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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended June 30, 2012
Commission file Number 001-35066
(Exact name of registrant as specified in its charter)
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant 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 x No ¨
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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares of each of the issuers classes of common stock, as of the latest practicable date:
Table of Contents
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; the performance of IMAX DMR films; competitive actions by other companies; 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; the failure to respond to change and advancements in digital technology; risks related to the acquisition of AMC Entertainment Holdings, Inc. by Dalian Wanda Group Co., Ltd.; 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 within which the Company operates; risks related to the Companys inability to protect the Companys intellectual property; 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 think big®, think big® and IMAX Is Believing are trademarks and trade
names of the Company or its subsidiaries that are registered or otherwise protected under laws of various jurisdictions.
CONDENSED CONSOLIDATED BALANCE SHEETS
In accordance with United States Generally Accepted Accounting Principles
(In thousands of U.S. dollars)
(the accompanying notes are an integral part of these condensed consolidated financial statements)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
In accordance with United States Generally Accepted Accounting Principles
(In thousands of U.S. dollars, except per share amounts)
(the accompanying notes are an integral part of these condensed consolidated financial statements)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In accordance with United States Generally Accepted Accounting Principles
(In thousands of U.S. dollars)
(the accompanying notes are an integral part of these condensed consolidated financial statements)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In accordance with United States Generally Accepted Accounting Principles
(In thousands of U.S. dollars)
(the accompanying notes are an integral part of these condensed consolidated financial statements)
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)
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 together with its wholly-owned subsidiaries, and any entities 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 of the respective VIE that most significantly impact the respective VIEs economic performance and has the obligation to absorb losses of the VIE that could potentially be significant to the respective VIE 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 and total liabilities of $nil as at June 30, 2012 (December 31, 2011 $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, 2012, these 6 VIEs have total assets and total liabilities of $12.7 million (December 31, 2011 $12.7 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, 2012, respectively (2011 $nil and $nil, respectively). The carrying value of these investments in VIEs that are not consolidated is $nil at June 30, 2012 (December 31, 2011 $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 Companys exposure is $nil at June 30, 2012.
The Company accounts for investments in new business ventures using the guidance of ASC 323 Investments Equity Method and Joint Ventures (ASC 323) and ASC 320 Investments in Debt and Equity Securities (ASC 320), as appropriate. At June 30, 2012, the equity method of accounting is being utilized for an investment with a carrying value of $3.7 million (December 31, 2011 $4.1 million). The Company has determined it is not the primary beneficiary of this VIE, and therefore it has not been consolidated. In addition, the Company has 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 $1.3 million at June 30, 2012 (December 31, 2011 $1.0 million). This investment is classified as an available-for-sale investment. The total carrying value of investments in new business ventures at June 30, 2012 and December 31, 2011, is $5.0 million and $5.1 million, respectively, 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 2011 Annual Report on Form 10-K for the year ended December 31, 2011 (the 2011 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, 2011, except as noted below.
2. New Accounting Standards and Accounting Changes
Changes in Accounting Policies
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 U.S. 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. On January 1, 2012, the Company adopted the disclosure requirements amendments in ASU 2011-04 relating to Level 3 fair value measurements and accordingly, has expanded disclosures as presented in note 17(b).
Recently Issued FASB Accounting Standard Codification Updates
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet Disclosures about Offsetting Assets and Liabilities (ASC Topic 210). The purpose of the amendment is to provide greater clarity within disclosures between entities reporting in U.S. GAAP versus IFRS that have offsetting (netting) assets and liabilities. Entities will be required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments in ASU 2011-11 for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. It is to be applied retrospectively for all comparative periods presented. The Company is currently evaluating the potential impact of ASU 2011-11 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:
As at June 30, 2012, the financed sale receivables had a weighted average effective interest rate of 9.0% (December 31, 2011 8.9%).
At June 30, 2012, finished goods inventory for which title had passed to the customer and revenue was deferred amounted to $7.3 million (December 31, 2011 $5.7 million).
