are procedural decisions, and do not contain any conclusions binding on a judge at trial as
to the factual or legal merits of the claim. Leave to appeal those decisions was denied. The
Company believes the allegations made against it in the statement of claim are meritless and will
vigorously defend the matter, although no assurance can be given with respect to the ultimate
outcome of such proceedings. The Companys directors and officers
17
insurance policy provides for reimbursement of costs and expenses incurred in connection with this
lawsuit as well as potential damages awarded, if any, subject to certain policy limits, exclusions
and deductibles.
(f) In November 2009, the Company filed suit against Sanborn Theatres (Sanborn) in the
United States District Court for the Central District of California alleging breach of Sanborns
agreement to make payments for the purchase of two IMAX theater systems from the Company and
seeking $1.7 million in compensatory damages. After granting Sanborn notice of default in
connection with the failure to make required payments under the agreement and upon Sanborns
failure to cure, the Company terminated its agreement with Sanborn. On May 11, 2010, Sanborn filed
counterclaims against the Company and AMC Entertainment Inc. (AMC Entertainment) and Regal
Cinemas, Inc. (Regal) in the U.S. District Court for the Central District of California alleging
breach of contract, fraud and unfair competition against the Company and alleging intentional
interference with contractual relations against AMC Entertainment and Regal. The lawsuits are at
early stages and, as a result the Company is not able to estimate a potential loss exposure, if
any, at this time. The Company will vigorously prosecute its claims and defenses in both matters,
although no assurances can be given with respect to the outcome of such proceedings.
(g) Since June 2006, the Company had been subject to informal inquiries by the Securities and
Exchange Commission (the SEC) and the Ontario Securities Commission (the OSC). In September
2010, the SEC issued a formal order of investigation in connection with its inquiry. On June 28,
2011, the SEC informed the Company that its investigation had been completed with respect to the
Company and that it did not intend to recommend any enforcement action against the Company. On June
28, 2011 the OSC informed the Company that the OSC Staff will not be seeking any orders pursuant to
s.127 of the Securities Act (Ontario).
(h) In addition to the matters described above, the Company is currently involved in other
legal proceedings which, in the opinion of the Companys management, will not materially affect the
Companys financial position or future operating results, although no assurance can be given with
respect to the ultimate outcome of any such proceedings.
(i) In the normal course of business, the Company enters into agreements that may contain
features that meet the definition of a guarantee. The Guarantees Topic of the FASB ASC defines a
guarantee to be a contract (including an indemnity) that contingently requires the Company to make
payments (either in cash, financial instruments, other assets, shares of its stock or provision of
services) to a third party based on (a) changes in an underlying interest rate, foreign exchange
rate, equity or commodity instrument, index or other variable, that is related to an asset, a
liability or an equity security of the counterparty, (b) failure of another party to perform under
an obligating agreement or (c) failure of another third party to pay its indebtedness when due.
Financial Guarantees
The Company has provided no significant financial guarantees to third parties.
Product Warranties
The following summarizes the accrual for product warranties that was recorded as part of
accrued liabilities in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Balance at the beginning of period |
|
$ |
160 |
|
|
$ |
36 |
|
Warranty redemptions |
|
|
(19 |
) |
|
|
(87 |
) |
Warranties issued |
|
|
59 |
|
|
|
211 |
|
|
|
|
|
|
|
|
Balance at the end of period |
|
$ |
200 |
|
|
$ |
160 |
|
|
|
|
|
|
|
|
Director/Officer Indemnifications
The Companys General By-law contains an indemnification of its directors/officers, former
directors/officers and persons who have acted at its request to be a director/officer of an entity
in which the Company is a shareholder or creditor, to indemnify them, to the extent permitted by
the Canada Business Corporations Act, against expenses (including legal fees), judgments, fines and
any amount actually and reasonably incurred by them in connection with any action, suit or
proceeding in which the directors and/or officers are sued as a result of their service, if they
acted honestly and in good faith with a view to the best interests of the Company. The nature of
the indemnification prevents the Company from making a reasonable estimate of the maximum potential
amount it
18
could be required to pay to counterparties. The Company has purchased directors and officers
liability insurance. No amount has been accrued in the condensed consolidated balance sheets as at
June 30, 2011 and December 31, 2010 with respect to this indemnity.
Other Indemnification Agreements
In the normal course of the Companys operations, the Company provides indemnifications to
counterparties in transactions such as: theater system lease and sale agreements and the
supervision of installation or servicing of the theater systems; film production, exhibition and
distribution agreements; real property lease agreements; and employment agreements. These
indemnification agreements require the Company to compensate the counterparties for costs incurred
as a result of litigation claims that may be suffered by the counterparty as a consequence of the
transaction or the Companys breach or non-performance under these agreements. While the terms of
these indemnification agreements vary based upon the contract, they normally extend for the life of
the agreements. A small number of agreements do not provide for any limit on the maximum potential
amount of indemnification; however, virtually all of the Companys system lease and sale agreements
limit such maximum potential liability to the purchase price of the system. The fact that the
maximum potential amount of indemnification required by the Company is not specified in some cases
prevents the Company from making a reasonable estimate of the maximum potential amount it could be
required to pay to counterparties. Historically, the Company has not made any significant payments
under such indemnifications and less than $0.1 million has been accrued in the condensed
consolidated financial statements with respect to the contingent aspect of these indemnities.
10. Condensed Consolidated Statements of Operations Supplemental Information
(a) Selling Expenses
The Company defers direct selling costs such as sales commissions and other amounts related to
its sale and sales-type lease arrangements until the related revenue is recognized. These costs,
included in costs and expenses applicable to revenues-equipment and product sales, totaled $0.1
million and $0.8 million for the three and six months ended June 30, 2011, respectively (2010
$0.4 million and $0.6 million, respectively).
Film exploitation costs, including advertising and marketing, totaled $2.1 million and $2.8
million for the three and six months ended June 30, 2011, respectively (2010 $0.4 million and
$1.1 million, respectively) and are recorded in costs and expenses applicable to revenues-services
as incurred.
Commissions are recognized as costs and expenses applicable to revenues-rentals in the month
they are earned. These costs totaled $0.7 million and $0.9 million for the three and six months
ended June 30, 2011, respectively (2010 $0.4 million and $0.8 million, respectively). Direct
advertising and marketing costs for each theater are charged to costs and expenses applicable to
revenues-rentals as incurred. These costs totaled $1.1 million and $1.4 million for the three and
six months ended June 30, 2011, respectively (2010 $0.2 million and $0.4 million, respectively).
(b) Foreign Exchange
Included in selling, general and administrative expenses for the three and six months ended
June 30, 2011 is a gain of $0.1 million and a gain of $0.7 million, respectively, for net foreign
exchange gains/losses related to the translation of foreign currency denominated monetary assets
and liabilities and unhedged foreign exchange contracts compared with a loss of $0.9 million and
$0.6 million for the three and six months ended June 30, 2010, respectively. See note 17(c) for
additional information.
(c) Collaborative Arrangements
Joint Revenue Sharing Arrangements
In a joint revenue sharing arrangement, the Company receives a portion of a theaters
box-office and concession revenues in exchange for placing a theater system at the theater
operators venue. Under joint revenue sharing arrangements, the customer has the ability and the
right to operate the hardware components or direct others to operate them in a manner determined by
the customer. The Companys joint revenue sharing arrangements are typically non-cancellable for 7
to 10 years with renewal provisions. Title to equipment under joint revenue sharing arrangements
does not transfer to the customer. The Companys joint revenue sharing arrangements do not contain
a guarantee of residual value at the end of the term. The customer is required to pay for executory
costs such as insurance and taxes and is required to pay the Company for maintenance and extended
warranty throughout the term. The
19
customer is responsible for obtaining insurance coverage for the theater systems commencing on the
date specified in the arrangements shipping terms and ending on the date the theater systems are
delivered back to the Company.
The Company has signed joint revenue sharing agreements with 17 exhibitors for a total of 332
theater systems, of which 204 theaters were operating as of June 30, 2011, the terms of which are
similar in nature, rights and obligations. The accounting policy for the Companys joint revenue
sharing arrangements is disclosed in note 2(n) of the Companys 2010 Form 10-K.
Amounts attributable to transactions arising between the Company and its customers under joint
revenue sharing arrangements are included in Rentals revenue and for the three and six months ended
June 30, 2011 amounted to $8.3 million and $12.4 million, respectively (2010 $8.5 million and
$27.4 million, respectively).
IMAX DMR
In an IMAX DMR arrangement, the Company transforms conventional motion pictures into the
Companys large screen format, allowing the release of Hollywood content to the IMAX theater
network. In a typical IMAX DMR film arrangement, the Company will absorb its costs for the digital
re-mastering of the film and then recoup this cost from a percentage of the gross box-office
receipts of the film, which generally range from 10-15%. The Company does not typically hold
distribution rights or the copyright to these films.
For the six months ended June 30, 2011, 15 IMAX DMR films were released to the IMAX theater
network. The Company has entered into arrangements with film producers to convert 9 additional
films which are expected to be released during the remainder of 2011, the terms of which are
similar in nature, rights and obligations. The accounting policy for the Companys IMAX DMR
arrangements is disclosed in note 2(n) of the Companys 2010 Form 10-K.
Amounts attributable to transactions arising between the Company and its customers under IMAX
DMR arrangements are included in Services revenue and for the three and six months ended June 30,
2011 amounted to $12.4 million and $19.7 million, respectively (2010 $14.5 million and $38.0
million, respectively).
Co-Produced Film Arrangements
In certain film arrangements, the Company co-produces a film with a third party whereby the
third party retains the copyright and rights to the film, except that the Company obtains exclusive
theatrical distribution rights to the film. Under these arrangements, both parties contribute
funding to the Companys wholly-owned production company for the production of the film and for
associated exploitation costs. Clauses in the film arrangements generally provide for the third
party to take over the production of the film if the cost of the production exceeds its approved
budget or if it appears as though the film will not be delivered on a timely basis.
The accounting policies relating to co-produced film arrangements are disclosed in notes 2(a)
and 2(n) of the Companys 2010 Form 10-K.
At June 30, 2011, the Company has 1 significant co-produced film arrangement which makes up
greater than 50% of the VIE total assets and liabilities balance of $12.7 million and 3 other
co-produced film arrangements, the terms of which are similar.
For the three and six months ended June 30, 2011, amounts totaling $2.5 million and $3.5
million, respectively (2010 $2.1 million and $3.7 million, respectively) attributable to
transactions between the Company and other parties involved in the production of the films have
been included in cost and expenses applicable to revenues-services.
20
11. Condensed Consolidated Statements of Cash Flows Supplemental Information
(a) Changes in other non-cash operating assets and liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Decrease (increase) in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
(4,950 |
) |
|
$ |
(2,563 |
) |
Financing receivables |
|
|
(6,035 |
) |
|
|
(1,232 |
) |
Inventories |
|
|
(1,269 |
) |
|
|
(4,513 |
) |
Prepaid expenses |
|
|
(1,102 |
) |
|
|
(2,724 |
) |
Commissions and other deferred selling expenses |
|
|
(117 |
) |
|
|
(757 |
) |
Insurance recoveries |
|
|
1,135 |
|
|
|
521 |
|
Other assets |
|
|
(1,441 |
) |
|
|
845 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
6,703 |
|
|
|
671 |
|
Accrued and other liabilities(1) |
|
|
(30,763 |
) |
|
|
(6,553 |
) |
Deferred revenue |
|
|
7,837 |
|
|
|
3,970 |
|
|
|
|
|
|
|
|
|
|
$ |
(30,002 |
) |
|
$ |
(12,335 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Decrease in accrued and other liabilities for the six months ended June 30, 2011 includes
payments of $23.7 million for variable stock-based compensation. |
(b) Cash payments made on account of:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Income taxes |
|
$ |
1,652 |
|
|
$ |
332 |
|
|
|
|
|
|
|
|
Interest |
|
$ |
570 |
|
|
$ |
1,104 |
|
|
|
|
|
|
|
|
(c) Depreciation and amortization are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Film assets |
|
$ |
6,584 |
|
|
$ |
5,741 |
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Joint revenue sharing arrangements |
|
|
3,062 |
|
|
|
2,815 |
|
Other property, plant and equipment |
|
|
1,927 |
|
|
|
1,743 |
|
Other intangible assets |
|
|
228 |
|
|
|
229 |
|
Other assets |
|
|
79 |
|
|
|
|
|
Deferred financing costs |
|
|
303 |
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
$ |
12,183 |
|
|
$ |
10,696 |
|
|
|
|
|
|
|
|
21
(d) Write-downs, net of recoveries, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Accounts receivables |
|
$ |
270 |
|
|
$ |
10 |
|
Financing receivables |
|
|
89 |
|
|
|
356 |
|
Property, plant and equipment |
|
|
11 |
|
|
|
|
|
Other intangible assets |
|
|
|
|
|
|
17 |
|
Inventories(1) |
|
|
|
|
|
|
195 |
|
|
|
|
|
|
|
|
|
|
$ |
370 |
|
|
$ |
578 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the six months ended June 30, 2011, the Company recorded a charge of $nil (2010 $0.2
million) in costs and expenses applicable to revenues services, primarily for its
film-based projector inventories due to lower net realizable values resulting from the
Companys development of a digital projection system. |
12. Receivable Provisions, Net of Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Accounts receivable provisions, net of recoveries |
|
$ |
151 |
|
|
$ |
16 |
|
|
$ |
270 |
|
|
$ |
10 |
|
Financing receivables, net of recoveries |
|
|
|
|
|
|
337 |
|
|
|
89 |
|
|
|
356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable provisions, net of recoveries |
|
$ |
151 |
|
|
$ |
353 |
|
|
$ |
359 |
|
|
$ |
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Income Taxes
(a) Income Taxes
The Companys effective tax rate differs from the statutory tax rate and varies from year to
year primarily as a result of numerous permanent differences, investment and other tax credits, the
provision for income taxes at different rates in foreign and other provincial jurisdictions,
enacted statutory tax rate increases or reductions in the year, changes due to foreign exchange,
changes in the Companys valuation allowance based on the Companys recoverability assessments of
deferred tax assets, and favorable or unfavorable resolution of various tax examinations. During
the last quarter of 2010, the Company released a valuation allowance of $54.8 million relating to
the future utilization of deductible temporary differences, tax credits, and certain net operating
loss carryforwards. During the six months ended June 30, 2011, there was no change in the Companys
estimates of the recoverability of its deferred tax assets based on an analysis of both positive
and negative evidence including projected future earnings.
As at June 30, 2011, the Company had net deferred income tax assets after valuation allowance
of $56.2 million (December 31, 2010 $57.1 million). As at June 30, 2011, the Company had a gross deferred income
tax asset before valuation allowance of $64.1 million (December 31, 2010 $65.1 million), against
which the Company is carrying a $7.9 million valuation allowance (December 31, 2010 $7.9
million).
As at June 30, 2011 and December 31, 2010, the Company had total unrecognized tax benefits
(including interest and penalties) of $4.7 million and $4.4 million, respectively, for
international withholding taxes. All of the unrecognized tax benefits could impact the Companys
effective tax rate if recognized. While the Company believes it has adequately provided for all tax
positions, amounts asserted by taxing authorities could differ from the Companys accrued position.
Accordingly, additional provisions on federal, state, provincial and foreign tax-related matters
could be recorded in the future as revised estimates are made or the underlying matters are settled
or otherwise resolved.
Consistent with its historical financial reporting, the Company has elected to classify
interest and penalties related to income tax liabilities, when applicable, as part of the interest
expense in its condensed consolidated statement of operations rather than income tax
22
expense. The Company recognized approximately less than $0.1 million and $0.1 million in
potential interest and penalties associated with unrecognized tax benefits for the three and six
months ended June 30, 2011, respectively (2010 $0.1 million and $0.1 million, respectively).
(b) Income Tax Effect on Comprehensive Income
The income tax expenses related to the following items included in other comprehensive income
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Amortization of actuarial gain on defined benefit plan |
|
$ |
(11 |
) |
|
$ |
|
|
|
$ |
(27 |
) |
|
$ |
|
|
Unrealized
change in market value of available-for-sale investment |
|
|
61 |
|
|
|
|
|
|
|
61 |
|
|
|
|
|
Unrealized hedging gain |
|
|
(12 |
) |
|
|
|
|
|
|
(96 |
) |
|
|
|
|
Realization of hedging gains upon settlement |
|
|
126 |
|
|
|
|
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
164 |
|
|
$ |
|
|
|
$ |
136 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Capital Stock
(a) Authorized
Common Shares
The authorized capital of the Company consists of an unlimited number of common shares. The
following is a summary of the rights, privileges, restrictions and conditions of the common shares.
The holders of common shares are entitled to receive dividends if, as and when declared by the
directors of the Company, subject to the rights of the holders of any other class of shares of the
Company entitled to receive dividends in priority to the common shares.
The holders of the common shares are entitled to one vote for each common share held at all
meetings of the shareholders.
(b) Stock-Based Compensation
The Company has five stock-based compensation plans that are described below. The compensation
costs recorded in the condensed consolidated statement of operations for these plans were $4.7
million and $8.7 million for the three and six months ended June 30, 2011, respectively (2010
recovery of $3.7 million and an expense of $5.6 million, respectively).
Stock Option Plan
The Companys Stock Option Plan, which is shareholder approved, permits the grant of options
to employees, directors and consultants. The Company recorded an expense of $2.8 million and $4.8
million for the three and six months ended June 30, 2011, respectively (2010 $1.1 million and
$1.7 million, respectively), related to grants issued to employees and directors in the plan. No
income tax benefit is recorded in the condensed consolidated statement of operations for these
costs.
The Companys policy is to issue new shares from treasury to satisfy stock options which are
exercised.
The Company utilizes a lattice-binomial option-pricing model (Binomial Model) to determine
the fair value of stock-based payment awards. The fair value determined by the Binomial Model is
affected by the Companys stock price as well as assumptions regarding a number of highly complex
and subjective variables. These variables include, but are not limited to, the Companys expected
stock price volatility over the term of the awards, and actual and projected employee stock option
exercise behaviors. The Binomial Model also considers the expected exercise multiple which is the
multiple of exercise price to grant price at which exercises are expected to occur on average.
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 Companys employee stock
options have certain characteristics
23
that are significantly different from traded options, and because changes in the subjective
assumptions can materially affect the estimated value, in managements opinion, the Binomial Model
best provides a fair measure of the fair value of the Companys employee stock options.
The weighted average fair value of all common share options, granted to employees for the
three and six months ended June 30, 2011 at the measurement date was $7.72 per share and $9.60 per
share, respectively (2010 $8.00 per share and $7.27 per share, respectively). The following
assumptions were used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Average risk-free interest rate |
|
|
2.34% |
|
|
|
3.09% |
|
|
|
2.79% |
|
|
|
3.11% |
|
Expected option life (in years) |
|
|
1.78 - 5.14 |
|
|
|
2.99 - 5.33 |
|
|
|
1.78 - 5.14 |
|
|
|
2.99 - 5.39 |
|
Expected volatility |
|
|
50% |
|
|
|
61% |
|
|
|
50% |
|
|
|
61% |
|
Annual termination probability |
|
|
0% - 8.31 |
% |
|
|
0% - 9.69 |
% |
|
|
0% - 8.49 |
% |
|
|
0% - 9.69 |
% |
Dividend yield |
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
As at June 30, 2011, the Company has reserved a total of 12,913,511 (December 31, 2010
12,829,115) common shares for future issuance under the Stock Option Plan, of which options in
respect of 7,409,881 common shares are outstanding at June 30, 2011. All awards of stock options
are made at fair market value of the Companys Common Shares on the date of grant. The fair market
value of a Common Share on a given date means the higher of the closing price of a Common Share on
the grant date (or the most recent trading date if the grant date is not a trading date) on the New
York Stock Exchange (NYSE), the Toronto Stock Exchange (the TSX) and such national exchange, as
may be designated by the Companys Board of Directors (the Fair Market Value). The options
generally vest between one and 5 years and expire 10 years or less from the date granted. The Stock
Option Plan provides that vesting will be accelerated if there is a change of control, as defined
in the plan and upon certain conditions. At June 30, 2011, options in respect of 3,121,874 common
shares were vested and exercisable.
The following table summarizes certain information in respect of option activity under the
Stock Option Plan for the six month periods ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Exercise |
|
|
Number of Shares |
|
Price Per Share |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Options outstanding, beginning of year |
|
|
6,743,272 |
|
|
|
6,173,795 |
|
|
$ |
10.79 |
|
|
$ |
6.52 |
|
Granted |
|
|
1,107,342 |
|
|
|
1,047,689 |
|
|
|
31.83 |
|
|
|
17.76 |
|
Exercised |
|
|
(421,983 |
) |
|
|
(838,206 |
) |
|
|
12.07 |
|
|
|
6.03 |
|
Forfeited |
|
|
(18,750 |
) |
|
|
|
|
|
|
7.57 |
|
|
|
|
|
Expired |
|
|
|
|
|
|
(22,302 |
) |
|
|
|
|
|
|
22.68 |
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period |
|
|
7,409,881 |
|
|
|
6,360,976 |
|
|
|
13.87 |
|
|
|
8.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of period |
|
|
3,121,874 |
|
|
|
3,093,225 |
|
|
|
7.61 |
|
|
|
6.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2011, the Company did not cancel any stock
options from its Stock Option Plan (2010 nil and nil, respectively) surrendered by Company
employees.
As at June 30, 2011, 6,790,608 options were fully vested or are expected to vest with a
weighted average exercise price of $13.47, aggregate intrinsic value of $129.3 million and weighted
average remaining contractual life of 4.8 years. As at June 30, 2011, options that are exercisable
have an intrinsic value of $77.8 million and a weighted average remaining contractual life of 3.2
years. The
24
intrinsic value of options exercised in the three and six months ended June 30, 2011 was $6.3
million and $8.7 million, respectively (2010 $2.6 million and $8.3 million, respectively).
Options to Non-Employees
During the three and six months ended June 30, 2011, an aggregate of nil and 103,944,
respectively (2010 50,000 and 61,217, respectively) common share options to purchase the
Companys common stock with an average exercise price of n/a and $27.64, respectively (2010
$18.98 and $18.12, respectively) were granted to certain advisors and strategic partners of the
Company. These options have a maximum contractual life of 6 years. The granted options vested
immediately. These options were granted under the Stock Option Plan.
As at June 30, 2011, non-employee options outstanding amounted to 107,501 options (2010
91,885) with a weighted average exercise price of $14.31 (2010 $13.43). Of these grants, 20,000
common share options are subject to vesting based on a performance commitment which has not been
completed as at June 30, 2011 and no expense has been recorded. 9,500 options (2010 11,217) were
exercisable with an average weighted exercise price of $14.40 (2010 $14.31) and the vested
options have an aggregate intrinsic value of $0.2 million (2010 less than $0.1 million). The
weighted average fair value of options granted to non-employees during the three and six months
ended June 30, 2011 at the measurement date was n/a and $13.75 per share, respectively (2010
$8.08 and $8.15 per share, respectively), utilizing a Binomial Model with the following underlying
assumptions for periods ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Average risk-free interest rate |
|
|
n/a |
|
|
|
3.12 |
% |
|
|
2.38 |
% |
|
|
3.10 |
% |
Contractual option life |
|
|
n/a |
|
|
6.84 years |
|
6 years |
|
6 - 6.84 years |
Average expected volatility |
|
|
n/a |
|
|
|
61.00 |
% |
|
|
50 |
% |
|
|
61 |
% |
Dividend yield |
|
|
n/a |
|
|
|
0.00 |
% |
|
|
0 |
% |
|
|
0 |
% |
For the three and six months ended June 30, 2011, the Company recorded a charge of $0.5
million and $0.7 million, respectively (2010 less than $0.1 million and $0.1 million,
respectively) to cost and expenses related to revenues services and selling, general and
administrative expenses related to the non-employee stock options. Included in accrued liabilities
is an accrual of less than $0.1 million for non-employee stock options recorded (December 31, 2010
$1.5 million).
Restricted Common Shares
Under the terms of certain employment agreements dated July 12, 2000, the Company was required
to issue either 160,000 restricted common shares or pay their cash equivalent upon request by the
employees at any time. The Company accounted for the obligation as a liability, which was
classified within accrued liabilities. In December 2010, upon request by the employees, the Company
paid $4.2 million in cash to settle the equivalent of the remaining 160,000 restricted common
shares under these agreements. The Company recorded a recovery of $0.5 million and an expense of
$0.2 million for the three and six months ended June 30, 2010, respectively related to the
restricted common shares.
Stock Appreciation Rights
There were no stock appreciation rights (SARs) granted during the first six months of 2011
or 2010. During 2007, 2,280,000 SARs with a weighted average exercise price of $6.20 per right were
granted in-lieu of stock options to certain Company executives. For the three and six months ended
June 30, 2011 472,000 and 999,500 SARs were cash settled for $13.0 million and $23.7 million,
respectively (2010 270,000 and 480,000 SARs were cash settled for $3.3 million and $5.4 million,
respectively). The average exercise prices for the settled SARs for the three and six months ended
June 30, 2011 was $6.86 and $6.86, respectively (2010 $5.74 and $5.13, respectively) per SAR. As
at June 30, 2011, 133,000 SARs were outstanding, of which 100,000 SARs were exercisable. None of
the SARs were forfeited, cancelled, or expired for the three and six months ended June 30, 2011 and
2010. The SARs vesting period ranges from immediately upon granting to 5 years, with a remaining
contractual life ranging from 6.51 years as at June 30, 2011. The outstanding SARs had an average
fair value of $25.31 per right as at June 30, 2011 (December 31, 2010 $21.21). The Company
accounts for the obligation of these SARs as a liability (June 30, 2011 $3.1 million; December
31, 2010
25
$23.7 million), which is classified within accrued liabilities. The Company has recorded an expense
of $1.4 million and $3.2 million for the three and six months ended June 30, 2011, respectively
(2010 recovery of $4.4 million and an expense of $3.6 million, respectively) to selling, general
and administrative expenses related to these SARs. The following assumptions were used for
measuring the fair value of the SARs:
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2011 |
|
As at December 31, 2010 |
Average risk-free interest rate |
|
|
2.25% |
|
|
|
0.65% |
|
Expected option life (in years) |
|
|
0.36 - 2.40 |
|
|
|
0.24 - 2.51 |
|
Expected volatility |
|
|
50% |
|
|
|
50% - 61% |
|
Annual termination probability |
|
|
8.31% |
|
|
|
0% - 8.31% |
|
Dividend yield |
|
|
0% |
|
|
|
0% |
|
Warrants
There were no warrants issued during the three and six months ended or outstanding as at June
30, 2011 and 2010.
(c) Income Per Share
Reconciliations of the numerator and denominator of the basic and diluted per-share
computations are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income from operations applicable to common shareholders |
|
$ |
1,825 |
|
|
$ |
13,302 |
|
|
$ |
822 |
|
|
$ |
39,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares (000s): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding, beginning of period |
|
|
64,255 |
|
|
|
63,460 |
|
|
|
64,146 |
|
|
|
62,832 |
|
Weighted average number of shares issued during the period |
|
|
121 |
|
|
|
104 |
|
|
|
136 |
|
|
|
478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing basic
income per share |
|
|
64,376 |
|
|
|
63,564 |
|
|
|
64,282 |
|
|
|
63,310 |
|
Assumed exercise of stock options, net of shares assumed |
|
|
4,323 |
|
|
|
3,424 |
|
|
|
4,096 |
|
|
|
3,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing diluted
income per share |
|
|
68,699 |
|
|
|
66,988 |
|
|
|
68,378 |
|
|
|
66,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
(d) Shareholders Equity
The following summarizes the movement of Shareholders Equity for the six months ended June 30, 2011:
|
|
|
|
|
Balance as at December 31, 2010 |
|
$ |
158,458 |
|
Issuance of common shares for stock options exercised |
|
|
5,095 |
|
Net income |
|
|
822 |
|
Adjustment to other equity for employee stock options granted |
|
|
4,797 |
|
Adjustment to other equity for non-employee stock options granted |
|
|
2,232 |
|
Adjustment to capital stock for stock options exercised |
|
|
2,210 |
|
Adjustment to other equity for stock options exercised |
|
|
(2,210 |
) |
Adjustments to accumulated other comprehensive income to record unrealized hedging gains |
|
|
351 |
|
Adjustments to accumulated other comprehensive income to record the realization of hedging gains upon settlement |
|
|
(724 |
) |
Adjustments to accumulated other comprehensive income to record the amortization of actuarial loss on defined
benefit plan |
|
|
107 |
|
Adjustments to accumulated other comprehensive income to record an unrealized decline in the market value of the
preferred stock of another business venture |
|
|
(488 |
) |
Tax effect of movement in accumulated other comprehensive income |
|
|
136 |
|
|
|
|
|
Balance as at June 30, 2011 |
|
$ |
170,786 |
|
|
|
|
|
15. Segmented Information
The Company has 8 reportable segments identified by category of product sold or service
provided: IMAX systems; theater system maintenance; joint revenue sharing arrangements; film
production and IMAX DMR; film distribution; film post-production; theater operations; and other.
The IMAX systems segment designs, manufactures, sells or leases IMAX theater projection system
equipment. The theater system maintenance segment maintains IMAX theater projection system
equipment in the IMAX theater network. The joint revenue sharing arrangements segment provides IMAX
theater projection system equipment to an exhibitor in exchange for a share of the box-office and
concession revenues. The film production and IMAX DMR segment produces films and performs film
re-mastering services. The film distribution segment distributes films for which the Company has
distribution rights. The film post-production segment provides film post-production and film print
services. The theater operations segment operates certain IMAX theaters. The Company refers to all
theaters using the IMAX theater system as IMAX theaters. The other segment includes camera
rentals and other miscellaneous items. The accounting policies of the segments are the same as
those described in note 2 to the audited consolidated financial statements included in the
Companys 2010 Form 10-K.
The Companys Chief Operating Decision Maker (CODM), as defined in the Segment Reporting
Topic of the FASB ASC, assesses segment performance based on segment revenues, gross margins and
film performance. Selling, general and administrative expenses, research and development costs,
amortization of intangibles, receivables provisions (recoveries), writedowns net of recoveries,
interest income, interest expense and tax provision (recovery) are not allocated to the segments.
Transactions between the film production and IMAX DMR segment and the film post-production
segment are valued at exchange value. Inter-segment profits are eliminated upon consolidation, as
well as for the disclosures below.
Transactions between the other segments are not significant.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenue(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMAX systems |
|
$ |
20,470 |
|
|
$ |
17,329 |
|
|
$ |
42,729 |
|
|
$ |
28,282 |
|
Theater system maintenance |
|
|
6,127 |
|
|
|
5,102 |
|
|
|
11,922 |
|
|
|
10,068 |
|
Joint revenue sharing arrangements |
|
|
8,347 |
|
|
|
8,494 |
|
|
|
12,387 |
|
|
|
27,430 |
|
Films |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production and IMAX DMR |
|
|
12,422 |
|
|
|
14,540 |
|
|
|
19,680 |
|
|
|
37,992 |
|
Distribution |
|
|
5,275 |
|
|
|
3,870 |
|
|
|
7,892 |
|
|
|
7,142 |
|
Post-production |
|
|
1,039 |
|
|
|
2,326 |
|
|
|
2,663 |
|
|
|
4,918 |
|
Theater operations |
|
|
1,918 |
|
|
|
2,954 |
|
|
|
2,899 |
|
|
|
8,903 |
|
Other |
|
|
1,634 |
|
|
|
983 |
|
|
|
2,220 |
|
|
|
3,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
57,232 |
|
|
$ |
55,598 |
|
|
$ |
102,392 |
|
|
$ |
128,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margins |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMAX systems(2) |
|
$ |
11,440 |
|
|
$ |
9,918 |
|
|
$ |
23,175 |
|
|
$ |
14,418 |
|
Theater system maintenance |
|
|
2,381 |
|
|
|
2,051 |
|
|
|
4,968 |
|
|
|
4,360 |
|
Joint revenue sharing arrangements(2) |
|
|
4,881 |
|
|
|
6,501 |
|
|
|
7,059 |
|
|
|
23,313 |
|
Films |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production and IMAX DMR(2) |
|
|
6,461 |
|
|
|
6,823 |
|
|
|
9,220 |
|
|
|
26,324 |
|
Distribution(2) |
|
|
487 |
|
|
|
719 |
|
|
|
1,113 |
|
|
|
1,461 |
|
Post-production |
|
|
307 |
|
|
|
837 |
|
|
|
1,996 |
|
|
|
2,891 |
|
Theater operations |
|
|
(242 |
) |
|
|
152 |
|
|
|
(1,005 |
) |
|
|
1,810 |
|
Other |
|
|
587 |
|
|
|
39 |
|
|
|
422 |
|
|
|
762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26,302 |
|
|
$ |
27,040 |
|
|
$ |
46,948 |
|
|
$ |
75,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three and six months ended June 30, 2011, the Companys two largest customers
collectively represent 13.1% and 11.5%, respectively, of total revenues (2010 15.4% and
20.4%, respectively). |
|
(2) |
|
IMAX systems include commission costs of $0.1 million and $0.8 million for the three and six
months ended June 30, 2011, respectively (2010 $0.4 million and $0.6 million,
respectively). Joint revenue sharing arrangements segment margins include advertising,
marketing and commission costs of $1.8 million and $2.3 million for the three and six months
ended June 30, 2011, respectively (2010 $0.6 million and $1.2 million, respectively).
Production and DMR segment margins include marketing costs of $0.7 million and $1.2 million
for the three and six months ended June 30, 2011, respectively (2010 $0.6 million and $0.8
million, respectively). Distribution segment margins include marketing costs of $1.4 million
and $1.6 million for the three and six months ended June 30, 2011, respectively (2010
recovery of $0.2 million and an expense of $0.3 million, respectively). |
28
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
IMAX systems |
|
$ |
126,571 |
|
|
$ |
119,708 |
|
Theater system maintenance |
|
|
14,800 |
|
|
|
13,548 |
|
Joint revenue sharing arrangements |
|
|
99,523 |
|
|
|
81,376 |
|
Films |
|
|
|
|
|
|
|
|
Production and IMAX DMR |
|
|
18,166 |
|
|
|
17,229 |
|
Distribution |
|
|
7,776 |
|
|
|
5,313 |
|
Post-production |
|
|
3,652 |
|
|
|
2,877 |
|
Theater operations |
|
|
552 |
|
|
|
582 |
|
Other |
|
|
2,525 |
|
|
|
1,785 |
|
Corporate and other non-segment specific assets |
|
|
98,567 |
|
|
|
106,670 |
|
|
|
|
|
|
|
|
Total |
|
$ |
372,132 |
|
|
$ |
349,088 |
|
|
|
|
|
|
|
|
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
$ |
4,626 |
|
|
$ |
874 |
|
|
$ |
5,627 |
|
|
$ |
2,771 |
|
United States |
|
|
36,240 |
|
|
|
38,087 |
|
|
|
61,720 |
|
|
|
93,882 |
|
Russia and the CIS |
|
|
5,086 |
|
|
|
1,987 |
|
|
|
9,003 |
|
|
|
3,626 |
|
Western Europe |
|
|
4,193 |
|
|
|
3,245 |
|
|
|
6,475 |
|
|
|
7,937 |
|
Rest of Europe |
|
|
317 |
|
|
|
230 |
|
|
|
2,641 |
|
|
|
562 |
|
Asia (excluding Greater China) |
|
|
3,554 |
|
|
|
6,142 |
|
|
|
5,873 |
|
|
|
8,655 |
|
Greater China |
|
|
1,890 |
|
|
|
1,112 |
|
|
|
8,662 |
|
|
|
4,434 |
|
Mexico |
|
|
302 |
|
|
|
475 |
|
|
|
658 |
|
|
|
1,735 |
|
Rest of the World |
|
|
1,024 |
|
|
|
3,446 |
|
|
|
1,733 |
|
|
|
4,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
57,232 |
|
|
$ |
55,598 |
|
|
$ |
102,392 |
|
|
$ |
128,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No single country in the Rest of the World, Western Europe, Rest of Europe or Asia (excluding Greater
China) classifications comprises more than 5% of the total revenue.
16. Employees Pension and Postretirement Benefits
(a) Defined Benefit Plan
The Company has an unfunded U.S. defined benefit pension plan, the SERP, covering Richard L.
Gelfond, Chief Executive Officer (CEO) of the Company and Bradley J. Wechsler, Chairman of the
Companys Board of Directors. The SERP provides for a lifetime retirement benefit from age 55
determined as 75% of the members best average 60 consecutive months of earnings over the members
employment history. The benefits were 50% vested as at July 2000, the SERP initiation date. The
vesting percentage increases on a straight-line basis from inception until age 55. As at June 30,
2011, the benefits of Mr. Gelfond were 100% vested. Upon a termination for cause, prior to a change
of control, the executive shall forfeit any and all benefits to which such executive may have been
entitled, whether or not vested.
Under the terms of the SERP, if Mr. Gelfonds employment terminated other than for cause prior
to August 1, 2010, he would have been entitled to receive SERP benefits in the form of monthly
annuity payments until the earlier of a change of control or August 1, 2010, at which time he
became entitled to receive remaining benefits in the form of a lump sum payment. If Mr. Gelfonds
employment is, or would have been, terminated other than for cause on or after August 1, 2010, he
is, or would have been, entitled to receive SERP benefits in the form of a lump sum payment. SERP
benefit payments to Mr. Gelfond are subject to a deferral for six
29
months after the termination of his employment, at which time Mr. Gelfond will be entitled to
receive interest on the deferred amount credited at the applicable federal rate for short-term
obligations. The term of Mr. Gelfonds current employment agreement has been extended through
December 31, 2012.
Under the terms of the extension, Mr. Gelfond also agreed that any compensation earned during 2011 and 2012 would not be included in calculating his
entitlement under the SERP.
Under the terms of the SERP, monthly annuity payments payable to Mr. Wechsler, whose
employment as Co-CEO terminated effective April 1, 2009, were deferred for six months and were paid
in the form of a lump sum plus interest on the deferred amount on October 1, 2009. Thereafter, in
accordance with the terms of the SERP, Mr. Wechsler was entitled to receive monthly annuity
payments until the earlier of a change of control or August 1, 2010, at which time he was entitled
to receive remaining benefits in the form of a lump sum payment. On August 1, 2010, the Company
made a lump sum payment of $14.7 million to Mr. Wechsler in accordance with the terms of the plan,
representing a settlement in full of Mr. Wechslers entitlement under the SERP.
The amounts accrued for the SERP are determined as follows:
|
|
|
|
|
|
|
|
|
|
|
As at |
|
|
As at |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Obligation, beginning of period |
|
$ |
18,108 |
|
|
$ |
29,862 |
|
Service cost |
|
|
|
|
|
|
448 |
|
Interest cost |
|
|
139 |
|
|
|
351 |
|
Benefits paid |
|
|
|
|
|
|
(15,199 |
) |
Actuarial loss |
|
|
|
|
|
|
2,646 |
|
|
|
|
|
|
|
|
Obligation, end of period and unfunded status |
|
$ |
18,247 |
|
|
$ |
18,108 |
|
|
|
|
|
|
|
|
The following table provides disclosure of pension expense for the SERP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Service cost |
|
$ |
|
|
|
$ |
112 |
|
|
$ |
|
|
|
$ |
224 |
|
Interest cost |
|
|
69 |
|
|
|
88 |
|
|
|
139 |
|
|
|
175 |
|
Amortization of actuarial loss |
|
|
53 |
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension expense |
|
$ |
122 |
|
|
$ |
200 |
|
|
$ |
246 |
|
|
$ |
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the SERP was $18.2 million at June 30, 2011 (December
31, 2010 $18.1 million).
The following amounts were included in accumulated other comprehensive income (AOCI) and
will be recognized as components of net periodic benefit cost in future periods:
|
|
|
|
|
|
|
|
|
|
|
As at |
|
|
As at |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Unrecognized actuarial loss |
|
$ |
2,132 |
|
|
$ |
2,239 |
|
|
|
|
|
|
|
|
No contributions are expected to be made for the SERP during 2011. The Company expects
amortization of actuarial losses of $0.1 million to be recognized as a component of net periodic
benefit cost during the remainder of 2011.
The following benefit payments are expected to be made as per the current SERP assumptions and
the terms of the SERP in each of the next 5 years, and in the aggregate:
30
|
|
|
|
|
2011 (six months remaining) |
|
$ |
|
|
2012 |
|
|
|
|
2013 |
|
|
18,813 |
|
2014 |
|
|
|
|
2015 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
18,813 |
|
|
|
|
|
At the time the Company established the SERP, it also took out life insurance policies on
Messrs. Gelfond and Wechsler with coverage amounts of $21.5 million in aggregate to which the
Company was the beneficiary. During 2010, the Company obtained $3.2 million representing the cash
surrender value of Mr. Gelfonds policy and $4.6 million representing the cash surrender value of
Mr. Wechslers policy.
(b) Defined Contribution Plan
The Company also maintains defined contribution pension plans for its employees, including its
executive officers. The Company makes contributions to these plans on behalf of employees in an
amount up to 5% of their base salary subject to certain prescribed maximums. During the three and
six months ended June 30, 2011, the Company contributed and expensed an aggregate of $0.3 million
and $0.5 million, respectively (2010 $0.2 million and $0.4 million, respectively), to its
Canadian plan and an aggregate of less than $0.1 million and $0.1 million, respectively (2010
less than $0.1 million and $0.1 million, respectively), to its defined contribution employee
pension plan under Section 401(k) of the U.S. Internal Revenue Code.
(c) Postretirement Benefits
The Company has an unfunded postretirement plan covering Messrs. Gelfond and Wechsler. The
plan provides that the Company will maintain health benefits for Messrs. Gelfond and Wechsler until
they become eligible for Medicare and, thereafter, the Company will provide Medicare supplement
coverage as selected by Messrs. Gelfond and Wechsler. The postretirement benefits obligation as at
June 30, 2011 is $0.5 million (December 31, 2010 $0.5 million). The Company has expensed less
than $0.1 million and less than $0.1 million for the three and six months ended June 30, 2011,
respectively (2010 less than $0.1 million and less than $0.1 million, respectively).
The following benefit payments are expected to be made as per the current plan assumptions in
each of the next 5 years:
|
|
|
|
|
2011 (six months remaining) |
|
$ |
13 |
|
2012 |
|
|
15 |
|
2013 |
|
|
31 |
|
2014 |
|
|
34 |
|
2015 |
|
|
38 |
|
Thereafter |
|
|
353 |
|
|
|
|
|
|
|
$ |
484 |
|
|
|
|
|
17. Financial Instruments
(a) Financial Instruments
The Company maintains cash with various major financial institutions. The Companys cash is
invested with highly rated financial institutions.