Inventories at June 30, 2012 include provisions for excess and obsolete inventory based upon current estimates of net realizable value considering future events and conditions of $4.2 million (December 31, 2011 $4.0 million).
5. Property, Plant and Equipment
6. Other Intangible Assets
The Company expects to amortize approximately $1.0 million of other intangible assets for the remainder of 2012 and an average of $2.0 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, 2012, the Company acquired $3.2 million in other intangible assets. The net book value of these other intangible assets was $3.1 million as at June 30, 2012. The weighted average amortization period for these additions was 10 years.
During the three and six months ended June 30, 2012, the Company incurred costs of $0.1 million and $0.1 million, respectively, to renew or extend the term of acquired other intangible assets which were recorded in selling, general and administrative expenses (2011 $0.1 million and $0.1 million, respectively).
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 substantially 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.
On June 2, 2013 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 revolving asset-based portion and the revolving term portion of the Credit Facility bear 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 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, and 2.97% and 2.97%, respectively, for the revolving portion. Under the Credit Facility, the effective interest rate for the revolving term loan portion was 2.32% and 2.42% for the three and six months ended June 30, 2012, respectively. 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 $55.0 million and $78.6 million at June 30, 2012 respectively. The Company was in compliance with all of these requirements at June 30, 2012.
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:
Total amounts drawn and available under the Credit Facility at June 30, 2012 were $55.0 million and $55.0 million, respectively (December 31, 2011 $55.1 million and $52.0 million, respectively).
As at June 30, 2012, the Companys current borrowing capacity under the revolving asset-based portion of the Credit Facility was $50.0 million after deduction for letters of credit of $nil and the minimum Excess Availability reserve of $5.0 million (December 31, 2011 $47.1 million) and borrowing capacity under the revolving term portion of the Credit Facility was $5.0 million.
As at June 30, 2012, the Company does not have any letters of credit and advance payment guarantees outstanding (December 31, 2011 $3.0 million), under the Credit Facility.
In accordance with the loan agreement, the Company is obligated to make payments on the principal of the revolving term loan as follows:
Wells Fargo Foreign Exchange Facility
Within the Credit Facility, the Company is able to purchase foreign currency forward contracts and/or other swap arrangements. The settlement risk on its foreign currency forward contracts was $nil as at June 30, 2012 as the fair value exceeded the notional value of the forward contracts. As at June 30, 2012, the Company has $30.3 million of such arrangements outstanding.
Bank of Montreal Facility
As at June 30, 2012, the Company has available a $10.0 million facility (December 31, 2011 $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, 2012, the Company has letters of credit and advance payment guarantees outstanding of $0.9 million (December 31, 2011 $0.8 million) under the Bank of Montreal Facility.
(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, 2012 for each of the years ended December 31, are as follows:
Rent expense was $1.5 million and $3.0 million for three and six months ended June 30, 2012, respectively (2011 $1.0 million and $2.2 million, respectively) net of sublease rental of $nil and $nil, respectively (2011 $nil and less than $0.1 million, respectively).
Recorded in the accrued liabilities balance as at June 30, 2012 is $2.9 million (December 31, 2011 $3.5 million) related to accrued rent and lease inducements being recognized as an offset to rent expense over the term of the respective leases.
Purchase obligations under long-term supplier contracts as at June 30, 2012 were $11.0 million (December 31, 2011 $12.9 million).
(b) As at June 30, 2012, the Company did not have any letters of credit and advance payment guarantees outstanding (December 31, 2011 $3.0 million), under the Credit Facility. As at June 30, 2012, the Company had letters of credit and advance payment guarantees outstanding of $0.9 million as compared to $0.8 million as at December 31, 2011, 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 Company up to the collection of the customers last initial payment. At June 30, 2012, $1.4 million (December 31, 2011 $1.3 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 ICDR 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 arbitration 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. In July 2008, E-City commenced a proceeding in Mumbai, India seeking an order that the ICC award may not be recognized in India. The Company has opposed that application on a number of grounds and seeks to have the ICC award recognized in India. That Mumbai proceeding is still pending. On June 24, 2011, the Company commenced an application to the Ontario Superior Court of Justice for recognition of the final award. On December 2, 2011, the Ontario court issued an order recognizing the final award and requiring E-City to pay the Company $30,000 to cover the costs of the application. On January 18, 2012, the Company filed an application in New York State Supreme Court seeking recognition of the Ontario order in New York. On April 11, 2012, the New York court issued an order granting the Companys application.