The Companys accounts receivables and financing receivables are subject to credit risk. The
Companys accounts receivable and financing receivables are concentrated with the theater
exhibition industry and film entertainment industry. To minimize the Companys credit risk, the
Company retains title to underlying theater systems leased, performs initial and ongoing credit
evaluations of its customers and makes ongoing provisions for its estimate of potentially
uncollectible amounts. The Company believes it has adequately provided for related exposures
surrounding receivables and contractual commitments.
31
(b) Fair Value Measurements
The carrying values of the Companys cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities due within one year approximate fair values due to the short-term
maturity of these instruments. The Companys other financial instruments are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2011 |
|
As at December 31, 2010 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
Borrowings under Credit Facility |
|
$ |
34,583 |
|
|
$ |
34,583 |
|
|
$ |
17,500 |
|
|
$ |
17,500 |
|
Net financed sales receivable |
|
$ |
57,428 |
|
|
$ |
56,628 |
|
|
$ |
43,620 |
|
|
$ |
43,615 |
|
Net investment in sales-type leases |
|
$ |
22,130 |
|
|
$ |
23,324 |
|
|
$ |
29,981 |
|
|
$ |
32,613 |
|
Available-for-sale investment |
|
$ |
1,012 |
|
|
$ |
1,012 |
|
|
$ |
1,500 |
|
|
$ |
1,500 |
|
Foreign exchange contracts designated forwards |
|
$ |
292 |
|
|
$ |
292 |
|
|
$ |
664 |
|
|
$ |
664 |
|
Foreign exchange contracts non-designated forwards |
|
$ |
480 |
|
|
$ |
480 |
|
|
$ |
1,249 |
|
|
$ |
1,249 |
|
The carrying value of borrowings under the Credit Facility approximates fair value as the
interest rates offered under the Credit Facility are close to June 30, 2011 and December 31, 2010
market rates for the Company for debt of the same remaining maturities (Level 2 input in accordance
with the Fair Value Measurements Topic of the FASB ASC hierarchy) as at June 30, 2011 and December
31, 2010, respectively.
The estimated fair values of the net financed sales receivable and net investment in
sales-type leases are estimated based on discounting future cash flows at currently available
interest rates with comparable terms (Level 2 input in accordance with the Fair Value Measurements
Topic of the FASB ASC hierarchy) as at June 30, 2011 and December 31, 2010, respectively.
The fair value of the Companys available-for-sale investment is determined using more recent
securities with similar characteristics, the present value of expected cash flows based on
projected earnings and other information readily available from the business venture (Level 3 input
in accordance with the Fair Value Measurements Topic of the FASB ASC hierarchy) as at June 30, 2011
and December 31, 2010, respectively.
The fair value of foreign currency derivatives are determined using quoted prices in active
markets (Level 2 input in accordance with the Fair Value Measurements Topic of the FASB ASC
hierarchy) as at June 30, 2011 and December 31, 2010, respectively. These identical instruments are
traded on a closed exchange.
The table below sets forth a summary of changes in the fair value of the Companys
available-for-sale investment measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the period:
|
|
|
|
|
|
|
Available |
|
|
|
For Sale |
|
|
|
Investments |
|
Beginning balance, January 1, 2011 |
|
$ |
1,500 |
|
Transfers into/out of Level 3 |
|
|
|
|
Total gains or losses (realized/unrealized) |
|
|
|
|
Included in earnings |
|
|
|
|
Included in other comprehensive income |
|
|
(488 |
) |
Purchases, issuances, sales and settlements |
|
|
|
|
|
|
|
|
Ending balance, June 30, 2011 |
|
$ |
1,012 |
|
|
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period included in earnings attributable to the change in
unrealized gains or losses relating to assets still held at the reporting date |
|
$ |
|
|
|
|
|
|
32
(c) Financing Receivables
The Companys net investment in leases and its net financed sale receivables are subject to
the disclosure requirements of the FASB ASC 310 Receivables. Due to differing risk profiles of
its net investment in leases and its financed sales receivables, the Company views its net
investment in leases and its financed sale receivables as separate classes of financing
receivables. The Company does not aggregate financing receivables to assess impairment.
The Company monitors the credit quality of each customer on a frequent basis through
collections and aging analyses. The Company also holds meetings monthly in order to identify credit
concerns and whether a change in credit quality classification is required for the customer. A
customer may improve in their credit quality classification once a substantial payment is made on
overdue balances or the customer has agreed to a payment plan with the Company and payments have
commenced in accordance to the payment plan. The change in credit quality indicator is dependant
upon management approval.
The Company classifies its customers into three categories to indicate their credit quality internally:
Good standing Theater continues to be in good standing with the Company as the clients
payments and reporting are up-to-date.
Pre-approved transactions only Theater operator has begun to demonstrate a delay in
payments with little or no communication with the Company. All service or shipments to the theater
must be reviewed and approved by management. These financing receivables are considered to be in
better condition than those receivables related to theaters in the All transactions suspended
category, but not in as good of condition as those receivables in Good standing. Depending on the
individual facts and circumstances of each customer, finance income recognition may be suspended if
management believes the receivable to be impaired.
All transactions suspended Theater is severely delinquent, non-responsive or not
negotiating in good faith with the Company. Once a theater is classified as All transactions
suspended, the theater is placed on nonaccrual status and all revenue recognitions related to the
theater are stopped.
The following table discloses the recorded investment in financing receivables by credit
quality indicator as at June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
Financed |
|
|
|
|
|
|
Lease |
|
|
Sales |
|
|
|
|
|
|
Payments |
|
|
Receivables |
|
|
Total |
|
In good standing |
|
$ |
19,077 |
|
|
$ |
54,799 |
|
|
$ |
73,876 |
|
Pre-approved transactions |
|
|
943 |
|
|
|
1,094 |
|
|
|
2,037 |
|
Transactions suspended |
|
|
4,702 |
|
|
|
1,601 |
|
|
|
6,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,722 |
|
|
$ |
57,494 |
|
|
$ |
82,216 |
|
|
|
|
|
|
|
|
|
|
|
While recognition of finance income is suspended, payments received by a customer are applied
against the outstanding balance owed. If payments are sufficient to cover any unreserved
receivables, a recovery of provision taken on the billed amount, if applicable, is recorded to the
extent of the residual cash received. Once the collectibility issues are resolved and the customer
has returned to being in good standing, the Company will resume recognition of finance income.
33
The Companys investment in financing receivables on nonaccrual status as at June 30, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
Related |
|
|
|
Investment |
|
|
Allowance |
|
Net investment in leases |
|
$ |
4,702 |
|
|
$ |
(2,475 |
) |
Net financed sales receivables |
|
|
1,601 |
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,303 |
|
|
$ |
(2,541 |
) |
|
|
|
|
|
|
|
The Company considers financing receivables with aging between 60-89 days as indications of
theaters with potential collection concerns. The Company will begin to focus its review on these
financing receivables and increase its discussions internally and with the theater regarding
payment status. Once a theaters aging exceeds 90 days, the Companys policy is to review and
assess collectibility on the theaters past due accounts. Over 90 days past due is used by the
Company as an indicator of potential impairment as invoices up to 90 days outstanding could be
considered reasonable due to the time required for dispute resolution or for the provision of
further information or supporting documentation to the customer.
The Companys aged financing receivables as at June 30, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related |
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billed |
|
|
Unbilled |
|
|
Total |
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing |
|
|
Recorded |
|
|
Recorded |
|
|
Related |
|
|
Net of |
|
|
|
Current |
|
|
30-89 Days |
|
|
90+ Days |
|
|
Receivables |
|
|
Investment |
|
|
Investment |
|
|
Allowances |
|
|
Allowances |
|
Net investment in leases |
|
$ |
418 |
|
|
$ |
357 |
|
|
$ |
1,922 |
|
|
$ |
2,697 |
|
|
$ |
22,025 |
|
|
$ |
24,722 |
|
|
$ |
(2,592 |
) |
|
$ |
22,130 |
|
Net financed sales
receivables |
|
|
960 |
|
|
|
551 |
|
|
|
639 |
|
|
|
2,150 |
|
|
|
55,344 |
|
|
|
57,494 |
|
|
|
(66 |
) |
|
|
57,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,378 |
|
|
$ |
908 |
|
|
$ |
2,561 |
|
|
$ |
4,847 |
|
|
$ |
77,369 |
|
|
$ |
82,216 |
|
|
$ |
(2,658 |
) |
|
$ |
79,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys recorded investment in past due financing receivables for which the Company
continues to accrue finance income as at June 30, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related |
|
|
|
|
|
|
Recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billed |
|
|
Unbilled |
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing |
|
|
Recorded |
|
|
Related |
|
|
Past Due |
|
|
|
Current |
|
|
30-89 Days |
|
|
90+ Days |
|
|
Receivables |
|
|
Investment |
|
|
Allowance |
|
|
and Accruing |
|
Net investment in leases |
|
$ |
70 |
|
|
$ |
108 |
|
|
$ |
546 |
|
|
$ |
724 |
|
|
$ |
2,988 |
|
|
$ |
(116 |
) |
|
$ |
3,596 |
|
Net financed sales
receivables |
|
|
281 |
|
|
|
254 |
|
|
|
459 |
|
|
|
994 |
|
|
|
15,403 |
|
|
|
|
|
|
|
16,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
351 |
|
|
$ |
362 |
|
|
$ |
1,005 |
|
|
$ |
1,718 |
|
|
$ |
18,391 |
|
|
$ |
(116 |
) |
|
$ |
19,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company considers financing receivables to be impaired when it believes it to be probable
that it will not recover the full amount of principal and interest owing under the arrangement. The
Company uses its knowledge of the industry and economic trends, as well as its prior experiences to
determine the amount recoverable for impaired financing receivables. The following table discloses
information regarding the Companys impaired financing receivables:
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Financing Receivables |
|
|
|
For the Three and Six Months Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
Recorded |
|
|
Unpaid |
|
|
Related |
|
|
Recorded |
|
|
Income |
|
|
|
Investment |
|
|
Principal |
|
|
Allowance |
|
|
Investment |
|
|
Recognized |
|
Recorded investment for which there is a related allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net financed sales receivables |
|
|
232 |
|
|
|
195 |
|
|
|
(66 |
) |
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recorded investment in impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net financed sales receivables |
|
$ |
232 |
|
|
$ |
195 |
|
|
$ |
(66 |
) |
|
$ |
232 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys activity in the allowance for credit losses for the period and the Companys
recorded investment in financing receivables is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011 |
|
|
Six Months Ended June 30, 2011 |
|
|
|
Net Investment |
|
|
Net Financed |
|
|
Net Investment |
|
|
Net Financed |
|
|
|
in Leases |
|
|
Sales Receivables |
|
|
in Leases |
|
|
Sales Receivables |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
2,558 |
|
|
$ |
66 |
|
|
$ |
4,838 |
|
|
$ |
66 |
|
Charge-offs |
|
|
|
|
|
|
|
|
|
|
(2,445 |
) |
|
|
|
|
Provision |
|
|
34 |
|
|
|
|
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
2,592 |
|
|
$ |
66 |
|
|
$ |
2,592 |
|
|
$ |
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment |
|
$ |
2,592 |
|
|
$ |
66 |
|
|
$ |
2,592 |
|
|
$ |
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment |
|
$ |
24,722 |
|
|
$ |
57,494 |
|
|
$ |
24,722 |
|
|
$ |
57,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Foreign Exchange Risk Management
The Company is exposed to market risk from changes in foreign currency rates. A major portion
of the Companys revenues is denominated in U.S. dollars while a substantial portion of its costs
and expenses is denominated in Canadian dollars. A portion of the net U.S. dollar cash flows of the
Company is periodically 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 in
Japanese yen. Net Japanese yen cash flows are converted to U.S. dollars generally through the spot
market. The Company also has cash receipts under leases denominated in Japanese yen, Canadian
dollar and Euros which are converted to U.S. dollars generally through the spot market. The
Companys policy is to not use any financial instruments for trading or other speculative purposes.
The Company entered into a series of foreign currency forward contracts to manage the
Companys risks associated with the volatility of foreign currencies. Certain of these foreign
currency forward contracts met the criteria required for hedge accounting under the Derivatives and
Hedging Topic of the FASB ASC at inception, and continue to meet hedge effectiveness tests at June
30, 2011 (the Foreign Currency Hedges), with settlement dates throughout 2011. In
addition, at June 30, 2011, the Company held foreign currency forward contracts to manage foreign
currency risk on future anticipated Canadian dollar expenditures that were not considered Foreign
Currency Hedges by the Company. Foreign currency derivatives are recognized and measured in the
balance sheet at fair value. Changes in the fair value (gains or losses) are recognized in the
condensed consolidated statement of operations except for derivatives designated and qualifying as
foreign currency hedging instruments. For foreign currency hedging instruments, the effective
portion of the gain or loss in a hedge of a forecasted transaction is reported in other
comprehensive income (OCI) and reclassified to the condensed consolidated statement of operations
when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the
condensed consolidated statement of operations.
35
The following tabular disclosures reflect the impact that derivative instruments and
hedging activities have on the Companys condensed consolidated financial statements:
Notional value foreign exchange contracts as at:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
Foreign exchange contracts Forwards |
|
$ |
4,062 |
|
|
$ |
12,671 |
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
Foreign exchange contracts Forwards |
|
|
6,984 |
|
|
|
28,842 |
|
|
|
|
|
|
|
|
|
|
$ |
11,046 |
|
|
$ |
41,513 |
|
|
|
|
|
|
|
|
Fair value of derivatives in foreign exchange contracts as at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
Balance Sheet Location |
|
|
2011 |
|
|
2010 |
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts Forwards |
|
Other assets |
|
$ |
292 |
|
|
$ |
664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts Forwards |
|
Other assets |
|
|
480 |
|
|
|
1,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
772 |
|
|
$ |
1,913 |
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Foreign Currency Hedging relationships for the:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Foreign exchange contracts Forwards |
|
Derivative Gain (Loss) Recognized in OCI (Effective Portion) |
|
$ |
49 |
|
|
$ |
(387 |
) |
|
$ |
351 |
|
|
$ |
(179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
49 |
|
|
$ |
(387 |
) |
|
$ |
351 |
|
|
$ |
(179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Derivative Gain |
|
|
|
|
|
|
|
|
|
(Loss) Reclassified from |
|
|
|
|
|
|
|
|
|
AOCI into Income |
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
(Effective Portion) |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Foreign exchange contracts - Forwards |
|
Selling, general and administrative expenses |
|
$ |
466 |
|
|
$ |
(7 |
) |
|
$ |
724 |
|
|
$ |
542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
466 |
|
|
$ |
(7 |
) |
|
$ |
724 |
|
|
$ |
542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Non Designated Derivatives in Foreign Currency relationships for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Derivative Gain |
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
(Loss) |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Foreign exchange contracts - Forwards |
|
Selling, general and administrative expenses |
|
$ |
93 |
|
|
$ |
(602 |
) |
|
$ |
721 |
|
|
$ |
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
93 |
|
|
$ |
(602 |
) |
|
$ |
721 |
|
|
$ |
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e) Investments in New Business Ventures
The Company accounts for investments in new business ventures using the guidance of the FASB
ASC 323 and the FASB ASC 320, as appropriate. As at June 30, 2011, the equity method of accounting
is being utilized for an investment with a carrying value of $3.3 million (December 31, 2010
$1.6 million). For the three months ended June 30, 2011, gross revenues, cost of revenue and net
loss for the investment were $0.3 million, $2.4 million and $4.4 million, respectively (2010
$nil, $nil and $nil, respectively). For the six months ended June 30, 2011, gross revenues, cost of
revenue and net loss for the investment were $0.5 million, $3.8 million and $8.6 million,
respectively (2010 $nil, $nil and $nil, respectively). The Company has determined it is not the
primary beneficiary of this VIE, and therefore it has not been consolidated. In addition, during
2010, the Company made an investment in preferred stock of another business venture of $1.5 million
which meets the criteria for classification as a debt security under the FASB ASC 320 and is
recorded at its fair value of $1.0 million at June 30, 2011 (December 31, 2010 $1.5 million).
This investment is classified as an available-for-sale investment. The total carrying value of
investments in new business ventures at June 30, 2011 is $4.3 million (December 31, 2010 $3.1
million) and is recorded in Other Assets.
37
IMAX CORPORATION
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
OVERVIEW
IMAX Corporation, together with its wholly-owned subsidiaries (the Company), is one of the
worlds leading entertainment technology companies, specializing in motion picture technologies and
presentations. The Companys principal business is the design and manufacture of premium digital
and film-based theater systems (IMAX theater systems) and the sale or lease of IMAX theater
systems or the contribution of IMAX theater systems under revenue-sharing arrangements to its
customers. The IMAX theater systems are based on proprietary and patented technology developed over
the course of the Companys 43-year history. The Companys customers who purchase, lease or
otherwise acquire the IMAX theater systems are theater exhibitors that operate commercial theaters
(particularly multiplexes), museums, science centers, or destination entertainment sites. The
Company generally does not own IMAX theaters, but licenses the use of its trademarks along with the
sale, lease or contribution of its equipment. The Company refers to all theaters using the IMAX
theater system as IMAX theaters.
The Company derives revenue principally from the sale or long-term lease of IMAX theater
systems and associated maintenance and extended warranty services, the installation of IMAX theater
systems under joint revenue sharing arrangements, the provision of film production and digital
re-mastering services, the distribution of certain films, and the provision of post-production
services, including the conversion of two-dimensional (2D) and three-dimensional (3D) Hollywood
feature films for exhibition on IMAX theater systems around the world. The Company also derives
revenue from the operation of its own theaters, camera rentals and the provision of aftermarket
parts for its system components.
The Company believes the IMAX theater network is the most extensive premium theater network in
the world with 560 IMAX theaters (441 commercial, 119 institutional) operating in 46 countries as
at June 30, 2011. This compares to 447 IMAX theaters (325 commercial, 122 institutional) operating
in 47 countries as at June 30, 2010.
Important factors that the Companys Chief Executive Officer (CEO) Richard L. Gelfond uses
in assessing the Companys business and prospects include revenue, gross margins from the Companys
operating segments, the signing and financial performance of theater system arrangements
(particularly its joint revenue sharing arrangements), film performance, installations, earnings
from operations as adjusted for unusual items that the Company views as non-recurring, the success
of strategic initiatives such as the securing of new film projects (particularly IMAX DMR films)
and the viability of new businesses, the overall execution, reliability and consumer acceptance of
The IMAX Experience and related technologies and short- and long-term cash flow projections.
IMAX Systems, Theater System Maintenance and Joint Revenue Sharing Arrangements
The Company provides IMAX theater systems to customers on a sales or long-term lease basis,
typically with initial terms of approximately 10 years. These agreements typically provide for
three major sources of cash flows: initial fees, ongoing fees (which can include a fixed minimum
amount per annum and contingent fees in excess of the minimum payments) and maintenance and
extended warranty fees. The initial fees vary depending on the system configuration and location of
the theater and generally are paid to the Company in installments commencing upon the signing of
the agreement. Finance income is derived over the term of the sales or sales-type lease arrangement
as the unearned income on financed sales or sales-type leases is earned. Ongoing fees are paid
monthly over the term of the contract, commencing after the theater system has been installed and
are generally equal to the greater of a fixed minimum amount per annum or a percentage of
box-office receipts. Both ongoing fees and maintenance and extended warranty fees are typically
indexed to a local consumer price index.
The Company also offers certain commercial clients joint revenue sharing arrangements, where
the Company receives a portion of the theaters box-office and concession revenue in exchange for
placing an IMAX theater system at the theater operators venue.
Revenue from theater system arrangements is recognized at a different time from when cash is
collected. See Critical Accounting Policies below for further discussion on the Companys revenue
recognition policies.
38
Sales Backlog and Theater Network
The Companys sales backlog fluctuates in both number of systems and dollar value from quarter
to quarter depending on the signing of new theater system arrangements, which adds to backlog, and
the installation and acceptance of theater systems and the settlement of contracts, both of which
reduce backlog. Sales backlog typically represents the fixed contracted revenue under signed
theater system sale and lease agreements that the Company believes will be recognized as revenue
upon installation and acceptance of the associated theater. Sales backlog includes initial fees
along with the estimated present value of contractual ongoing fees due over the lease term, but
excludes amounts allocated to maintenance and extended warranty revenues as well as fees in excess
of contractual ongoing fees that may be received in the future. The value of sales backlog does not
include revenue from theaters in which the Company has an equity interest, joint revenue sharing
arrangements, operating leases, letters of intent or long-term conditional theater commitments.
The Companys theater signings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
Number of |
|
|
Dollar Value |
|
|
Number of |
|
|
Dollar Value |
|
|
Number of |
|
|
Dollar Value |
|
|
Number of |
|
|
Dollar Value |
|
|
|
Systems |
|
|
(in millions) |
|
|
Systems |
|
|
(in millions) |
|
|
Systems |
|
|
(in millions) |
|
|
Systems |
|
|
(in millions) |
|
Full new sales
and sale-type lease
arrangements |
|
|
13 |
(1) |
|
$ |
17.8 |
|
|
|
31 |
(1) |
|
$ |
40.7 |
|
|
|
36 |
(2) |
|
$ |
44.7 |
|
|
|
39 |
(2) |
|
$ |
51.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital upgrades
under sales and
sale-type lease
arrangements |
|
|
13 |
(3) |
|
|
6.9 |
|
|
|
8 |
(3) |
|
|
4.6 |
|
|
|
15 |
(4) |
|
|
7.8 |
|
|
|
22 |
(4) |
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint revenue
sharing
arrangements |
|
|
26 |
(5) |
|
|
n/a |
|
|
|
18 |
(5) |
|
|
n/a |
|
|
|
102 |
(6) |
|
|
n/a |
|
|
|
37 |
(6) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
$ |
24.7 |
|
|
|
57 |
|
|
$ |
45.3 |
|
|
|
153 |
|
|
$ |
52.5 |
|
|
|
98 |
|
|
$ |
62.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 1 installation and 12 in backlog as at June 30, 2011 (2010 1 and 30,
respectively). |
|
(2) |
|
Includes 3 installations and 33 in backlog as at June 30, 2011 (2010 3 and 36,
respectively). |
|
(3) |
|
Includes 2 installations and 11 in backlog as at June 30, 2011 (2010 4 and 4, respectively). |
|
(4) |
|
Includes 4 installations and 11 in backlog as at June 30, 2011 (2010 18 and 4,
respectively). |
|
(5) |
|
Includes 3 installations and 23 in backlog as at June 30, 2011 (2010 nil and 18,
respectively). |
|
(6) |
|
Includes 5 installations and 97 in backlog as at June 30, 2011 (2010 1 and 36,
respectively). |
39
The Companys sales backlog is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
|
Number of |
|
|
Dollar Value |
|
|
Number of |
|
|
Dollar Value |
|
|
|
Systems |
|
|
(in thousands) |
|
|
Systems |
|
|
(in thousands) |
|
Sales and sale-type lease arrangements |
|
|
166 |
(1) |
|
$ |
196,469 |
|
|
|
117 |
(1) |
|
$ |
156,091 |
|
Joint revenue sharing arrangements |
|
|
128 |
|
|
|
n/a |
|
|
|
70 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294 |
|
|
$ |
196,469 |
|
|
|
187 |
|
|
$ |
156,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 12 upgrades from film-based IMAX theater systems to IMAX digital theater systems as
at June 30, 2011 (2010 5). |
Theater systems under joint revenue sharing arrangements carry no assigned backlog value. The
Company believes that the contractual obligations for theater system installations that are listed
in sales backlog are valid and binding commitments.
The following chart shows the number of the Companys theater systems by configuration, opened
theater network base and backlog as at June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
Theater |
|
|
|
|
|
|
Theater |
|
|
|
|
|
|
Network |
|
|
|
|
|
|
Network |
|
|
|
|
|
|
Base |
|
|
Backlog |
|
|
Base |
|
|
Backlog |
|
Flat Screen (2D) |
|
|
28 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
Dome Screen (2D) |
|
|
62 |
|
|
|
|
|
|
|
66 |
|
|
|
|
|
IMAX 3D Dome (3D) |
|
|
5 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
IMAX 3D GT (3D) |
|
|
69 |
(1) |
|
|
1 |
|
|
|
88 |
(2) |
|
|
1 |
|
IMAX 3D SR (3D) |
|
|
29 |
(1) |
|
|
1 |
|
|
|
46 |
(2) |
|
|
2 |
|
IMAX MPX (3D) |
|
|
11 |
(1) |
|
|
4 |
|
|
|
20 |
(2) |
|
|
9 |
|
IMAX Digital (3D) |
|
|
356 |
(1) |
|
|
288 |
(3) |
|
|
190 |
(2) |
|
|
175 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
560 |
|
|
|
294 |
|
|
|
447 |
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the six months ended June 30, 2011, the Company upgraded 28 film-based IMAX theater
systems to IMAX digital theater systems (all sales arrangements). |
|
(2) |
|
During the six months ended June 30, 2010, the Company upgraded 21 film-based IMAX theater
systems to IMAX digital theater systems (20 sales arrangements and 1 joint revenue sharing
arrangement). |
|
(3) |
|
Includes 128 and 70 theater systems as at June 30, 2011 and 2010, respectively, under joint
revenue sharing arrangements. |
The following table outlines the breakdown of the theater network by type and geographic
location as at June 30:
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Theater Network Base |
|
|
2010 Theater Network Base |
|
|
|
Commercial |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
Multiplex |
|
|
Destination |
|
|
Institutional |
|
|
Total |
|
|
Multiplex |
|
|
Destination |
|
|
Institutional |
|
|
Total |
|
United States |
|
|
245 |
|
|
|
10 |
|
|
|
64 |
|
|
|
319 |
|
|
|
182 |
|
|
|
8 |
|
|
|
66 |
|
|
|
256 |
|
Canada |
|
|
19 |
|
|
|
2 |
|
|
|
7 |
|
|
|
28 |
|
|
|
13 |
|
|
|
2 |
|
|
|
7 |
|
|
|
22 |
|
Mexico |
|
|
7 |
|
|
|
|
|
|
|
10 |
|
|
|
17 |
|
|
|
8 |
|
|
|
|
|
|
|
11 |
|
|
|
19 |
|
Russia & the CIS |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Western Europe |
|
|
38 |
|
|
|
7 |
|
|
|
8 |
|
|
|
53 |
|
|
|
26 |
|
|
|
7 |
|
|
|
9 |
|
|
|
42 |
|
Rest of Europe |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Japan |
|
|
10 |
|
|
|
2 |
|
|
|
6 |
|
|
|
18 |
|
|
|
5 |
|
|
|
2 |
|
|
|
7 |
|
|
|
14 |
|
Greater China (1) |
|
|
28 |
|
|
|
|
|
|
|
18 |
|
|
|
46 |
|
|
|
12 |
|
|
|
|
|
|
|
14 |
|
|
|
26 |
|
Rest of World |
|
|
40 |
|
|
|
4 |
|
|
|
5 |
|
|
|
49 |
|
|
|
38 |
|
|
|
3 |
|
|
|
8 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
417 |
(2) |
|
|
25 |
|
|
|
118 |
|
|
|
560 |
|
|
|
303 |
(2) |
|
|
22 |
|
|
|
122 |
|
|
|
447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Greater China includes China, Hong Kong, Taiwan and Macau. |
|
(2) |
|
Includes 204 and 126 theater systems in operation as at June 30, 2011
and 2010, respectively, under joint revenue sharing arrangements. |
CRITICAL ACCOUNTING POLICIES
The Company prepares its interim condensed consolidated financial statements in accordance
with United States Generally Accepted Accounting Principles (U.S. GAAP).
The preparation of these condensed consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. On an ongoing basis, management evaluates its estimates, including those related to
selling prices associated with the individual elements in multiple element arrangements; residual
values of leased theater systems; economic lives of leased assets; allowances for potential
uncollectibility of accounts receivable, financing receivables and net investment in leases;
provisions for inventory obsolescence; ultimate revenues for film assets; impairment provisions for
film assets, long-lived assets and goodwill; depreciable lives of property, plant and equipment;
useful lives of intangible assets; pension plan and post retirement assumptions; accruals for
contingencies including tax contingencies; valuation allowances for deferred income tax assets;
and, estimates of the fair value and expected exercise dates of stock-based payment awards.
Management bases its estimates on historic experience, future expectations and other assumptions
that are believed to be reasonable at the date of the consolidated 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, and differences may be material. The
Companys significant accounting policies are discussed in note 2 to its audited consolidated
financial statements in the Companys 2010 Annual Report on Form 10-K for the year ended December
31, 2010 (the 2010 Form 10-K) and are summarized below.
The Company considers the following significant estimates, assumptions and judgments to have
the most significant effect on its results:
Revenue Recognition
The Company generates revenue from various sources as follows:
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design, manufacture, sale and lease of proprietary theater systems for IMAX theaters
principally owned and operated by commercial and institutional customers located in 46
countries as at June 30, 2011; |
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production, digital re-mastering, post-production and/or distribution of certain films
shown throughout the IMAX theater network; |
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operation of certain IMAX theaters primarily in the United States; |
41
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provision of other services to the IMAX theater network, including ongoing maintenance and
extended warranty services for IMAX theater systems; and |
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other activities, which includes short-term rental of cameras and aftermarket sales of
projector system components. |
Multiple Element Arrangements
The Companys revenue arrangements with certain customers may involve multiple elements
consisting of a theater system (projector, sound system, screen system and, if applicable, 3D
glasses cleaning machine); services associated with the theater system including theater design
support, supervision of installation, and projectionist training; a license to use of the IMAX
brand; 3D glasses; maintenance and extended warranty services; and licensing of films. The Company
evaluates all elements in an arrangement to determine what are considered typical deliverables for
accounting purposes and which of the deliverables represent separate units of accounting based on
the applicable accounting guidance in the Leases Topic of the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC or Codification); the Guarantees Topic of the
FASB ASC; the Entertainment Films Topic of FASB ASC; and the Revenue Recognition Topic of the
FASB ASC. If separate units of accounting are either required under the relevant accounting
standards or determined to be applicable under the Revenue Recognition Topic, the total
consideration received or receivable in the arrangement is allocated based on the applicable
guidance in the above noted standards.
Theater Systems
The Company has identified the projection system, sound system, screen system and, if
applicable, 3D glasses cleaning machine, theater design support, supervision of installation,
projectionist training and the use of the IMAX brand to be a single deliverable and a single unit
of accounting (the System Deliverable). When an arrangement does not include all the elements of
a System Deliverable, the elements of the System Deliverable included in the arrangement are
considered by the Company to be a single deliverable and a single unit of accounting. The Company
is not responsible for the physical installation of the equipment in the customers facility;
however, the Company supervises the installation by the customer. The customer has the right to use
the IMAX brand from the date the Company and the customer enter into an arrangement.
The Companys System Deliverable arrangements involve either a lease or a sale of the theater
system. Consideration in the Companys arrangements that are not joint revenue sharing
arrangements, consists of upfront or initial payments made before and after the final installation
of the theater system equipment and ongoing payments throughout the term of the lease or over a
period of time, as specified in the arrangement. The ongoing payments are the greater of an annual
fixed minimum amount or a certain percentage of the theater box-office. Amounts received in excess
of the annual fixed minimum amounts are considered contingent payments. The Companys arrangements
are non-cancellable, unless the Company fails to perform its obligations. In the absence of a
material default by the Company, there is no right to any remedy for the customer under the
Companys arrangements. If a material default by the Company exists, the customer has the right to
terminate the arrangement and seek a refund only if the customer provides notice to the Company of
a material default and only if the Company does not cure the default within a specified period.
Sales Arrangements
For arrangements qualifying as sales, the revenue allocated to the System Deliverable is
recognized in accordance with the Revenue Recognition Topic of the FASB ASC, when all of the
following conditions have been met: (i) the projector, sound system and screen system have been
installed and are in full working condition, (ii) the 3D glasses cleaning machine, if applicable,
has been delivered, (iii) projectionist training has been completed, and (iv) the earlier of (a)
receipt of written customer acceptance certifying the completion of installation and run-in testing
of the equipment and the completion of projectionist training or (b) public opening of the theater,
provided there is persuasive evidence of an arrangement, the price is fixed or determinable and
collectibility is reasonably assured.
The initial revenue recognized consists of the initial payments received and the present value
of any future initial payments and fixed minimum ongoing payments that have been attributed to this
unit of accounting. Contingent payments in excess of the fixed minimum ongoing payments are
recognized when reported by theater operators, provided collectibility is reasonably assured.
The Company has also agreed, on occasion, to sell equipment under lease or at the end of a
lease term. Consideration agreed to for these lease buyouts is included in revenues from equipment
and product sales, when persuasive evidence of an arrangement exists, the
42
fees are fixed or determinable, collectibility is reasonably assured and title to the theater
system passes from the Company to the customer.
In a certain sales arrangement not subject to the provisions of the amended FASB ASC 605-25,
Revenue Recognition: Multiple-Element Arrangements (ASC 605-25), the Company provided a
customer with digital upgrades on several systems, including several specified upgrades to an
as-of-yet undeveloped product. At the current period-end, the Company has not yet established the
fair value of this product, and as a result, the Company cannot determine the arrangements
consideration, nor its allocation of consideration between delivered and undelivered items.
Consequently, revenue recognition has been deferred for all delivered items in the arrangement.
Once the Company determines an objective and reliable fair value of the undeveloped specified
upgrade, the Company will be able to calculate total arrangement consideration and consequently,
the Company will be able to recognize revenue on the delivered elements of the arrangement. If the
arrangement is materially modified in the future such that contract consideration becomes fixed,
the arrangement in its entirety would be subject to the provisions of the amended FASB ASC 605-25
and the Company would be required to develop, absent an established selling price for the
undeveloped specified upgrade, a best estimated selling price for the undeveloped specified
upgrade, allocate the arrangements consideration on a relative selling price allocation basis, and
recognize revenue on the delivered elements based on that allocation.
Lease Arrangements
The Company uses the Leases Topic of the FASB ASC to evaluate whether an arrangement is a
lease and the classification of the lease. Arrangements not within the scope of the accounting
standard are accounted for either as a sales or services arrangement, as applicable.
For lease arrangements, the Company determines the classification of the lease in accordance
with the Leases Topic of the FASB ASC. A lease arrangement that transfers substantially all of the
benefits and risks incident to ownership of the equipment is classified as a sales-type lease based
on the criteria established in the accounting standard; otherwise the lease is classified as an
operating lease. Prior to commencement of the lease term for the equipment, the Company may modify
certain payment terms or make concessions. If these circumstances occur, the Company reassesses the
classification of the lease based on the modified terms and conditions.
For sales-type leases, the revenue allocated to the System Deliverable is recognized when the
lease term commences, which the Company deems to be when all of the following conditions have been
met: (i) the projector, sound system and screen system have been installed and are in full working
condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii)
projectionist training has been completed, and (iv) the earlier of (a) receipt of the written
customer acceptance certifying the completion of installation and run-in testing of the equipment
and the completion of projectionist training or (b) public opening of the theater, provided
collectibility is reasonably assured.
The initial revenue recognized for sales-type leases consists of the initial payments received
and the present value of future initial payments and fixed minimum ongoing payments computed at the
interest rate implicit in the lease. Contingent payments in excess of the fixed minimum payments
are recognized when reported by theater operators, provided collectibility is reasonably assured.
For operating leases, initial payments and fixed minimum ongoing payments are recognized as
revenue on a straight-line basis over the lease term. For operating leases, the lease term is
considered to commence when all of the following conditions have been met: (i) the projector, sound
system and screen system have been installed and are in full working condition, (ii) the 3D glasses
cleaning machine, if applicable, has been delivered, (iii) projectionist training has been
completed, and (iv) the earlier of (a) receipt of the written customer acceptance certifying the
completion of installation and run-in testing of the equipment and the completion of projectionist
training or (b) public opening of the theater. Contingent payments in excess of fixed minimum
ongoing payments are recognized as revenue when reported by theater operators, provided
collectibility is reasonably assured.
For joint revenue sharing arrangements, where the Company receives a portion of a theaters
box-office and concession revenues, in exchange for placing a theater system at the theater
operators venue, revenue is recognized when box-office and concession revenues are reported by the
theater operator, provided collectibility is reasonably assured.
Equipment and components allocated to be used in future joint revenue sharing arrangements, as
well as direct labor costs and an allocation of direct production costs, are included in assets
under construction until such equipment is installed and in working condition, at which time the
equipment is depreciated on a straight-line basis over the lesser of the term of the joint revenue
sharing arrangement and the equipments anticipated useful life.
43
Finance Income
Finance income is recognized over the term of the lease or over the period of time specified
in the sales arrangement, provided collectibility is reasonably assured. Finance income recognition
ceases when the Company determines that the associated receivable is not recoverable.
Terminations, Consensual Buyouts and Concessions
The Company enters into theater system arrangements with customers that provide for customer
payment obligations prior to the scheduled installation of the theater system. During the period of
time between signing and the installation of the theater system, which may extend several years,
certain customers may be unable to, or elect not to, proceed with the theater 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 arrangement may be terminated under the default provisions of the
arrangement or by mutual agreement between the Company and the customer (a consensual buyout).
Terminations by default are situations when a customer does not meet the payment obligations under
an arrangement and the Company retains the amounts paid by the customer. Under a consensual buyout,
the Company and the customer agree, in writing, to a settlement and to release each other of any
further obligations under the arrangement or an arbitrated settlement is reached. Any initial
payments retained or additional payments received by the Company are recognized as revenue when the
settlement arrangements are executed and the cash is received, respectively. These termination and
consensual buyout amounts are recognized in Other revenues.
In addition, the Company could agree with customers to convert their obligations for other
theater system configurations that have not yet been installed to arrangements to acquire or lease
the IMAX digital theater system. The Company considers these situations to be a termination of the
previous arrangement and origination of a new arrangement for the IMAX digital theater system. For
all arrangements entered into or modified prior to the date of adoption of the amended FASB ASC
605-25, the Company continues to defer an amount of any initial fees received from the customer
such that the aggregate of the fees deferred and the net present value of the future fixed initial
and ongoing payments to be received from the customer equals the selling price of the IMAX digital
theater system to be leased or acquired by the customer. Any residual portion of the initial fees
received from the customer for the terminated theater system is recorded in Other revenues at the
time when the obligation for the original theater system is terminated and the new theater system
arrangement is signed. Under the amended FASB ASC 605-25, as described in note 2 to the
accompanying notes to the unaudited condensed consolidated financial statements, for all
arrangements entered into or materially modified after the date of adoption, the total arrangement
consideration to be received is allocated on a relative selling price basis to the digital upgrade
and the termination of the previous theater system. The arrangement consideration allocated to the
termination of the existing arrangement is recorded in Other revenues at the time when the
obligation for the original theater system is terminated and the new theater system arrangement is
signed.
The Company may offer certain incentives to customers to complete theater system transactions
including payment concessions or free services and products such as film licenses or 3D glasses.
Reductions in, and deferral of, payments are taken into account in determining the sales price
either by a direct reduction in the sales price or a reduction of payments to be discounted in
accordance with the Leases or Interests Topic of the FASB ASC. Free products and services are
accounted for as separate units of accounting. Other consideration given by the Company to
customers are accounted for in accordance with the Revenue Recognition Topic of the FASB ASC.
Maintenance and Extended Warranty Services
Maintenance and extended warranty services may be provided under a multiple element
arrangement or as a separately priced contract. Revenues related to these services are deferred and
recognized on a straight-line basis over the contract period and are recognized in Services
revenues. Maintenance and extended warranty services includes maintenance of the customers
equipment and replacement parts. Under certain maintenance arrangements, maintenance services may
include additional training services to the customers technicians. All costs associated with this
maintenance and extended warranty program are expensed as incurred. A loss on maintenance and
extended warranty services is recognized if the expected cost of providing the services under the
contracts exceeds the related deferred revenue.
44
Film Production and IMAX DMR Services
In certain film arrangements, the Company produces a film financed by third parties, whereby
the third party retains the copyright and the Company obtains exclusive distribution rights. Under
these arrangements, the Company is entitled to receive a fixed fee or to retain as a fee the excess
of funding over cost of production (the production fee). The third parties receive a portion of
the revenues received by the Company from distributing the film, which is charged to costs and
expenses applicable to revenues-services. The production fees are deferred, and recognized as a
reduction in the cost of the film, based on the ratio of the Companys distribution revenues
recognized in the current period to the ultimate distribution revenues expected from the film.
Revenue from film production services where the Company does not hold the associated
distribution rights are recognized in Services revenues when performance of the contractual service
is complete, provided there is persuasive evidence of an agreement, the fee is fixed or
determinable and collectibility is reasonably assured.
Revenues from digitally re-mastering (IMAX DMR) films where third parties own or hold the
copyrights and the rights to distribute the film are derived in the form of processing fees and
recoupments calculated as a percentage of box-office receipts generated from the re-mastered films.
Processing fees are recognized as Services revenues when the performance of the related
re-mastering service is completed, provided there is persuasive evidence of an arrangement, the fee
is fixed or determinable and collectibility is reasonably assured. Recoupments, calculated as a
percentage of box-office receipts, are recognized as Services revenues when box-office receipts are
reported by the third party that owns or holds the related film rights, provided collectibility is
reasonably assured.
Losses on film production and IMAX DMR services are recognized as costs and expenses
applicable to revenues-services in the period when it is determined that the Companys estimate of
total revenues to be realized by the Company will not exceed estimated total production costs to be
expended on the film production and the cost of IMAX DMR services.
Film Distribution
Revenue from the licensing of films is recognized in Services revenues when persuasive
evidence of a licensing arrangement exists, the film has been completed and delivered, the license
period has begun, the fee is fixed or determinable and collectibility is reasonably assured. When
license fees are based on a percentage of box-office receipts, revenue is recognized when
box-office receipts are reported by exhibitors, provided collectibility is reasonably assured.
Film Post-Production Services
Revenues from post-production film services are recognized in Services revenue when
performance of the contracted services is complete provided there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collectibility is reasonably assured.
Theater Operations Revenue
The Company recognizes revenue in Services revenues from its owned and operated theaters
resulting from box-office ticket and concession sales as tickets are sold, films are shown and upon
the sale of various concessions. The sales are cash or credit card transactions with theatergoers
based on fixed prices per seat or per concession item.
In addition, the Company enters into commercial arrangements with third party theater owners
resulting in the sharing of profits and losses which are recognized in Services revenues when
reported by such theaters. The Company also provides management services to certain theaters and
recognizes revenue over the term of such services.
Other
Revenues on camera rentals are recognized in Rental revenue over the rental period.
Revenue from the sale of 3D glasses is recognized in Equipment and product sales revenue when
the 3D glasses have been delivered to the customer.
Other service revenues are recognized in Service revenues when the performance of contracted
services is complete.