(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 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 and in Ontario, Canada, to confirm the award. On July 13, 2011, a California district court granted Robots petition to confirm the award, and denied the Companys petition to vacate the award. On August 18, 2011, the Company appealed the district courts denial of its petition to vacate to the United States Court of Appeals for the Ninth Circuit. On January 12, 2012, the Company, Ridefilm and Robots entered into a confidential settlement agreement, pursuant to which the parties fully and finally resolved and settled all claims between them relating to this dispute. The Company dismissed the Ninth Circuit appeal on January 27, 2012, and the parties filed their respective Notices of Abandonment of the Ontario proceedings with the court of February 17, 2012, resulting in a dismissal of those proceedings.
(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 on the NASDAQ between February 27, 2003 and July 20, 2007 (the U.S. Class), 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. On April 14, 2011, the Court issued an order appointing The Merger Fund as the lead plantiff and Abbey Spanier Rodd & Abrams, LLP as lead plantiffs counsel. On November 2, 2011, the parties entered into a memorandum of understanding containing the terms and conditions of a settlement of this action. On January 26, 2012, the parties executed and filed with the Court a formal stipulation of settlement and proposed form of notice to the class, which the Court preliminarily approved on February 1, 2012. Under the terms of the settlement, members of the U.S. Class who did not opt out of the settlement will release defendants from liability for all claims that were alleged in this action or could have been alleged in this action or any other proceeding (including the action in Canada as described in (e) of this note (the Canadian Action)) relating to the purchase of IMAX securities on the NASDAQ from February 27, 2003 and July 20, 2007 or the subject matter and facts relating to this action. As part of the settlement and in exchange for the release, defendants will pay $12.0 million to a settlement fund which amount will be funded by the carriers of the Companys directors and officers insurance policy and by PricewaterhouseCoopers LLP. On March 26, 2012, the parties executed and filed with the Court an amended formal stipulation of settlement and proposed form of notice to the class, which the court preliminarily approved on March 28, 2012. On June 20, 2012, the court issued an order granting final approval of the settlement. The settlement is conditioned on the Companys receipt of an order from the court in the Canadian Action excluding from the class in the Canadian Action every member of the class in both actions who has not opted out of the U.S. settlement. The hearing on the motion for the order from the court in the Canadian Action is scheduled for July 30, 2012.
(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 seeks $210.0 million in compensatory and punitive damages, as well as costs. 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 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 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.
(g) 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.
The Company has provided no significant financial guarantees to third parties.
The following summarizes the accrual for product warranties that was recorded as part of accrued liabilities in the condensed consolidated balance sheets:
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 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, 2012 and December 31, 2011 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 no amounts have 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 $0.5 million and $1.2 million for the three and six months ended June 30, 2012, respectively (2011 $0.1 million and $0.8 million, respectively).
Film exploitation costs, including advertising and marketing, totaled $1.5 million and $2.9 million for the three and six months ended June 30, 2012, respectively (2011 $2.1 million and $2.8 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 $0.4 million and $0.5 million for the three and six months ended June 30, 2012, respectively (2011 $0.7 million and $0.9 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 $0.3 million and $0.5 million for the three and six months ended June 30, 2012, respectively (2011 $1.1 million and $1.4 million, respectively).