45
Allowances for Accounts Receivable and Financing Receivables
Allowances for doubtful accounts receivable are based on the Companys assessment of the
collectibility of specific customer balances, which is based upon a review of the customers credit
worthiness, past collection history and the underlying asset value of the equipment, where
applicable. Interest on overdue accounts receivable is recognized as income as the amounts are
collected.
The Company monitors the performance of the theaters to which it has leased or sold theater
systems which are subject to ongoing payments. When facts and circumstances indicate that there is
a potential impairment in the accounts receivable, net investment in lease or a financing
receivable, the Company will evaluate the potential outcome of either renegotiations involving
changes in the terms of the receivable or defaults on the existing lease or financed sale
agreements. The Company will record a provision if it is considered probable that the Company will
be unable to collect all amounts due under the contractual terms of the arrangement or a
renegotiated lease amount will cause a reclassification of the sales-type lease to an operating
lease.
When the net investment in lease or the financing receivable is impaired, the Company will
recognize a provision for the difference between the carrying value in the investment and the
present value of expected future cash flows discounted using the effective interest rate for the
net investment in the lease or the financing receivable. If the Company expects to recover the
theater system, the provision is equal to the excess of the carrying value of the investment over
the fair value of the equipment.
When the minimum lease payments are renegotiated and the lease continues to be classified as a
sales-type lease, the reduction in payments is applied to reduce unearned finance income.
These provisions are adjusted when there is a significant change in the amount or timing of
the expected future cash flows or when actual cash flows differ from cash flow previously expected.
Once a net investment in lease or financing receivable is considered impaired, the Company
does not recognize interest income until the collectibility issues are resolved. When finance
income is not recognized, any payments received are applied against outstanding gross minimum lease
amounts receivable or gross receivables from financed sales.
Inventories
Inventories are carried at the lower of cost, determined on an average cost basis, and net
realizable value except for raw materials, which are carried out at the lower of cost and
replacement cost. Finished goods and work-in-process include the cost of raw materials, direct
labor, theater design costs, and an applicable share of manufacturing overhead costs.
The costs related to theater systems under sales and sales-type lease arrangement are relieved
from inventory to costs and expenses applicable to revenues-equipment and product sales when
revenue recognition criteria are met. The costs related to theater systems under operating lease
arrangements and joint revenue sharing arrangements are transferred from inventory to assets under
construction in property, plant and equipment when allocated to a signed joint revenue sharing
arrangement or when the arrangement is first classified as an operating lease.
The Company records provisions for excess and obsolete inventory based upon current estimates
of future events and conditions, including the anticipated installation dates for the current
backlog of theater system contracts, technological developments, signings in negotiation, growth
prospects within the customers ultimate marketplace and anticipated market acceptance of the
Companys current and pending theater systems.
Finished goods inventories can contain theater systems for which title has passed to the
Companys customer, under the contract, but the revenue recognition criteria as discussed above
have not been met.
Asset Impairments
The Company performs an impairment test on its goodwill on an annual basis, coincident with
the year-end, as well as in quarters where events or changes in circumstances suggest that the
carrying amount may not be recoverable.
Goodwill impairment is assessed at the reporting unit level by comparing the units carrying
value, including goodwill, to the fair value of the unit. Significant estimates are involved in the
impairment test. The carrying values of each unit are subject to allocations
46
of certain assets and liabilities that the Company has applied in a systematic and rational
manner. The fair value of the Companys units is assessed using a discounted cash flow model. The
model is constructed using the Companys budget and long-range plan as a base.
Long-lived asset impairment testing is performed at the lowest level of an asset group at
which identifiable cash flows are largely independent. In performing its review for recoverability,
the Company estimates the future cash flows expected to result from the use of the asset or asset
group and its eventual disposition. If the sum of the expected future cash flows is less than the
carrying amount of the asset or asset group, an impairment loss is recognized in the consolidated
statement of operations. Measurement of the impairment loss is based on the excess of the carrying
amount of the asset or asset group over the fair value calculated using discounted expected future
cash flows.
The Companys estimates of future cash flows involve anticipating future revenue streams,
which contain many assumptions that are subject to variability, as well as estimates for future
cash outlays, the amounts of which, and the timing of which are both uncertain. Actual results that
differ from the Companys budget and long-range plan could result in a significantly different
result to an impairment test, which could impact earnings.
Foreign Currency Translation
Monetary assets and liabilities of the Companys operations which are denominated in
currencies other than the functional currency are translated into the functional currency at the
exchange rates prevailing at the end of the period. Non-monetary items are translated at historical
exchange rates. Revenue and expense transactions are translated at exchange rates prevalent at the
transaction date. Such exchange gains and losses are included in the determination of earnings in
the period in which they arise.
Foreign currency derivatives are recognized and measured in the balance sheet at fair value.
Changes in the fair value (gains or losses) are recognized in the consolidated statement of
operations except for derivatives designated and qualifying as foreign currency hedging
instruments. For foreign currency hedging instruments, the effective portion of the gain or loss in
a hedge of a forecasted transaction is reported in other comprehensive income and reclassified to
the consolidated statement of operations when the forecasted transaction occurs. Any ineffective
portion is recognized immediately in the consolidated statement of operations.
Pension Plan and Postretirement Benefit Obligations Assumptions
The Companys pension plan and postretirement benefit obligations and related costs are
calculated using actuarial concepts, within the framework of the Compensation Retirement
Benefits Topic of the FASB ASC. A critical assumption to this accounting is the discount rate. The
Company evaluates this critical assumption annually or when otherwise required to by accounting
standards. Other assumptions include factors such as expected retirement date, mortality rate, 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 Companys discount rate was determined by
considering the average of pension yield curves constructed from a large population of high-quality
corporate bonds. The resulting discount rate reflects the matching of plan liability cash flows to
the yield curves.
The discount rate used is a key assumption in the determination of the pension benefit
obligation and expense. A 1.0% change in the discount rate used could result in a $1.7 $2.0
million increase or decrease in the pension benefit obligation with a corresponding benefit or
charge recognized in other comprehensive income in the year. A one year delay in Mr. Gelfonds
retirement date would increase the discount rate by 0.3% and have a $0.4 million impact on the
expected pension payment.
Deferred Tax Asset Valuation
As at June 30, 2011, the Company had net deferred income tax assets of $56.2 million. The
Companys management assesses realization of its deferred tax assets based on all available
evidence in order to conclude whether it is more likely than not that the deferred tax assets will
be realized. Available evidence considered by the Company includes, but is not limited to, the
Companys historic operating results, projected future operating results, reversing temporary
differences, contracted sales backlog at June 30, 2011, changing business circumstances, and the
ability to realize certain deferred tax assets through loss and tax credit carry-back and
carry-forward strategies.
47
When there is a change in circumstances that causes a change in judgment about the
realizability of the deferred tax assets, the Company would adjust the applicable valuation
allowance in the period when such change occurs.
Tax Exposures
The Company is subject to ongoing tax exposures, 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 the
Companys ongoing assessments of such matters which require judgment and can materially increase or
decrease its effective rate as well as impact operating results. The Company provides for such
exposures in accordance with Income Taxes Topic of the FASB ASC.
Stock-Based Compensation
The Company utilizes a lattice-binomial option-pricing model (the Binomial Model) to
determine the fair value of stock-based payment awards. The fair value determined by the Binomial
Model is affected by the Companys stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited to, the Companys
expected stock price volatility over the term of the awards, and actual and projected employee
stock option exercise behaviors. The Binomial Model also considers the expected exercise multiple
which is the multiple of exercise price to grant price at which exercises are expected to occur on
average. 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 Companys
employee stock options and stock appreciation rights (SARs) have certain characteristics that are
significantly different from traded options, and because changes in the subjective assumptions can
materially affect the estimated value, in managements opinion, the Binomial Model best provides an
accurate measure of the fair value of the Companys employee stock options and SARs. Although the
fair value of employee stock options and SARs are determined in accordance with the Equity topic of
the FASB ASC using an option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
Impact of Recently Issued Accounting Pronouncements
See note 2 to the accompanying condensed consolidated financial statements in Item 1 for
information regarding recent changes in accounting policies and the impact of recently issued
accounting pronouncements impacting the Company.
Non-GAAP Financial Measures
In this report, the Company presents adjusted net income and adjusted net income per diluted
share as supplemental measures of performance of the Company, which are not recognized under US
GAAP. The Company presents adjusted net income and adjusted net income per diluted share because it
believes that they are important supplemental measures of its comparable controllable operating
performance and it wants to ensure that its investors fully understand the impact of its variable
share-based compensation, provision for arbitration award and deferred taxes on its net income. The
Company presents gross margin from its joint revenue sharing arrangements segment excluding initial
launch costs because it believes that it is an important supplemental measure used by management to
evaluate ongoing joint revenue sharing arrangement theater performance. Management uses these
measures to review operating performance on a comparable basis from period to period. However,
these non-GAAP measures may not be comparable to similarly titled amounts reported by other
companies. Adjusted net income and adjusted net income per diluted share should be considered in
addition to, and not as a substitute for, net income and other measures of financial performance
reported in accordance with GAAP.
48
RESULTS OF OPERATIONS
As identified in note 15 to the accompanying condensed consolidated financial statements in
Item 1, the Company has eight reportable segments identified by category of product sold or service
provided: IMAX systems; theater system maintenance; joint revenue sharing arrangements; film
production and IMAX DMR; film distribution; film post-production; theater operations; and other.
The IMAX systems segment designs, manufactures, sells or leases IMAX theater projection system
equipment. The theater system maintenance segment maintains IMAX theater projection system
equipment in the IMAX theater network. The joint revenue sharing arrangements segment installs IMAX
theater projection system equipment to an exhibitor in exchange for a certain percentage of
box-office and concession revenue. The film production and IMAX DMR segment produces films and
performs film re-mastering services. The film distribution segment distributes films for which the
Company has distribution rights. The film post-production segment provides film post-production and
film print services. The theater operations segment owns and operates certain IMAX theaters. The
other segment includes camera rentals and other miscellaneous items. The accounting policies of the
segments are the same as those described in note 2 to the audited consolidated financial statements
included in the Companys 2010 Form 10-K.
The Companys Managements Discussion and Analysis of Financial Condition and Results of
Operations have been organized and discussed with respect to the above stated segments. Management
feels that a discussion and analysis based on its segments is significantly more relevant as the
Companys condensed consolidated statements of operations captions combine results from several
segments.
Three Months Ended June 30, 2011 Versus Three Months Ended June 30, 2010
The Company reported net income of $1.8 million or $0.03 per basic and diluted share for the
second quarter of 2011, as compared to net income of $13.3 million or $0.21 per basic share and
$0.20 per diluted share for the second quarter of 2010. Net income for the quarter includes a $1.4
million pre-tax charge or $0.02 per diluted share (2010 recovery of $4.9 million or $0.07 per
diluted share) for variable share-based compensation expense primarily due to the increase in the
Companys stock price during the quarter (from $32.17 per share to $32.43 per share) and a deferred
tax provision of $1.4 million ($0.02 per diluted share). Adjusted net income, which consists of net
income excluding the impact of variable share-based compensation and the deferred tax provision was
$4.6 million or $0.07 per diluted share in the second quarter of 2011 as compared to adjusted net
income of $8.4 million or $0.13 per diluted share for the second quarter of 2010. A reconciliation
of net income, the most directly comparable GAAP measure, to adjusted net income and adjusted net
income per diluted share is presented in the table below:
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Three Months Ended |
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Three Months Ended |
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June 30, 2011 |
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|
June 30, 2010 |
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Net Income |
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Diluted EPS |
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Net Income |
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Diluted EPS |
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Reported |
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$ |
1,825 |
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|
$ |
0.03 |
|
|
$ |
13,302 |
|
|
$ |
0.20 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable stock compensation |
|
|
1,357 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
Deferred tax provision |
|
|
1,419 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery of variable stock compensation |
|
|
|
|
|
|
|
|
|
|
4,899 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
$ |
4,601 |
|
|
$ |
0.07 |
|
|
$ |
8,403 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
|
|
|
|
68,699 |
|
|
|
|
|
|
|
66,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
The following table sets forth the breakdown of revenue and gross margin by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
Gross Margin |
|
|
|
Three Months Ended June 30, |
|
|
Three Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
IMAX Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and sales-type leases(1) |
|
$ |
17,857 |
|
|
$ |
14,428 |
|
|
$ |
8,892 |
|
|
$ |
7,216 |
|
Ongoing rent, fees, and finance income(2) |
|
|
2,613 |
|
|
|
2,901 |
|
|
|
2,548 |
|
|
|
2,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,470 |
|
|
|
17,329 |
|
|
|
11,440 |
|
|
|
9,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater System Maintenance |
|
|
6,127 |
|
|
|
5,102 |
|
|
|
2,381 |
|
|
|
2,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint Revenue Sharing Arrangements |
|
|
8,347 |
|
|
|
8,494 |
|
|
|
4,881 |
|
|
|
6,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production and IMAX DMR |
|
|
12,422 |
|
|
|
14,540 |
|
|
|
6,461 |
|
|
|
6,823 |
|
Distribution |
|
|
5,275 |
|
|
|
3,870 |
|
|
|
487 |
|
|
|
719 |
|
Post-production |
|
|
1,039 |
|
|
|
2,326 |
|
|
|
307 |
|
|
|
837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,736 |
|
|
|
20,736 |
|
|
|
7,255 |
|
|
|
8,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater Operations |
|
|
1,918 |
|
|
|
2,954 |
|
|
|
(242 |
) |
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
1,634 |
|
|
|
983 |
|
|
|
587 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
57,232 |
|
|
$ |
55,598 |
|
|
$ |
26,302 |
|
|
$ |
27,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes initial payments and the present value of fixed minimum payments from equipment,
sales and sales-type lease transactions. |
|
(2) |
|
Includes rental income from operating leases, contingent rents from operating and sales-type
leases, contingent fees from sales arrangements and finance income. |
Revenues and Gross Margin
The Companys revenues for the second quarter of 2011 increased by 2.9% to $57.2 million from
$55.6 million in the same period last year due in large part to increase in IMAX systems revenue,
partially offset by decreases in revenue from film and joint revenue sharing arrangements. The
gross margin across all segments in the second quarter of 2011 was $26.3 million, or 46.0% of total
revenue, compared to $27.0 million, or 48.6% of total revenue in the second quarter of 2010.
IMAX Systems
IMAX systems revenue increased 18.1% to $20.5 million in the second quarter of 2011 as
compared to $17.3 million in the second quarter of 2010, resulting primarily from the installation
of 6 more full, theater systems (excluding digital upgrades) under sales or sales-type leases as
compared to the prior year comparative period.
Revenue from sales and sales-type leases increased 23.8% to $17.9 million in the second
quarter of 2011 from $14.4 million in the second quarter of 2010. The Company recognized revenue on
11 full, new theater systems which qualified as either sales or sales-type leases in the second
quarter of 2011, with a total value of $13.9 million, as compared to 6 in the second quarter of
2010 with a total value of $9.4 million. The Company also recognized revenue on 6 digital upgrades
in the second quarter of 2011, with a total value of $2.8 million, as compared to 11 in the second
quarter of 2010 with a total value of $4.9 million. Digital upgrades have lower sales prices and
gross margin than full theater system installations. The Company has decided to offer digital
upgrades at lower selling prices for strategic reasons since the Company believes that digital
systems increase flexibility and profitability for the Companys existing exhibition customers. The
Company recognized revenue on one used system during the three months ended June 30, 2011 with a
value of $1.2 million as compared to none during the three months ended June 30, 2010.
50
Average revenue per full, new sales and sales-type lease system was $1.3 million for the three
months ended June 30, 2011, as compared to $1.6 million for the three months ended June 30, 2010.
Average revenue per full, new sales and sales-type lease system was lower in the second quarter of
2011 compared to the prior year comparative period primarily due to the mix of units sold in the
quarter. Average revenue per digital upgrade was $0.5 million for the three months ended June 30,
2011, as compared to $0.4 million experienced during the three months ended June 30, 2010. The
breakdown in mix of sales and sales-type lease and joint revenue sharing arrangement (see
discussion below) installations by theater system configuration for the second quarter of 2011 and
2010 is outlined in the table below.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Sales and Sales-type lease systems installed and recognized |
|
|
|
|
|
|
|
|
IMAX 3D GT |
|
|
1 |
|
|
|
1 |
|
IMAX digital |
|
|
17 |
(1) |
|
|
16 |
(2) |
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
IMAX digital installed and deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
Joint revenue sharing arrangements installed and operating |
|
|
|
|
|
|
|
|
IMAX digital |
|
|
23 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the digital upgrade of 6 systems (all sales arrangements) from film-based to
digital. |
|
(2) |
|
Includes the digital upgrade of 11 systems (all sales arrangements) from film-based to
digital. |
Settlement revenue was $nil for the three months ended June 30, 2011 and 2010, respectively.
IMAX theater systems gross margin from full, new sales and sale-type leases, excluding the
impact of settlements and asset impairment charges was 65.6% in the second quarter of 2011 in
comparison to 66.1% in the second quarter of 2010. The gross margin on digital upgrades, excluding
the impact of settlements and asset impairment charges, was $0.6 million in the second quarter of
2011 in comparison to $1.6 million in the prior year quarter reflecting the lower number of digital
system upgrades this year in comparison to the prior year. The gross margin on the sale of one used
system recognized in the three months ended June 30, 2011 was $0.1 million.
Ongoing rent revenue and finance income was $2.6 million in the second quarter of 2011
compared to $2.9 million in the second quarter of 2010. Gross margin for ongoing rent and finance
income in the second quarter of 2011 decreased to $2.5 million from $2.7 million in the second
quarter of 2010. Contingent fees included in this caption amounted to $0.6 million and $0.3 million
in the three months ended June 30, 2011 and 2010, respectively.
Theater System Maintenance
Theater system maintenance revenue increased 20.1% to $6.1 million during the second quarter
of 2011 as compared to $5.1 million in the second quarter of 2010. Theater system maintenance gross
margin increased $0.3 million to $2.4 million in the second quarter of 2011 as compared to $2.1
million in the prior year comparative period. Maintenance revenue continues to grow as the number
of theaters in the IMAX theater network grows. Maintenance margins can vary depending on the mix of
theater system configurations in the theater network and the date(s) of installation and/or
service.
Joint Revenue Sharing Arrangements
Revenue from joint revenue sharing arrangements decreased 1.7% to $8.3 million in the second
quarter of 2011 compared to $8.5 million in the second quarter of 2010. The Company ended the
second quarter with 204 theaters operating under joint revenue sharing arrangements as compared to
126 theaters at the end of the second quarter of 2010. The decrease in revenues from joint revenue
sharing arrangements was due to lower per-screen gross box office revenue experienced from the
films released to the joint
51
revenue sharing theater network in the quarter. During the quarter, the Company installed 23 full, new
theaters under joint revenue sharing arrangements, as compared to 4 full, new theaters during the
prior year quarter.
The gross margin from joint revenue sharing arrangements in the second quarter of 2011
decreased to $4.9 million compared to $6.5 million in the second quarter of 2010. The decrease in
gross margin was largely a result of a decrease in revenues and higher launch expenses. Included in
the calculation of second quarter gross margin were certain advertising, marketing and selling
expenses of $1.8 million, as compared to $0.7 million incurred in the prior year period. Adjusted
gross margin from joint revenue sharing arrangements, which excludes these launch expenses from
both periods, was $6.7 million in the second quarter of 2011, compared to $7.2 million in the
second quarter of 2010. A reconciliation of gross margin from the joint revenue sharing arrangement
segment, the most directly comparable GAAP measure, to adjusted gross margin is presented in the
table below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Gross margin from joint revenue sharing arrangements |
|
$ |
4,881 |
|
|
$ |
6,501 |
|
Add: |
|
|
|
|
|
|
|
|
Advertising, marketing and selling expenses |
|
|
1,785 |
|
|
|
676 |
|
|
|
|
|
|
|
|
Adjusted gross margin from joint revenue sharing arrangements |
|
$ |
6,666 |
|
|
$ |
7,177 |
|
|
|
|
|
|
|
|
Film
Revenues from the Companys film segments decreased 9.6% to $18.7 million in the second
quarter of 2011 from $20.7 million in the second quarter of 2010. Film production and IMAX DMR
revenues decreased to $12.4 million in the second quarter of 2011 from $14.5 million in the second
quarter of 2010. The decrease in film production and IMAX DMR revenues was primarily as a result of
lower gross box office generated by the films released to the IMAX network in the quarter. Gross
box office generated by IMAX DMR films decreased to $107.7 million for the second quarter of 2011
from $113.9 million for the second quarter of 2010. Gross box office per screen for the three
months ended June 30, 2011 averaged $315,700 in comparison to
$483,500 in the comparable period
last year. In the second quarter of 2011, gross box office was
generated by the release of primarily 9 films
(listed below), as compared to 8 films released during the second quarter of 2010:
|
|
|
Three Months Ended June 30, 2011 Films Released |
|
Three Months Ended June 30, 2010 Films Released |
Sucker Punch: The IMAX Experience
|
|
Avatar: An IMAX 3D Experience |
Fast Five: The IMAX Experience
|
|
Alice in Wonderland: An IMAX 3D Experience |
Thor: An IMAX 3D Experience
|
|
How to Train Your Dragon: An IMAX 3D Experience |
Pirates of the Caribbean: On Stranger Tides: An IMAX
3D Experience
|
|
Iron Man 2: The IMAX Experience
Shrek Forever After: An IMAX 3D Experience |
The Founding of a Party: The IMAX Experience
|
|
Prince of Persia: The Sands of Time: The IMAX Experience |
Kung Fu Panda 2: An IMAX 3D Experience
|
|
Toy Story 3: An IMAX 3D Experience |
Super 8: The IMAX Experience
|
|
The Twilight Saga: Eclipse: The IMAX Experience |
Cars 2: An IMAX 3D Experience |
|
|
Transformers: Dark of the Moon: An IMAX 3D Experience |
|
|
Film distribution revenues increased to $5.3 million in the second quarter of 2011 from $3.9
million in the second quarter of 2010. During the second quarter of 2011, the Company, in
conjunction with WB, released the original film Born to Be Wild 3D: An IMAX 3D Experience to its
network. The Company did not release any new, original titles in the second quarter of 2010.