(b) Foreign Exchange
Included in selling, general and administrative expenses for the three and six months ended June 30, 2012 is a loss of $0.5 million and a gain of $0.9 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 gain of $0.1 million and gain of $0.7 million for the three and six months ended June 30, 2011, respectively. See note 17(d) 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 and in some cases a small upfront or initial payment, 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 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 27 exhibitors for a total of 409 theater systems, of which 274 theaters were operating as of June 30, 2012, 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 2011 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, 2012 amounted to $15.6 million and $27.3 million, respectively (2011 $8.3 million and $12.4 million, respectively).
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, 2012, the majority of IMAX DMR revenue was earned from the exhibition of 20 IMAX DMR films through 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 2012, 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 2011 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, 2012 amounted to $19.7 million and $33.5 million, respectively (2011 $12.4 million and $19.7 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 2011 Form 10-K.
At June 30, 2012, the Company has 3 significant co-produced film arrangements which makes up greater than 50% of the VIE total assets and liabilities balance of $12.7 million and 2 other co-produced film arrangements, the terms of which are similar.
For the three and six months ended June 30, 2012, amounts totaling $2.3 million and $3.2 million, respectively (2011 $2.5 million and $3.5 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.
11. Condensed Consolidated Statements of Cash Flows Supplemental Information
(a) Changes in other non-cash operating assets and liabilities are comprised of the following:
(b) Cash payments made on account of:
(c) Depreciation and amortization are comprised of the following:
(d) Write-downs, net of recoveries, are comprised of the following:
12. Receivable Provisions, Net of Recoveries
The following table reflects the Companys receivable provisions, net of recoveries recorded in the condensed consolidated statements of operations:
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 six months ended June 30, 2012, 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, 2012, the Company had net deferred income tax assets after valuation allowance of $46.2 million (December 31, 2011 $50.0 million). As at June 30, 2012, the Company had a gross deferred income tax asset before valuation allowance of $52.3 million (December 31, 2011 $56.1 million), against which the Company is carrying a $6.1 million valuation allowance (December 31, 2011 $6.1 million).
Due to a change in enacted tax rates, the Company recorded an increase to deferred tax assets and a decrease to the deferred tax provision of $0.7 million in the second quarter of 2012.
As at June 30, 2012 and December 31, 2011, 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 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, 2012, respectively (2011 less than $0.1 million and $0.1 million, respectively).
(b) Income Tax Effect on Comprehensive Income
The income tax (expense) benefit related to the following items included in other comprehensive income are as follows:
14. Capital Stock
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 $3.7 million and $7.5 million for the three and six months ended June 30, 2012, respectively (2011 expense of $4.7 million and $8.7 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 $3.7 million and $6.7 million for the three and six months ended June 30, 2012, respectively (2011 $2.8 million and $4.8 million, respectively), related to grants issued to employees and directors in the plan. No income tax benefit is recorded in the condensed consolidated statements 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 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, 2012 at the measurement date was $5.25 per share and $7.50 per share, respectively (2011 $7.72 per share and $9.60 per share, respectively). The following assumptions were used:
As at June 30, 2012, the Company has reserved a total of 13,178,597 (December 31, 2011 13,010,548) common shares for future issuance under the Stock Option Plan, of which options in respect of 7,952,170 common shares are outstanding at June 30, 2012. 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, 2012, options in respect of 3,199,152 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:
The Company cancelled 300 and 300 stock options from its Stock Option Plan (2011 nil and nil, respectively) surrendered by Company employees during the three and six months ended June 30, 2012, respectively.
As at June 30, 2012, 7,147,227 options were fully vested or are expected to vest with a weighted average exercise price of $17.04, aggregate intrinsic value of $61.1 million and weighted average remaining contractual life of 5.3 years. As at June 30, 2012, options that are exercisable have an intrinsic value of $39.1 million and a weighted average remaining contractual life of 4.6 years. The intrinsic value of options exercised in the three and six months ended June 30, 2012 was $3.7 million and $14.3 million, respectively (2011 $6.3 million and $8.7 million, respectively).