Film post-production revenues decreased to $1.0 million in the second quarter of 2011 from
$2.3 million in the second quarter of 2010 due primarily to a decrease in third party business.
The Companys gross margin from its film segments decreased in the second quarter of 2011 to
$7.3 million from $8.4 million in the second quarter of 2010. Film production and IMAX DMR gross
margin decreased to $6.5 million in the second quarter of 2011 from $6.8 million in the second
quarter of 2010 primarily due to the decrease in gross box office experienced in the second quarter
of 2011 as compared to the second quarter of 2010, partially offset by lower costs. The film
distribution gross margin decreased in the second quarter of 2011 to $0.5 million from $0.7 million
in the second quarter of 2010. The gross margin for the second quarter of 2011 included a higher
level of marketing costs of $1.4 million (including launch marketing expenditures associated with
the April
52
2011 release of Born to be Wild) as compared to $0.2 million in the prior year comparative
period. During the second quarter of 2011, the gross margin from post-production was $0.3 million
as compared to $0.8 million in the second quarter of 2010.
Theater Operations
Theater operations revenue decreased to $1.9 million in the second quarter of 2011 compared to
$3.0 million experienced in the second quarter of 2010. This decrease is due to a decrease in
average ticket prices and attendance from the prior year comparative period,
primarily due to lower film performance in the current period.
Theater operations gross margin decreased to a loss of $0.2 million in the second quarter of
2011 as compared to a profit of $0.2 million in the second quarter of 2010 primarily due to the
decrease in revenues.
Other
Other revenue increased to $1.6 million in the second quarter of 2011 compared to $1.0 million
in the same period in 2010. Other revenue primarily includes revenue generated from the Companys
camera and rental business and after market sales of projection system parts and 3D glasses.
The gross margin on other revenue increased to $0.6 million from less than $0.1 million in the
prior year comparative period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $19.5 million in the second quarter
of 2011 as compared to $11.1 million in the second quarter of 2010. The $8.4 million increase
experienced from the prior year comparative period was largely the result of the following:
|
|
|
an $8.4 million increase in the Companys stock-based compensation expense (including an
increase of $6.3 million for variable share-based awards); and |
|
|
|
|
a $1.1 million increase in staff-related and compensation costs including an increase in
salaries and benefits of $0.8 million including a higher average Canadian dollar denominated
salary expense, increased staffing and normal merit increases. |
These increases were offset by:
|
|
|
a $1.0 million decrease due to foreign exchange. During the second quarter of 2011, the
Company recorded a foreign exchange gain of $0.1 million for net foreign exchange
gains/losses related to the translation of foreign currency denominated monetary assets and
liabilities and unhedged foreign exchange contracts as compared to a loss of $0.9 million in
the prior year comparative period. See note 10(b) of the accompanying condensed consolidated
financial statements in Item 1 for more information. |
|
|
|
|
a $0.1 million decrease in other general corporate expenditures. |
Research and Development
Research and development expenses increased to $2.1 million in the second quarter of 2011
compared to $1.2 million in the second of 2010. The increased research and development expenses for
the three months ended June 30, 2011 compared to the prior year period are primarily attributable
to ongoing enhancements to the Companys digital projection technology to assure that the Company
continues to provide the highest quality, premiere movie going experience available to consumers,
as well as ongoing work performed on the Companys portable theater initiative.
Receivable Provisions, Net of Recoveries
Receivable provisions net of recoveries for accounts receivable and financing receivables
amounted to a net provision of $0.2 million and $0.4 million in the second quarter of 2011 and
2010, respectively.
53
The Companys accounts receivables and financing receivables are subject to credit risk. These
receivables are concentrated with the leading theater exhibitors and studios in the film
entertainment industry. To minimize the Companys credit risk, the Company retains title to
underlying theater systems that are leased, performs initial and ongoing credit evaluations of its
customers and makes ongoing provisions for its estimate of potentially uncollectible amounts.
Accordingly, the Company believes it has adequately protected itself against exposures relating to
receivables and contractual commitments.
Interest Income and Expense
Interest income decreased to less than $0.1 million in the second quarter of 2011 as compared
to less than $0.1 million in the second quarter of 2010.
Interest expense increased to $0.6 million in the second quarter of 2011 as compared to $0.5
million in the second quarter of 2010. Included in interest expense is the amortization of deferred
finance costs of $0.2 million in the second quarter of 2011 and less than $0.1 million in the
second quarter of 2010. The Companys policy is to defer and amortize, over the life of the debt
instrument, all the costs relating to debt financing which are paid directly to the debt provider.
Income Taxes
The Companys 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 due to foreign exchange,
changes in the Companys valuation allowance based on the Companys recoverability assessments of
deferred tax assets, and favorable or unfavorable resolution of various tax examinations.
There was no change in the Companys estimates of the recoverability of its deferred tax
assets based on an analysis of both positive and negative evidence including projected future
earnings. As at June 30, 2011, the Company had a gross deferred income tax asset of $64.1 million,
against which the Company is carrying a $7.9 million valuation allowance. The Company recorded an
income tax provision of $1.6 million for the three months ended June 30, 2011, of which a provision
of $0.1 million is related to an increase in unrecognized tax benefits. For the three months ended
June 30, 2010, the Company recorded an income tax provision of $0.4 million, of which $0.1 million
was related to an increase in unrecognized tax benefits.
The Company anticipates utilizing the majority of its currently available tax attributes over
the next two years.
54
Six Months Ended June 30, 2011 Versus Six Months Ended June 30, 2010
The Company reported net income of $0.8 million or $0.01 per basic and diluted share for the
six months ended June 30, 2011, as compared to net income of $39.9 million or $0.63 per basic share
and $0.60 per diluted share for the six months ended June 30, 2010.
The six months ended June 30, 2010 included the record-breaking performance of Avatar: An IMAX 3D Experience.
Net income for the six months
ended June 30, 2011 includes a $3.2 million pre-tax charge or $0.05 per diluted share (2010 $3.8
million or $0.06 per diluted share) for variable share-based compensation expense primarily due to
the increase in the Companys stock price during the six months ended June 30, 2011 (from $28.07
per share to $32.43 per share) and its impact on SARs, a one-time $2.1 million pre-tax charge
($0.03 per diluted share) due to an arbitration award arising from an arbitration proceeding
brought against the Company in connection with a discontinued subsidiary and a deferred tax
provision of $1.1 million ($0.01 per diluted share). Adjusted net income, which consists of net
income excluding the impact of variable share-based compensation expense, the charge for the
arbitration award, and the deferred tax provision was $7.1 million or $0.10 per diluted share in
the six months ended June 30, 2011 as compared to adjusted net income of $43.7 million or $0.66 per
diluted share for the six months ended June 30, 2010. A reconciliation of net income, the most
directly comparable GAAP measure, to adjusted net income and adjusted net income per diluted share
is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended June 30, 2011 |
|
|
Ended June 30, 2010 |
|
|
|
Net Income |
|
|
Diluted EPS |
|
|
Net Income |
|
|
Diluted EPS |
|
Net income |
|
$ |
822 |
|
|
$ |
0.01 |
|
|
$ |
39,883 |
|
|
$ |
0.60 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable stock compensation |
|
|
3,160 |
|
|
|
0.05 |
|
|
|
3,848 |
|
|
|
0.06 |
|
Deferred tax provision |
|
|
1,104 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
Provision for arbitration award |
|
|
2,055 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income |
|
$ |
7,141 |
|
|
$ |
0.10 |
|
|
$ |
43,731 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
|
|
|
|
68,378 |
|
|
|
|
|
|
|
66,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the breakdown of revenue and gross margin by category:
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
Gross Margin |
|
|
|
Six Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
IMAX Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and sales-type leases(1) |
|
$ |
37,165 |
|
|
$ |
22,959 |
|
|
$ |
17,834 |
|
|
$ |
9,279 |
|
Ongoing rent, fees, and finance income(2) |
|
|
5,564 |
|
|
|
5,323 |
|
|
|
5,341 |
|
|
|
5,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,729 |
|
|
|
28,282 |
|
|
|
23,175 |
|
|
|
14,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater System Maintenance |
|
|
11,922 |
|
|
|
10,068 |
|
|
|
4,968 |
|
|
|
4,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint Revenue Sharing Arrangements |
|
|
12,387 |
|
|
|
27,430 |
|
|
|
7,059 |
|
|
|
23,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production and IMAX DMR |
|
|
19,680 |
|
|
|
37,992 |
|
|
|
9,220 |
|
|
|
26,324 |
|
Distribution |
|
|
7,892 |
|
|
|
7,142 |
|
|
|
1,113 |
|
|
|
1,461 |
|
Post-production |
|
|
2,663 |
|
|
|
4,918 |
|
|
|
1,996 |
|
|
|
2,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,235 |
|
|
|
50,052 |
|
|
|
12,329 |
|
|
|
30,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater Operations |
|
|
2,899 |
|
|
|
8,903 |
|
|
|
(1,005 |
) |
|
|
1,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
2,220 |
|
|
|
3,646 |
|
|
|
422 |
|
|
|
762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102,392 |
|
|
$ |
128,381 |
|
|
$ |
46,948 |
|
|
$ |
75,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes initial rents and fees and the present value of fixed minimum rents and fees from
equipment, sales and sales-type lease transactions. |
|
(2) |
|
Includes rental income from operating leases, contingent rents from sales-type leases,
contingent fees from sales arrangements and finance income. |
Revenues and Gross Margin
The Companys revenues for the six months ended June 30, 2011 decreased by 20.2% to $102.4
million from $128.4 million in the same period last year due in large part to decreases in revenue
from the Companys film and joint revenue sharing arrangement segments partially offset by higher revenues from
the IMAX systems segment. The six months ended June 30, 2010 included the record-breaking performance of
Avatar: An IMAX 3D Experience.
The gross margin across all
segments in the six months ended June 30, 2011 was $46.9 million, or 45.9% of total revenue,
compared to $75.3 million, or 58.7% of total revenue in the six months ended June 30, 2010.
IMAX Systems
IMAX systems revenue increased 51.1% to $42.7 million in the six months ended June 30, 2011 as
compared to $28.3 million in the six months ended June 30, 2010 resulting primarily from the
installation of 13 more full, theater systems (excluding digital upgrades) under sales and
sales-type leases as compared to the prior year comparative period. In addition, the six months
ended June 30, 2011 included settlement revenue of $0.3 million as compared to $nil in the
comparable period last year.
Revenue from sales and sales-type leases increased 61.9% to $37.2 million in the six months
ended June 30, 2011 from $23.0 million in the six months ended June 30, 2010. The Company
recognized revenue on 22 full, new theater systems which qualified as either sales or sales-type
leases in the six months ended June 30, 2011, with a total value of $27.4 million, versus 9 in the
six months ended June 30, 2010 with a total value of $14.1 million. Additionally, the Company
recognized revenue on 20 digital upgrades in the six months ended June 30, 2011, with a total value
of $8.3 million, as compared to 20 digital upgrades in the six months ended June 30, 2010 with a
total value of $7.6 million. Digital upgrades have lower sales prices and gross margin than a full
theater installation. The Company has decided to offer digital upgrades at lower selling prices for
strategic reasons since the Company believes that digital systems increase flexibility and
profitability for the Companys existing exhibition customers. There was one used system installed
in the six months ended June 30 2011 with a value of $1.2 million as compared to one used system
with a value of $0.9 million recognized in the six months ended 2010.
Average revenue per full, new sales and sales-type lease systems was $1.2 million for the
six months ended June 30, 2011 as compared to $1.6 million for the six months ended June 30, 2010.
Average revenue per digital upgrade was $0.4 million for the six
56
months ended June 30, 2011, as compared to $0.4 million for the six months ended June 30,
2010. The breakdown in mix of sales and sales-type lease, joint revenue sharing arrangements (see
discussion below) and operating lease installations by theater system configuration for the six
months ended June 30, 2011 and 2010 is outlined in the table below.
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Sales and Sales-type lease systems installed and recognized |
|
|
|
|
|
|
|
|
IMAX 3D GT |
|
|
1 |
|
|
|
1 |
|
IMAX Dome |
|
|
|
|
|
|
1 |
|
IMAX 3D SR |
|
|
|
|
|
|
1 |
|
IMAX digital |
|
|
42 |
(1) |
|
|
27 |
(3) |
|
|
|
|
|
|
|
|
|
|
43 |
|
|
|
30 |
|
IMAX digital installed and deferred |
|
|
8 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
30 |
|
Joint revenue sharing arrangements installed and operating |
|
|
|
|
|
|
|
|
IMAX digital |
|
|
33 |
|
|
|
10 |
(3) |
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the digital upgrade of 20 systems (all sales arrangements) from film-based to
digital. |
|
(2) |
|
Includes the digital upgrade of 8 systems (all sales arrangements) from film-based to
digital. |
|
(3) |
|
Includes the digital upgrade of 21 systems (20 sales arrangements and 1 system under a joint
revenue sharing arrangement) from film-based to digital. |
As noted in the table above, 8 theater systems under a digital upgrade sales arrangement were
installed but revenue recognition was deferred in the six months ended June 30, 2011. The
arrangement contained provisions providing the customer with standard digital upgrades, which were
installed, and a number of as-of-yet undeveloped upgrades. The Companys policy is such that once
the fair value for the undeveloped upgrade is established, the Company allocates total contract
consideration, including any upgrade revenues, between the delivered and undelivered elements on a
relative fair value basis and recognizes the revenue allocated to the delivered elements with their
associated costs. If the arrangement is materially modified in the future such that contract
consideration becomes fixed, the arrangement in its entirety would be subject to the provisions of
the amended ASC 605-25 and the Company would be required to develop, absent an established selling
price or third party evidence of the selling price for the undeveloped specified upgrade, a best
estimated selling price for the undeveloped specified upgrade, allocate the arrangements
consideration on a relative selling price allocation basis, and recognize revenue on the delivered
elements based on that allocation. In the six months ended June 30, 2010, the Company did not
defer any recognitions.
Settlement revenue was $0.3 million for the six months ended June 30, 2011 as compared to $nil
in the six months ended June 30, 2010. The amount recognized in the six months ended June 30, 2011
related to a consensual buyout for one uninstalled theater system.
IMAX theater systems margin from full, new sales and sale-type leases, excluding the impact of
settlements and asset impairment charges, was 65.3% in the six months ended June 30, 2011, as
compared to 63.8% in the six months ended June 30, 2010. The gross margin on digital upgrades was
$1.2 million in the six months ended June 30, 2011 in comparison with $1.3 million in the six
months ended June 30, 2010. There was one used system installed during the six months ended June
30, 2011 with a margin of $0.1 million, which is consistent with the one used system with a gross
margin of $0.1 million installed and recognized in the comparable period last year.
Ongoing rent revenue and finance income increased to $5.6 million in the six months ended June
30, 2011 from $5.3 million in the six months ended June 30, 2010. Gross margin for ongoing rent and
finance income increased to $5.3 million in the six months ended June 30, 2011 from $5.1 million in
the six months ended June 30, 2010. Contingent
fees included in this caption amounted to $1.7 million and $0.4 million in the six months ended
June 30, 2011 and 2010, respectively.
57
Theater System Maintenance
Theater system maintenance revenue increased 18.4% to $11.9 million during the six months
ended June 30, 2011 as compared to $10.1 million in the six months ended June 30, 2010. Theater
system maintenance gross margin was $5.0 million in the six months ended June 30, 2011 as compared
to $4.4 million in the six months ended June 30, 2010. Maintenance revenue continues to grow as the
number of theaters in the IMAX theater network grows.
Joint Revenue Sharing Arrangements
Revenue from joint revenue sharing arrangements decreased to $12.4 million in the six months
ended June 30, 2011 compared to $27.4 million in the six months ended June 30, 2010. The Company
ended the six month period with 204 theaters under joint revenue sharing arrangements in operation
as compared to 126 theaters in operation at June 30, 2010. The decrease in revenues from joint
revenue sharing arrangements was primarily due to the lower per-screen gross box office realized
from the films released to the joint revenue sharing theater network during the six months ended
June 30, 2011 as compared to the six months ended June 30, 2010, which included the record-breaking
performance of Avatar: An IMAX 3D Experience, which
contributed approximately $13.3 million in revenue from joint
revenue sharing arrangements, offset slightly by the greater number of theaters
operating. During the six months ended June 30, 2011, the Company installed 33 full, new theaters
under joint revenue sharing arrangements, as compared to 9 new theaters during the prior year
comparative period.
The gross margin from joint revenue sharing arrangements in the six months ended June 30, 2011
decreased to $7.1 million from $23.3 million in the six months ended June 30, 2010. The variance
was due to lower revenues and higher launch expenses experienced in the six months ended June 30,
2011 as compared to the six months ended June 30, 2010, which included the record-breaking
performance of Avatar: An IMAX 3D Experience. Included in the calculation of gross margin in the
first six months of 2011 were certain advertising, marketing and selling expenses of $2.3 million,
as compared to $1.3 million for such expenses in the prior year comparative period. Adjusted gross
margin from joint revenue sharing arrangements, which excludes these launch expenses from both
periods, was $9.3 million in the six months ended June 30, 2011, compared to $24.6 million in the
six months ended June 30, 2010. A reconciliation of gross margin from the joint revenue sharing
arrangement segment, the most directly comparable GAAP measure, to adjusted gross margin is
presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Gross margin from joint revenue sharing arrangements |
|
$ |
7,059 |
|
|
$ |
23,313 |
|
Add: |
|
|
|
|
|
|
|
|
Advertising, marketing and selling expenses |
|
|
2,266 |
|
|
|
1,302 |
|
|
|
|
|
|
|
|
Adjusted gross margin from joint revenue sharing arrangements |
|
$ |
9,325 |
|
|
$ |
24,615 |
|
|
|
|
|
|
|
|
Film
The Companys revenues from its film segments decreased 39.6% to $30.2 million in the six
months ended June 30, 2011 from $50.1 million in the six months ended June 30, 2010. Film
production and IMAX DMR revenues decreased 48.2% to $19.7 million in the six months ended June 30,
2011 from $38.0 million in the six months ended June 30, 2010. The decrease in film production and
IMAX DMR revenues was due primarily to lower gross box office and particularly the lack of event
type films released during the period compared with the record breaking performance of Avatar: An
IMAX 3D Experience during the six months ended June 30,
2010, which contributed $180.0 million in IMAX gross box office
and $17.1 million in DMR revenue. Gross box office generated by IMAX
DMR films decreased to $170.0 million for the six months ended June 30, 2011 from $346.2 million
for the six months ended June 30, 2010, a 50.9% decrease year-over-year. Gross box office per
screen for the six months ended June 30, 2011 averaged $488,000 in comparison to $1,246,300 in the
comparable period last year. In 2011, gross box office was generated
from the release of primarily 15 films
to IMAX theaters (listed below), as compared to 8 films released during the six months ended June
30, 2010:
58
|
|
|
Six Months Ended June 30, 2011 Films Released |
|
Six Months Ended June 30, 2010 Films Released |
TRON: Legacy: An IMAX 3D Experience
|
|
Avatar: An IMAX 3D Experience |
The Green Hornet: An IMAX 3D Experience
|
|
Alice in Wonderland: An IMAX 3D Experience |
Tangled: An IMAX 3D Experience
|
|
How to Train Your Dragon: An IMAX 3D Experience |
Sanctum: An IMAX 3D Experience
|
|
Iron Man 2: The IMAX Experience |
I Am Number Four: The IMAX Experience
|
|
Shrek Forever After: An IMAX 3D Experience |
Mars Needs Moms: An IMAX 3D Experience
|
|
Prince of Persia: The Sands of Time: The IMAX Experience |
Sucker Punch: The IMAX Experience
|
|
Toy Story 3: An IMAX 3D Experience |
Fast Five: The IMAX Experience
|
|
The Twilight Saga: Eclipse: The IMAX Experience |
Thor: An IMAX 3D Experience |
|
|
Pirates of the Caribbean: On Stranger Tides: An IMAX
3D Experience |
|
|
The Founding of a Party: The IMAX Experience |
|
|
Kung Fu Panda 2: An IMAX 3D Experience |
|
|
Super 8: The IMAX Experience |
|
|
Cars 2: An IMAX 3D Experience |
|
|
Transformers: Dark of the Moon: An IMAX 3D Experience |
|
|
Film distribution revenues increased 10.5% to $7.9 million in the six months ended June 30,
2011 from $7.1 million in the six months ended June 30, 2010 including Born to be Wild 3D: An IMAX
3D Experience, which was released during April 2011. Film post-production revenues decreased to
$2.7 million in the six months ended June 30, 2011 from $4.9 million in the six months ended June
30, 2010, primarily due to a decrease in third party business.
The Companys gross margin from its film segments decreased 59.8% in the six months ended June
30, 2011 to $12.3 million from $30.7 million in the six months ended June 30, 2010. Film production
and IMAX DMR gross margins decreased to $9.2 million from $26.3 million in the six months ended
June 30, 2010 largely due to a decrease in IMAX DMR revenue partially offset by lower costs. The
film distribution margin of $1.1 million in the six months ended June 30, 2011 was $0.4 million
lower than the $1.5 million experienced in the six months ended June 30, 2010. The gross margin for
the six months ended June 30, 2011 included a higher level of marketing costs of $1.6 million
(including launch marketing expenditures associated with the April 2011 release of Born to be Wild)
compared to $0.3 million in the prior year comparative period. Film post-production gross margin
decreased by $0.9 million due to a decrease in third party business as compared to the prior year
period.
Theater Operations
Theater operations revenue in the six months ended June 30, 2011 decreased to $2.9 million in
comparison to $8.9 million experienced in the six months ended June 30, 2010. This decrease was
attributable to a decrease in average ticket prices and attendance over
the first six months of 2010, primarily as a result of the record breaking performance of Avatar:
An IMAX 3D Experience in the first six months of 2010 and comparatively weaker film performance in
2011.
Theater operations margin decreased $2.8 million to a loss of $1.0 million in the six months
ended June 30, 2011 as compared to $1.8 million in the six months ended June 30, 2010, reflecting
the impact of lower attendance and average ticket prices.
Other
Other revenue decreased to $2.2 million in the six months ended June 30, 2011 compared to $3.6
million in the same period in 2010. Other revenue primarily includes revenue generated from the
Companys camera and rental business and after market sales of projection system parts and 3D
glasses. Other revenue in the six months ended June 30, 2010 was driven by high orders for 3D
glasses as a result of the record breaking performance of Avatar: An IMAX 3D Experience.
The gross margin on other revenue was $0.3 million lower in the six months ended June 30, 2011
as compared to 2010.
59
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $36.3 million in the six months
ended June 30, 2011 as compared to $30.7 million in 2010. This $5.6 million increase experienced
from the prior year comparative period was largely the result of the following:
|
|
|
a $2.4 million increase in staff-related costs and compensation costs including (i) an
increase in salaries and benefits of $1.9 million including a higher average Canadian dollar
denominated salary expense, increased staffing and normal merit increases partially offset
by lower pension plan costs, and (ii) a $0.5 million increase in travel and entertainment
costs commensurate with business activity; |
|
|
|
|
a $2.9 million increase in the Companys stock-based compensation expense primarily due
to the cost associated with stock options granted during the period; and |
|
|
|
|
a $1.6 million increase in legal, professional and other general corporate expenditures. |
These increases were offset by:
|
|
|
a $1.3 million decrease due to foreign exchange. During the six months ended June 30,
2011, the Company recorded a foreign exchange gain of $0.7 million due to the impact of a
decrease in exchange rates on foreign currency denominated working capital balances and
unmatured and un-hedged foreign currency forward contracts as compared to a loss of $0.6
million recorded in the six months ended June 30, 2010. See note 10(b) of the accompanying
condensed consolidated financial statements in Item 1 for more information. |
Provision for Arbitration Award
During the six months ended June 30, 2011, the Company recorded a provision of $2.1 million
regarding an award issued in connection with an arbitration proceeding brought against the Company,
relating to agreements entered into in 1994 and 1995 by its former Ridefilm subsidiary, whose
business the Company discontinued through a sale to a third party in March 2001. The Company is
seeking to have the award vacated. See note 9(c) to the condensed consolidated financial statements
for more information on this matter.
Research and Development
Research and development expenses increased to $4.0 million in the six months ended June 30,
2011 compared to $2.5 million in the six months ended June 30, 2010. The increased research and
development expenses for the six months ended June 30, 2011 compared to the prior year period are
primarily attributable to ongoing enhancements to the Companys digital projection technology to
assure that the Company continues to provide the highest quality, premiere movie going experience
available to consumers, as well as ongoing work performed on the Companys portable theater
initiative.
Receivable Provisions, Net of Recoveries
Receivable provisions net of recoveries for accounts receivable and financing receivables
amounted to a net provision of $0.4 million in the six months ended June 30, 2011 as compared to
$0.4 million in the six months ended June 30, 2010.
The Companys accounts receivables and financing receivables are subject to credit risk. These
receivables are concentrated with the leading theater exhibitors and studios in the film
entertainment industry. To minimize the Companys credit risk, the Company retains title to
underlying theater systems leased, performs initial and ongoing credit evaluations of its customers
and makes ongoing provisions for its estimate of potentially uncollectible amounts. Accordingly,
the Company believes it has adequately protected itself against exposures relating to receivables
and contractual commitments.
Interest Income and Expense
Interest income decreased to less than $0.1 million in the six months ended June 30, 2011 as
compared to $0.3 million in the six months ended June 30, 2010. The decrease was largely due to
interest recorded during the first six months of 2010 related to tax refunds.
60
Interest expense decreased to $1.0 million in the six months ended June 30, 2011 as compared
to $1.2 million in the six months ended June 30, 2010. Included in interest expense is the
amortization of deferred finance costs in the amount of $0.3 million in the six months ended June
30, 2011 and $0.2 million in the six months ended June 30, 2010. The Companys policy is to defer
and amortize all the costs relating to debt financing which are paid directly to the debt provider,
over the life of the debt instrument.
Income Taxes
There was no change in the Companys estimates of the recoverability of its deferred tax
assets based on an analysis of both positive and negative evidence including projected future
earnings. The Company recorded an income tax provision of $1.3 million for the six months ended
June 30, 2011, of which a provision of $0.1 million is related to an increase in unrecognized tax
benefits. For the six months ended June 30, 2010, the Company recorded an income tax provision of
$0.8 million, of which $0.1 million was related to an increase in unrecognized tax benefits.
Outlook
While the Company expects
overall revenues for 2011 to be consistent with those of 2010,
the Companys revenues in 2011 to date have been adversely impacted by the lower gross box
office generated by the films released to IMAX theaters in the six months ended June 30, 2011 and,
in particular, the lack of event films such as the record breaking performance of Avatar: An IMAX
3D Experience, released in 2010. However, the Company continues to experience significant network
growth, driven in large part by the record number of theater signings the Company achieved in 2010,
which has continued into the first six months of 2011, with the Company entering into arrangements
for a total of 153 theater systems (138 new theater systems and 15 digital upgrades) in 2011 to
date, as compared to 98 theaters systems (76 new theater systems and 22 digital upgrades) in the
prior year comparative period.
The Company installed 56 IMAX theater systems, not including digital upgrades, in the first
six months of 2011. At June 30, 2011, this reflected an increase of 25.3% for the overall IMAX
theater network and 37.6% for the IMAX commercial multiplex theater network as compared to June 30,
2010. Of the theater system arrangements in backlog as at June 30, 2011, the Company currently
estimates that approximately 64-74 theater systems (excluding digital upgrades) will be installed
during the remainder of 2011. As a result, by the end of 2011, the Companys total theater network
is expected to have increased by approximately 21.4% over the prior year end and its commercial
multiplex theater network by approximately 30.3% over the prior year end as the majority of the new
2011 systems are to be installed in commercial settings. In addition, each year the Company
installs a number of systems that are signed in that same calendar year. (Although the Company
cautions that theater system installations slip from period to period in the course of the
Companys business and such slippages remain a recurring and unpredictable part of its business).
The Companys pace of overall IMAX theater system signings increased significantly in the
first six months of 2011 as compared to the prior year period. The Company signed deals for 153
theater systems during the first six months of 2011, as compared to 98 IMAX theater signings for
the first six months of 2010. The Company believes that this increase in IMAX theater system
signings will result in a larger IMAX theater network and, ultimately, should position the Company
to generate increased revenue over the longer term. A substantial portion of the recent commercial
theater network growth has come from theaters under joint revenue sharing arrangements in the
United States and, increasingly, in certain international markets. Revenue sharing arrangements
allow the Company to capitalize on its theater network growth by providing the Company with higher
recurring revenue than under most sales or sales-type lease arrangements. The Company believes that
the strategy of increasing the number of IMAX theaters under joint revenue sharing arrangements has
driven increased profitability in recent years and the Company believes that it will continue to
drive profitability in the future. The retirement of a significant portion of the Companys debt
during 2009 and increased cash flows from operations during 2009 and 2010 has allowed the Company
the financial flexibility to fund the expansion of its joint revenue sharing strategy. To date, the
Company has signed joint revenue sharing arrangements for 332 theater systems, including the
Companys 75-theater joint revenue sharing arrangement signed with Wanda Cinema Line Corporation,
Chinas top-grossing cinema chain, in March 2011. Furthermore, on July 15, 2011, the Company and
American-Multi Cinemas, Inc. (AMC) announced an expansion of the companies joint revenue sharing
arrangement to include the installation of 10 additional IMAX theaters in the United States
expected to be open by the end of 2012. This brings the total number of digital projection systems
contracted for under the agreement with AMC to 125, with 105 currently in operation. In addition,
on July 14, 2011, the Company and Regal Entertainment Group (Regal) announced an additional 9
IMAX theaters to be installed in the United States, bringing the total number of digital projection
systems under the joint revenue sharing arrangement between the parties to 64, with 45 currently in
operation. In the second quarter of 2011 the Company and Southern Theatres, LLC announced a 4
theater joint revenue sharing agreement, with 3 of the 4 theaters operational at June 30, 2011. On
July 6, 2011, the Company and ZON Lusomundo Cinemas announced a joint revenue sharing agreement to
install 3 new IMAX digital theater systems in Portugal, marking the first IMAX theaters to open in
Portugal. Of the 332 joint revenues
61
sharing theaters signed, 204 have been installed as at June 30,
2011. The Company cautions that as an increasing portion of its
revenues are derived from theaters under joint revenue sharing arrangements, it is
increasingly subject to the success or failure of its IMAX DMR film slate.
In recent years, the number of IMAX DMR films released to the IMAX theater network has also
increased. The increased number of IMAX DMR films can minimize the impact of an individual films
relatively weak performance. In addition, the increased number of titles with shorter release
windows can mean a greater opportunity to capitalize on the early weeks of a movies release, when
over half of a given titles gross box office is typically generated. The increased number of films
also permits the Company to select a diverse mix of titles to maximize the networks box office
potential. To date, the Company has signed contracts for 24 IMAX DMR films to be exhibited
throughout the IMAX theater network in 2011, as compared to 15 IMAX DMR titles in 2010 and 12 IMAX
DMR titles in 2009. The Company remains in active discussions with every major Hollywood studio
regarding future titles. However, the Company cautions that films can be subject to delays in
production or changes in release schedule, which can negatively impact the number, timing and type
of IMAX DMR and IMAX original films released to the IMAX theater network. The Company intends to
continue to try and achieve the optimal film slate, with the appropriate number of mix and titles.
During the six months ended June 30, 2011, the Companys DMR revenue decreased
48.2% over the prior year period owing to the lower box office performance of IMAX DMR films
exhibited, and in particular the lack of event film titles such as the record breaking performance
of Avatar: An IMAX 3D Experience in 2010. In the first six months of 2010, there were 6 films that
recorded gross domestic box office of over $200.0 million. All 6 of these event-type films were
released to the IMAX network in 2010. By contrast, there have been only 3 films in the first half
of 2011 that have recorded gross domestic box office of over $200.0 million. Of those films, 2
were released to the IMAX network in 2011. IMAX DMR films released to IMAX theaters during the
period, however, continued to significantly outperform lower-cost formats on a per screen basis.
The Company believes that its international expansion is an important driver of future growth
for the Company. On March 24, 2011, the Company announced a 75-theater joint revenue sharing
agreement with Wanda Cinema Line Corporation. This agreement with Wanda, which represents IMAXs
first full revenue-sharing arrangement in China and its largest single international partnership to
date, brings the total number of IMAX theaters open or in backlog in Greater China to 211. Under
the terms of the new partnership, IMAX will install its digital technology in 25 of the exhibitors
multiplex locations this year, with the remainder to be rolled out in 2012, 2013 and 2014. On March
29, 2011, the Company and Cinema Park, an exhibition chain owned by Russias largest media holding
company, Profmedia, announced a sale agreement to install 8 additional digital IMAX theater systems
(in addition to a deal for 10 systems in 2010). These theater systems are scheduled to be installed
in various parts of Russia in 2012 and 2013. In addition, on March 30, 2011, the Company and PVR
Cinemas, Indias leading cinema brand and operator of the countrys top-performing multiplexes,
announced an agreement to install 4 digital IMAX theater systems in key locations throughout India.
On July 6, 2011, the Company and ZON Lusomundo Cinemas announced a joint revenue sharing agreement
to install 3 new IMAX digital theater systems in Portugal, marking the first IMAX theaters to open
in Portugal. The first theater is expected to open by end of 2011, with the remaining 2 theaters
slated to open before the end of 2012.
For the first six months of 2011, 45.0% of the Companys gross box office from DMR films was
generated from IMAX theaters in international markets, as compared with 40.5% in the first six
months of 2010. In the first six months of 2011, 107 of the Companys 153 theater signings were for
theaters in international markets. During the remainder of 2011, the Company intends to continue to
expand its international presence, including by expanding its number of theaters under
international joint revenue sharing arrangements.
To support its growth in international markets, the Company has begun, and expects to
continue, to evaluate DMR opportunities in international markets. In July 2010, the first IMAX DMR
title outside of North America, Aftershock: The IMAX Experience, was released across IMAX theaters
in China, other parts of Asia and key North American markets pursuant to an agreement between the
Company and Huayi Bros. Media Corporation Ltd., Chinas largest media group. On August 30, 2010,
the Company announced that internationally acclaimed director John Woo and producer Terence Changs
next film, the action epic Flying Tigers, is intended to be released to select IMAX theaters in
early 2012. In June 2011, The Founding of a Party: The IMAX Experience was released to IMAX
theaters in China. The Company is similarly committed to maximizing the productivity of its
international theaters through international-only releases. The IMAX DMR film, Prince of Persia:
Sands of Time: The IMAX Experience was the first international-only release to IMAX theaters in May
2010 and the second international-only release, Tangled: An IMAX 3D Experience, was released to
IMAX theaters in select Asian markets beginning in February 2011. In addition, in June 2011, Kung
Fu Panda 2: An IMAX 3D Experience was an international-only release to IMAX theaters. In August
2011, Cowboys & Aliens: The IMAX Experience will be released in international IMAX theaters
day-and-date. In addition, Sector 7: An IMAX 3D Experience will be released to IMAX theaters in
August 2011 in select Asian markets. The Company anticipates announcing additional
international-only
62
releases to IMAX theaters in the future. Finally, in order to further strengthen
the Companys film slate internationally, the Company
has recently announced certain IMAX-exclusive early releases. For instance, TRON: Legacy: An
IMAX 3D Experience was released to IMAX theaters in France four days prior to its wide release in
that country. The Company and its studio partners also employed this IMAX-exclusive early release
strategy with Harry Potter and the Deathly Hallows: Part I: The IMAX Experience in France in
November, with TRON: Legacy: An IMAX 3D Experience in Russia in December and with I Am Number Four:
The IMAX Experience in Mexico in February. The Company anticipates announcing additional
IMAX-exclusive early releases in the future.
The Companys historical domestic growth strategy has been to penetrate domestic urban markets
with large national exhibition partners. More recently, however, the Company has signed several new
theater agreements with smaller, regional exhibitors such as Warren Theatres and Premiere Cinemas.
The Company has found that some of the top performing IMAX theaters in the United States are in
smaller markets and as such will continue to pursue this growth initiative.
In addition to the 15 DMR films that have already been shown in the IMAX theater network in
the first six months of 2011, 9 additional DMR films are scheduled to be released to its theater
network during the remaining six months of 2011:
|
|
|
Harry Potter and the Deathly Hallows Part II: An IMAX 3D Experience (WB, July 2011); |
|
|
|
|
Cowboys & Aliens: The IMAX Experience (DreamWorks, Paramount, August 2011); |
|
|
|
|
Sector 7: An IMAX 3D Experience (CJ Entertainment, August 2011); |
|
|
|
|
Contagion: The IMAX Experience (WB, September 2011); |
|
|
|
|
Real Steel: The IMAX Experience (DreamWorks, Disney, October 2011); |
|
|
|
|
Puss in Boots: An IMAX 3D Experience (Paramount, November 2011); |
|
|
|
|
Happy Feet 2: An IMAX 3D Experience (WB, November 2011); |
|
|
|
|
Mission: Impossible Ghost Protocol: The IMAX Experience (Paramount, December 2011);
and |
|
|
|
|
The Adventures of Tintin: The Secret of the Unicorn: An IMAX 3D Experience (Paramount,
December 2011). |
To date, the Company has announced the following three titles to be released in 2012 to its
theater network:
|
|
|
The Amazing Spider-Man: An IMAX 3D Experience (Sony, July 2012); |
|
|
|
The Dark Knight Rises: The IMAX Experience (WB, July 2012); and |
|
|
|
The Hobbit: An Unexpected Journey: An IMAX 3D Experience (WB, December 2012). |
The Company remains in active discussions with virtually every studio regarding future titles.
In addition, the Company, in conjunction with WB, released the original film Born to Be Wild
3D: An IMAX 3D Experience to its network in April 2011.
During the remainder of 2011, the Company expects to continue to explore new areas of brand
extension such as: 3D in-home entertainment technology; increased post-production opportunities;
alternative theater content; and partnering with technology, studio, programming, content and
consumer electronics companies. In 2010, 3net was formed. 3net is a 24/7 3D television channel
operated by a limited liability corporation owned by the Company, Discovery Communications and Sony
Corporation.
63
LIQUIDITY AND CAPITAL RESOURCES
On June 2, 2011, the Company amended and restated the terms of its existing senior secured
credit facility (the Prior Credit Facility), which had been scheduled to mature on October 31,
2013. The amended and restated facility (the Credit Facility), with a scheduled maturity of
October 31, 2015, has a maximum borrowing capacity of $110.0 million, consisting of revolving
asset-based loans of up to $50.0 million, subject to a borrowing base calculation (as described
below) and including a sublimit of $20.0 million for letters of credit, and a revolving term loan of
up to $60.0 million. The Prior Credit Facility had a maximum
borrowing capacity of $75.0 million.
Certain of the Companys subsidiaries will serve as guarantors (the Guarantors) of the Companys
obligations under the Credit Facility. The Credit Facility is collateralized by a first priority
security interest in substantially all of the present and future assets of the Company and the
Guarantors.
The Companys indebtedness under the Credit Facility includes the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Term Loan (under the Prior Credit Facility) |
|
$ |
|
|
|
$ |
17,500 |
|
Revolving Credit Facility |
|
|
34,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,583 |
|
|
$ |
17,500 |
|
|
|
|
|
|
|
|
As at June 30, 2011, the Companys current borrowing capacity under the revolving asset-based
portion of the Credit Facility was $44.2 million after deduction for the minimum Excess
Availability reserve of $5.0 million (December 31, 2010 $40.0 million) and borrowing capacity
under the revolving term portion of the Credit Facility was $25.4 million. Outstanding borrowings
and letters of credit and advance payment guarantees were $nil as at June 30, 2011.
The terms of the Credit Facility are set forth in the Second Amended and Restated Credit
Agreement (the Credit Agreement), dated June 2, 2011, among the Company, Wells Fargo Capital
Finance Corporation (Canada), as agent, lender, sole lead arranger and sole bookrunner, (Wells
Fargo) and Export Development Canada, as lender (EDC, together with Wells Fargo, the Lenders)
and in various collateral and security documents entered into by the Company and the Guarantors.
Each of the Guarantors has also entered into a guarantee in respect of the Companys obligations
under the Credit Facility.
The revolving asset-based portion of the Credit Facility permits maximum aggregate borrowings
equal to the lesser of:
(i) $50.0 million, and
(ii) a collateral calculation based on the percentages of the book values of certain of the
Companys net investment in sales-type leases, financing receivables, certain trade accounts
receivable, finished goods inventory allocated to backlog contracts and the appraised values of the
expected future cash flows related to operating leases and the Companys owned real property,
reduced by certain accruals and accounts payable and subject to other conditions, limitations and
reserve right requirements.
Two years after entry into the Credit Facility any outstanding borrowings under the revolving
term loan portion of the Credit Facility convert to a term loan to be repaid in accordance with the
terms of the Credit Facility, any undrawn amounts under the revolving term loan are cancelled and
the Company may not request any further advances under the revolving term loan.
The Company borrowed $29.6 million from the revolving term loan portion of the Credit Facility
to repay $15.0 million in outstanding indebtedness under the revolving portion of the Prior Credit
Facility and $14.6 million in outstanding indebtedness under the term loan portion of the Prior
Credit Facility. The Company subsequently borrowed another $5.0 million under the revolving term
loan portion of the Credit Facility. Under the Prior Credit Facility, the effective interest rate
for the three and six months ended June 30, 2011 for the term loan portion was 4.03% and 4.04%,
respectively (2010 4.04% and 4.03%, respectively) and 2.97% and 2.97%, respectively for the
revolving portion (2010 4.50% and 3.56%, respectively).
The revolving asset-based portion of the Credit Facility bears interest, at the Companys
option, at (i) LIBOR plus a margin of 2.00% per annum, or (ii) Wells Fargos prime rate plus a
margin of 0.50% per annum. The revolving term loan portion of the Credit Facility also bears
interest at the Companys option, at (i) LIBOR plus a margin of 2.00% per annum, or (ii) Wells
Fargos prime rate plus a margin of 0.50% per annum. Under the Credit Facility, the effective
interest rate for the three and six months ended June 30, 2011 for the revolving term loan portion
was 2.19% and 2.19%, respectively (2010 n/a). There was no amount drawn on the revolving
asset-based portion of the Credit Facility.