Options to Non-Employees
During the three and six months ended June 30, 2012, an aggregate of 12,500, respectively (2011 nil and 103,944, respectively), common share options to purchase the Companys common stock with an average exercise price of $22.82, respectively (2011 n/a and $27.64, respectively) were granted to certain advisors and strategic partners of the Company. These options granted have a maximum contractual life of 7 years and vest between one and 5 years. These options were granted under the Stock Option Plan.
As at June 30, 2012, non-employee options outstanding amounted to 120,001 options (2011 107,501) with a weighted average exercise price of $14.14 (2011 $14.31). Included within the non-employee outstanding options are 15,000 options which were modified in 2011 from service based employee awards to performance based non-employee awards. 33,967 options (2011 9,500) were exercisable with an average weighted exercise price of $11.53 (2011 $14.40) and the vested options have an aggregate intrinsic value of $0.4 million (2011 $0.2 million). The weighted average fair value of options granted to non-employees during the three and six months ended June 30, 2012 at the measurement date was $11.73 per share, respectively (2011 n/a and $13.75 per share, respectively), utilizing a Binomial Model with the following underlying assumptions for periods ended June 30:
For the three and six months ended June 30, 2012, the Company recorded a charge of less than $0.1 million and $0.1 million, respectively (2011 $0.5 million and $0.7 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, 2011 $0.1 million).
Restricted Common Shares
There were no restricted common shares issued during the three and six months ended or outstanding as at June 30, 2012 and 2011.
Stock Appreciation Rights
There has been no stock appreciation rights (SARs) granted since 2007. 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, 2012, nil and 15,000 SARs were cash settled for $nil and $0.3 million, respectively (2011 472,000 and 999,500 SARs were cash settled for $13.0 million and $23.7 million, respectively). The average exercise price for the settled SARs for the three and six months ended June 30, 2012 was $ 6.86 (2011 $6.86 and $6.86, respectively) per SAR. As at June 30, 2012, 118,000 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, 2012 and 2011. The SARs vesting period ranges from immediately upon granting to 5 years, with a remaining contractual life of 5.51 years as at June 30, 2012. The outstanding SARs had a weighted average fair value of $17.61 per right as at June 30, 2012 (December 31, 2011 $12.43). The Company accounts for the obligation of these SARs as a liability (June 30, 2012 $2.0 million; December 31, 2011 $1.6 million), which is classified within accrued liabilities. The Company has recorded a recovery of less than $0.1 million and an expense of $0.8 million for the three and six months ended June 30, 2012, respectively (2011 expense of $1.4 million and $3.2 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:
There were no warrants issued during the three and six months ended or outstanding as at June 30, 2012 and 2011.
(c) Income Per Share
Reconciliations of the numerator and denominator of the basic and diluted per-share computations are comprised of the following:
(d) Shareholders Equity
The following summarizes the movement of Shareholders Equity for the six months ended June 30, 2012:
15. Segmented Information
The Company has seven 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; 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 Company refers to all theaters using the IMAX theater system as IMAX theaters. The other segment includes certain IMAX theaters that the Company owns and operates, 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 2011 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.
In the third quarter of 2011, based on the guidance of ASC Topic 280, Segment Reporting (ASC 280), the Company identified a change in reportable segments. The theater operations segment which operates certain IMAX theaters has been consolidated into the other segment as it no longer meets the quantitative threshold requirements of ASC 280 for separate disclosure. Prior year comparatives have been restated to conform to the current reportable segment presentation.
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.
Revenue by geographic area is based on the location of the customer. Revenue related to IMAX DMR is presented based upon the geographic location of the theaters that exhibit the re-mastered films. IMAX DMR revenue is generated through contractual relationships with studios and other third parties and these may not be in the same geographical location as the theater. Comparative numbers related to IMAX DMR revenue have been adjusted to conform to the current period presentation.
No single country in the Rest of the World, Western Europe, Rest of Europe or Asia (excluding Greater China) classifications comprise 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, 2012, 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, he is 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, 2013. Under the terms of the extension, Mr. Gelfond also agreed that any compensation earned during 2011, 2012 and 2013 would not be included in calculating his entitlement under the SERP.