64
The Credit Facility provides that the Company will be required to maintain a ratio of funded
debt (as defined in the Credit Agreement) to EBITDA (as defined in the Credit Agreement) of not
more than 2:1. The Company will also be required to maintain a Fixed Charge Coverage Ratio (as
defined in the Credit Agreement) of not less than 1.1:1.0. At all times under the terms of the
Credit Facility, the Company is required to maintain minimum Excess Availability of not less than
$5.0 million and minimum Cash and Excess Availability of not less than $15.0 million. The ratio of
funded debt to EBITDA was 0.51:1 as at June 30, 2011, where Funded Debt (as defined in the Credit
Agreement) is the sum of all obligations evidenced by notes, bonds, debentures or similar
instruments and was $34.6 million. EBITDA is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
For the |
|
For the |
|
|
3 months ended |
|
12 months ended |
EBITDA per Credit Facility: |
|
June 30, 2011 |
|
June 30, 2011(1) |
(In thousands of U.S. Dollars) |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,825 |
|
|
$ |
61,717 |
|
Add (subtract): |
|
|
|
|
|
|
|
|
Loss from equity accounted investments
|
|
|
451 |
|
|
|
1,366 |
|
Provision for (recovery of) income taxes
|
|
|
1,634 |
|
|
|
(51,290 |
) |
Interest expense, net of interest income
|
|
|
538 |
|
|
|
1,560 |
|
Depreciation and amortization, including film asset amortization
|
|
|
6,719 |
|
|
|
21,548 |
|
Write-downs net of recoveries including asset impairments and receivable
provisions
|
|
|
163 |
|
|
|
2,343 |
|
Stock and other non-cash compensation
|
|
|
4,837 |
|
|
|
31,089 |
|
Other, net
|
|
|
|
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
$ |
16,167 |
|
|
$ |
68,244 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Ratio of funded debt calculated using twelve months ended EBITDA |
The Credit Facility contains typical affirmative and negative covenants, including covenants
that limit or restrict the ability of the Company and the guarantors 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.
The Credit Facility also contains customary events of default, including upon an acquisition
or change of control or upon a change in the business and assets of the Company or a guarantor that
in each case is reasonably expected to have a material adverse effect on the Company or a
guarantor. If an event of default occurs and is continuing under the Credit Facility, the Lenders
may, among other things, terminate their commitments and require immediate repayment of all amounts
owed by the Company.
Letters of Credit and Other Commitments
As at June 30, 2011, the Company has letters of credit and advance payment guarantees of $nil
outstanding (December 31, 2010 $nil), under the Credit Facility.
The Company also has a $10.0 million facility for advance payment guarantees and letters of
credit through the Bank of Montreal for use solely in conjunction with guarantees fully insured by
EDC (the Bank of Montreal Facility). The Bank of Montreal Facility is unsecured and includes
typical affirmative and negative covenants, including delivery of annual consolidated financial
statements within 120 days of the end of the fiscal year. The Bank of Montreal Facility is subject
to periodic annual reviews. As at June 30, 2011, the Company had letters of credit and advance
payment guarantees outstanding of $1.2 million under the Bank of Montreal Facility as compared to
$2.4 million as at December 31, 2010.
65
Cash and Cash Equivalents
As at June 30, 2011, the Companys principal sources of liquidity included cash and cash
equivalents of $23.2 million, the Credit Facility, anticipated collection from trade accounts
receivable of $44.2 million including receivables from theaters under joint revenue sharing arrangements and DMR agreements with studios, anticipated collection from financing receivables due in the next 12
months of $12.4 million, payments expected in the next
12 months on existing backlog deals. As at June 30, 2011, the Company had drawn down $nil on
the revolving asset-based portion of the
Credit Facility, and had letters of credit and advance payment guarantees of $nil outstanding under
the Credit Facility and $1.2 million under the Bank of Montreal Facility.
During the six months ended June 30, 2011, the Companys operations used cash of $10.4 million
and the Company used cash of $17.1 million to fund capital expenditures, principally to build
equipment for use in joint revenue sharing arrangements and to purchase property, plant, and
equipment. Based on managements current operating plan for 2011, the Company expects to continue
to use cash to deploy additional theater systems under joint revenue sharing arrangements and DMR
agreements with studios. Cash flows from joint revenue sharing arrangements are derived from the
theater box office and concession revenues and the Company invested directly in the roll out of 33
new theater systems under joint revenue sharing arrangements during the six months ended June 30,
2011.
The Company believes that cash flow from operations together with existing cash and borrowing
available under the Credit Facility will be sufficient to fund the Companys business operations,
including its strategic initiatives relating to existing joint revenue sharing arrangements for the
next 12 months.
The Companys operating cash flow will be adversely affected if managements projections of
future signings for theater systems and film productions, installations and film performance are
not realized. The Company forecasts its short-term liquidity requirements on a quarterly and annual
basis. Since the Companys future cash flows are based on estimates and there may be factors that
are outside of the Companys control (see Risk Factors in Item 1A in the Companys 2010 Form
10-K), there is no guarantee that the Company will continue to be able to fund its operations
through cash flows from operations. Under the terms of the Companys typical sale and sales-type
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.
Operating Activities
The Companys net cash provided by operating activities is affected by a number of factors,
including the proceeds associated with new signings of theater system lease and sale agreements in
the year, costs associated with contributing systems under joint revenue sharing arrangements, the
box-office performance of films distributed by the Company and/or released to IMAX theaters,
increases or decreases in the Companys operating expenses, including research and development, and
the level of cash collections received from its customers.
Cash used by operating activities amounted to $10.4 million for the six months ended June 30,
2011. Changes in other non-cash operating assets as compared to December 31, 2010 include: an
increase of $6.0 million in financing receivables; an increase of $5.0 million in accounts
receivable; an increase of $1.3 million in inventories; an increase of $1.1 million in prepaid
expenses, which primarily relates to an increase in prepaid benefits and film distribution
expenses; and an increase of $0.4 million in other assets which includes a $1.1 million decrease in
insurance recoveries receivable, a $1.4 million increase in other assets and a $0.1 million
increase in commission and agency fees. Changes in other operating liabilities as compared to
December 31, 2010 include: an increase in deferred revenue of $7.8 million related to amounts
relieved from deferred revenue related to theater system installations offset by backlog payments
received in the current period; an increase in accounts payable of $6.7 million; and a decrease of
$30.8 million in accrued liabilities including payments of $23.7 million for variable stock-based
compensation expense.
Included in accrued liabilities at June 30, 2011 was $18.2 million in respect of accrued
pension obligations.
Investing Activities
Net cash used in investing activities amounted to $18.4 million in the six months ended June
30, 2011, which includes an investment in joint revenue sharing equipment of $14.9 million,
purchases of $2.2 million in property, plant and equipment, an additional investment in business
ventures of $0.8 million and an increase in other intangible assets of $0.5 million.
66
Financing Activities
Net cash provided by financing activities in the six months ended June 30, 2011 amounted to
$21.9 million due to an increase in net bank indebtedness of $17.1 million and proceeds from the
issuance of common shares from stock option exercises of $5.1 million offset by a $0.3 million in
payment of fees relating to the Credit Facility amendment.
Capital Expenditures
Capital expenditures, including the Companys investment in joint revenue sharing equipment,
purchase of property, plant and equipment, net of sales proceeds, and investments in film assets
were $23.4 million for the six months ended June 30, 2011 as compared to $10.9 million for the six
months ended June 30, 2010.
CONTRACTUAL OBLIGATIONS
Payments to be made by the Company under contractual obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of U.S. Dollars) |
|
Obligations |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
Pension obligations (1) |
|
$ |
18,813 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18,813 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Credit Facility(2) |
|
|
34,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,583 |
|
|
|
|
|
Operating lease obligations (3) |
|
|
13,450 |
|
|
|
2,760 |
|
|
|
5,380 |
|
|
|
2,089 |
|
|
|
899 |
|
|
|
510 |
|
|
|
1,812 |
|
Purchase obligations (4) |
|
|
18,804 |
|
|
|
18,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits obligations |
|
|
484 |
|
|
|
13 |
|
|
|
15 |
|
|
|
31 |
|
|
|
34 |
|
|
|
38 |
|
|
|
353 |
|
Capital lease obligations (5) |
|
|
56 |
|
|
|
12 |
|
|
|
23 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,190 |
|
|
$ |
21,589 |
|
|
$ |
5,418 |
|
|
$ |
20,954 |
|
|
$ |
933 |
|
|
$ |
35,131 |
|
|
$ |
2,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The SERP assumptions are that Mr. Gelfond will receive a lump sum payment at the beginning of
2013 upon retirement at the end of the current term of his employment agreement, although Mr.
Gelfond has not informed the Company that he intends to retire at that time. |
|
(2) |
|
Interest on the Credit Facility is payable monthly in arrears based on the applicable
variable rate and is not included above. |
|
(3) |
|
The Companys total minimum annual rental payments to be made under operating leases, mostly
consisting of rent at the Companys properties in New York and Santa Monica, and at the
various owned and operated theaters. |
|
(4) |
|
The Companys total payments to be made under binding commitments with suppliers and
outstanding payments to be made for supplies ordered but yet to be invoiced. |
|
(5) |
|
The Companys total minimum annual payments to be made under capital leases, mostly
consisting of payments for IT hardware and various other fixed assets. |
Pension and Postretirement Obligations
The Company has an unfunded defined benefit pension plan, the SERP, covering Messrs. Gelfond
and Wechsler. As at June 30, 2011, the Company had an unfunded and accrued projected benefit
obligation of approximately $18.2 million (December 31, 2010 $18.1 million) in respect of the
SERP. At the time the Company established the SERP, it also took out life insurance policies on
Messrs. Gelfond and Wechsler with coverage amounts of $21.5 million in aggregate. During the
quarter ended June 30, 2010, the Company obtained $3.2 million representing the cash surrender
value of Mr. Gelfonds policy. The proceeds were used to pay down the term loan under the Credit
Facility. During the quarter ended September 30, 2010, the Company obtained $4.6 million
representing the cash surrender value of Mr. Wechslers policy. The amount was used to fund part of
the $14.7 million lump sum payment made to Mr. Wechsler on August 1, 2010 under the SERP, which
settled in full Mr. Wechslers entitlement under the SERP.
At June 30, 2011, the cash surrender
value of these policies was $nil.
67
Under the terms of the SERP, if Mr. Gelfonds employment had been terminated other than for
cause prior to August 1, 2010, he would have been entitled to receive SERP benefits in the form of
monthly annuity payments until the earlier of a change of control or August 1, 2010, at which time
he would have become entitled to receive remaining benefits in the form of a lump sum payment. If
Mr. Gelfonds employment is, or would have been, terminated other than for cause on or after August
1, 2010, he is, or would have been, entitled to receive SERP benefits in the form of a lump sum
payment. SERP benefit payments to Mr. Gelfond are subject to a deferral for six months after the
termination of his employment, at which time Mr. Gelfond will be entitled to receive interest on
the deferred amount credited at the applicable federal rate for short-term obligations. The term of
Mr. Gelfonds current employment agreement has been extended through December 31, 2012.
Under the terms of the extension, Mr. Gelfond also agreed that any compensation earned during 2011 and 2012 would not be included in calculating his entitlement under the SERP.
Under the terms of SERP, monthly annuity payments payable to Mr. Wechsler, whose employment as
Co-CEO terminated effective April 1, 2009, were deferred for six months and were paid in the form
of a lump sum plus interest on the deferred amount on October 1, 2009. These monthly annuity
payments continued through to August 1, 2010. On August 1, 2010, the Company made a lump sum
payment of $14.7 million to Mr. Wechsler in accordance with the terms of the plan, representing a
settlement in full of Mr. Wechslers entitlement under the SERP.
In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Wechsler
upon retirement. As at June 30, 2011, the Company had an unfunded benefit obligation of $0.5
million (December 31, 2010 $0.5 million).
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 Companys financial condition.
Item 3. Quantitative and Qualitative Factors about Market Risk
The Company is exposed to market risk from foreign currency exchange rates and interest rates,
which could affect operating results, financial position and cash flows. Market risk is the
potential change in an instruments value caused by, for example, fluctuations in interest and
currency exchange rates. The Companys primary market risk exposure is the risk of unfavorable
movements in exchange rates between the U.S. dollar and the Canadian dollar. The Company does not
use financial instruments for trading or other speculative purposes.
Foreign Exchange Rate Risk
A majority of the Companys 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 Companys net U.S.
dollar cash 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 cash 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 manages its exposure to foreign exchange rate risks through the Companys regular
operating and financing activities and, when appropriate, through the use of derivative financial
instruments. These derivative financial instruments are utilized to hedge economic exposures as
well as reduce earnings and cash flow volatility resulting from shifts in market rates.
For the three and six months ended June 30, 2011, the Company recorded a foreign exchange gain
of $0.1 million and $0.7 million, respectively, as compared with a foreign exchange loss of $0.9
million and $0.6 million at June 30, 2010, respectively, associated with the translation of
foreign currency denominated monetary assets and liabilities and unhedged foreign exchange
contracts.
The Company entered into a series of foreign currency forward contracts to manage the
Companys risks associated with the volatility of foreign currencies with settlement dates
throughout 2011. In addition, at June 30, 2011, the Company held foreign currency forward contracts
to manage foreign currency risk on future anticipated Canadian dollar expenditures that were not
considered foreign currency hedges by the Company. Foreign currency derivatives are recognized and
measured in the balance sheet at fair value. Changes in the fair value (gains or losses) are
recognized in the consolidated statement of operations except for derivatives designated and
qualifying as foreign currency hedging instruments. For foreign currency hedging instruments, the
effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other
comprehensive income and reclassified to the consolidated statement of operations when the
forecasted transaction occurs. Any ineffective portion is recognized immediately in the
68
consolidated statement of operations. The notional value of these contracts at June 30, 2011
was $4.1 million (December 31, 2010 $12.7 million). A gain of less than $0.1 million and a gain
of $0.4 million was recorded to Other Comprehensive Income with respect to the appreciation in the
value of these contracts in the three and six months ended June 30, 2011, respectively (2010
loss of $0.4 million and loss of $0.2 million, respectively). A gain of $0.5 million and gain of
$0.7 million for the three and six months ended June 30, 2011, respectively (2010 loss of less
than $0.1 million and gain of $0.5 million, respectively) was reclassified from Accumulated Other
Comprehensive Income to selling, general and administrative expenses. Appreciation or depreciation
on forward contracts not meeting the requirements for hedge accounting in the Derivatives and
Hedging Topic of the FASB Accounting Standards Codification are recorded to selling, general and
administrative expenses. The notional value of forward contracts that do not qualify for hedge
accounting at June 30, 2011 was $7.0 million (December 31, 2010 $28.8 million).
For all derivative instruments, the Company is subject to counterparty credit risk to the
extent that the counterparty may not meet its obligations to the Company. To manage this risk, the
Company enters into derivative transactions only with major financial institutions.
At June 30, 2011, the Companys net investment in leases and working capital items denominated
in Canadian dollar and Euros aggregated to $2.2 million. Assuming a 10% appreciation or
depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at
June 30, 2011, the potential change in the fair value of foreign currency-denominated net
investment in leases and working capital items would be $0.2 million. A significant portion of the
Companys selling, general, and administrative expenses are denominated in Canadian dollars.
Assuming a 1% change appreciation or depreciation in foreign currency exchange rates at June 30,
2011, the potential change in the amount of selling, general, and administrative expenses would be
$0.1 million for every $10.0 million in Canadian denominated expenditures.
Interest Rate Risk Management
The Companys earnings are also affected by changes in interest rates due to the impact those
changes have on its interest income from cash, and its interest expense from variable-rate
borrowings under the Credit Facility.
As at June 30, 2011, the Company borrowings under the Credit Facility were $34.6 million
(December 31, 2010 $17.5 million).
The Companys largest exposure with respect to variable rate debt comes from changes in the
London Interbank Offered Rate (LIBOR). The Company had variable rate debt instruments representing
approximately 17.2% and 9.2% of its total liabilities as at June 30, 2011 and December 31, 2010,
respectively. If interest rates available to the Company increased by 10%, the Companys interest
expense would increase by approximately $0.1 million and interest income from cash would increase
by approximately less than $0.1 million for the quarter ended June 30, 2011. These amounts are
determined by considering the impact of the hypothetical interest rates on the Companys
variable-rate debt and cash balances at June 30, 2011.
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 and that such
information is accumulated and communicated to management, including the CEO and CFO, to allow
timely discussions regarding required disclosure. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the possibility of
human error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable assurance of achieving
their control objectives.
The Companys management, with the participation of its CEO and its Chief Financial Officer
(CFO), has evaluated the effectiveness of the Companys disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as at June 30, 2011
and has concluded that, as at the end of the period covered by this report, the Companys
disclosure controls and procedures were adequate and effective. The Company will continue to
periodically evaluate its disclosure controls and procedures and will make modifications from time
to time as deemed necessary to ensure that information is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms.
69
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Companys internal control over financial reporting which
occurred during the three months ended June 30, 2011, that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See note 9 to the interim condensed consolidated financial statements for information
regarding legal proceedings involving the Company.
Item 1A. Risk Factors
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010.
Item 4. Submission of Matters to a Vote of Security Holders
The Companys 2011 Annual General Meeting of Shareholders was held on June 1, 2011.
Set forth below are the matters acted upon by the Companys shareholders at the Annual General
Meeting, and the final voting results on each such matter.
Election of Directors
By a vote by way of show of hands, Martin Pompadur was elected as a Class III director of the
Company for a term expiring in 2013 and each of Eric A. Demirian, David W. Leebron and Marc A. Utay
were elected as Class II directors of the Company to hold office until the year 2014 or until their
successors are elected or appointed. Management received proxies from the shareholders to vote for
the four directors nominated for election as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Director |
|
Votes For |
|
Votes Withheld |
|
Broker Non-Votes |
|
Martin Pompadur |
|
|
46,263,656 |
|
|
|
130,326 |
|
|
|
10,395,667 |
|
Eric A. Demirian |
|
|
46,272,964 |
|
|
|
121,018 |
|
|
|
10,395,667 |
|
David W. Leebron |
|
|
44,611,661 |
|
|
|
1,782,322 |
|
|
|
10,395,666 |
|
Marc A. Utay |
|
|
46,136,827 |
|
|
|
257,155 |
|
|
|
10,395,667 |
|
In addition to the foregoing directors, the following directors continued in office: Neil S.
Braun, Kenneth G. Copland, Richard L. Gelfond, Garth M. Girvan and Bradley J. Wechsler.
Appointment of Auditor
By a vote by way of show of hands, PricewaterhouseCoopers, LLP (PwC) were appointed auditors of
the Company to hold office until the next annual meeting of shareholders and the directors were
authorized to fix their remuneration. Management received proxies from the shareholders to vote for
the re-appointment of PwC as follows:
|
|
|
|
|
|
|
Votes For |
|
Votes Against |
|
Votes Withheld |
|
Broker Non-Votes |
|
56,485,801 |
|
178,854 |
|
124,994 |
|
0 |
70
Executive Compensation
By a vote by way of show of hands, the compensation of the Companys Named Executive Officers was
approved. Management received proxies from the shareholders to vote for the approval of the
compensation of the Companys Names Executive Officers as follows:
|
|
|
|
|
|
|
Votes For |
|
Votes Against |
|
Abstentions |
|
Broker Non-Votes |
|
42,913,002 |
|
3,270,929 |
|
210,052 |
|
10,395,666 |
Frequency
By a vote by way of show of hands, the Companys shareholders recommended the advisory vote on
executive officers compensation be held every two years. Management received proxies from the
shareholders to vote for the frequency of future advisory votes on executive officers compensation
as follows:
|
|
|
|
|
|
|
|
|
1 year |
|
2 years |
|
3 years |
|
Abstentions |
|
Broker Non-Votes |
|
19,335,879 |
|
26,360,410 |
|
553,993 |
|
143,531 |
|
10,395,836 |
There were no other matters coming before the meeting that required a vote by the shareholders.
Based on the June 1, 2011 results of the shareholders non-binding advisory vote on the frequency
of the advisory vote on the Companys executive officers compensation, the Companys Board of
Directors determined that an advisory vote on executive officers compensation will be conducted
every second year, until the next vote on the frequency of such votes.
Item 5. Other Information
None.
Item 6. Exhibits
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
10.37 |
|
|
Second Amended and Restated Credit Agreement, dated June 2, 2011 by and between IMAX Corporation, Wells Fargo Capital
Finance Corporation Canada and Export Development Canada. |
|
|
|
|
|
|
31.1 |
|
|
Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002, dated July 28, 2011, by Richard L. Gelfond. |
|
|
|
|
|
|
31.2 |
|
|
Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002, dated July 28, 2011, by Joseph Sparacio. |
|
|
|
|
|
|
32.1 |
|
|
Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002, dated July 28, 2011, by Richard L. Gelfond. |
|
|
|
|
|
|
32.2 |
|
|
Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002, dated July 28, 2011, by Joseph Sparacio. |
71
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: July 28, 2011
|
|
By:
|
|
/s/ JOSEPH SPARACIO |
|
|
|
|
|
|
|
|
|
Joseph Sparacio |
|
|
|
|
Executive Vice-President & Chief Financial Officer |
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
Date: July 28, 2011
|
|
By:
|
|
/s/ JEFFREY VANCE |
|
|
|
|
|
|
|
|
|
Jeffrey Vance |
|
|
|
|
Senior Vice-President, Finance & Controller |
|
|
|
|
(Principal Accounting Officer) |
72