The amounts accrued for the SERP are determined as follows:
On August 1, 2010, the Company made a lump sum payment to Mr. Wechsler in accordance with the terms of the plan, representing a settlement in full of Mr. Wechslers entitlement under the SERP.
The following table provides disclosure of pension expense for the SERP:
The accumulated benefit obligation for the SERP was $19.1 million at June 30, 2012 (December 31, 2011 $19.0 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:
No contributions are expected to be made for the SERP during 2012. The Company expects interest costs of $0.1 million and amortization of actuarial losses of $0.2 million to be recognized as a component of net periodic benefit cost during the remainder of 2012.
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:
(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, 2012, the Company contributed and expensed an aggregate of $0.3 million and $0.6 million, respectively (2011 $0.3 million and $0.5 million, respectively), to its Canadian plan and an aggregate of less than $0.1 million and $0.1 million, respectively (2011 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 for 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, 2012 is $0.5 million (December 31, 2011 $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, 2012, respectively (2011 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:
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.
(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:
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, 2012 and December 31, 2011 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, 2012 and December 31, 2011, 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, 2012 and December 31, 2011, respectively.
The fair value of the Companys available-for-sale investment is determined using 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, 2012 and December 31, 2011, respectively. The discounted cash flow valuation technique is based on significant unobservable inputs of revenue and expense projections, appropriately risk weighted, as the investment is in a start-up entity. The significant unobservable inputs used in the fair value measurement of the Companys available-for-sale investment are long-term revenue growth and pretax operating margin. A significant increase (decrease) in any of those inputs in isolation would result in a lower or higher fair value measurement.
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, 2012 and December 31, 2011, respectively. These identical instruments are traded on a closed exchange.
There were no significant transfers between Level 1 and Level 2 during the six months ended June 30, 2012 or 2011. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. 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:
There were no transfers in or out of the Companys level 3 assets during the six months ended June 30, 2012.
In the three and six months ended June 30, 2012, the Company recognized a $0.2 million other-than-temporary impairment of its available-for-sale investment, in Impairment of available-for-sale investment in the condensed consolidated statement of operations, as the value is not expected to recover based on the length of time and extent to which the market value has been less than cost.
(c) Financing Receivables
The Companys net investment in leases and its net financed sale receivables are subject to the disclosure requirements of ASC 310 Receivables. Due to differing risk profiles of its net investment in leases and its net financed sales receivables, the Company views its net investment in leases and its net 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 the credit quality worthiness of its financing receivables for internal purposes only:
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:
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.
The Companys investment in financing receivables on nonaccrual status is as follows:
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 are as follows:
The Companys recorded investment in past due financing receivables for which the Company continues to accrue finance income is as follows:
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:
The Companys activity in the allowance for credit losses for the period and the Companys recorded investment in financing receivables is as follows:
(d) Foreign Exchange Risk Management
The Company is exposed to market risk from changes in foreign currency rates. A majority 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 Chinese Renminbi, 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, 2012 (the Foreign Currency Hedges), with settlement dates throughout 2013. In addition, at June 30, 2012, 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 and reclassified to the condensed consolidated statement of operations when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the consolidated statement of operations.
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:
Fair value of derivatives in foreign exchange contracts as at:
Derivatives in Foreign Currency Hedging relationships are as follows:
Non Designated Derivatives in Foreign Currency relationships are as follows:
(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, 2012, the equity method of accounting is being utilized for an investment with a carrying value of $3.7 million (December 31, 2011 $4.1 million). For the three months ended June 30, 2012, gross revenues, cost of revenue and net loss for the investment were $2.8 million, $2.9 million and $2.4 million, respectively (2011 $0.3 million, $2.4 million and $4.4 million, respectively). For the six months ended June 30, 2012, gross revenues, cost of revenue and net loss for the investment $3.8 million, $6.0 million and $6.9 million, respectively (2011 $0.5 million, $3.8 million and $8.6 million, respectively). The Company has determined it is not the primary beneficiary of this VIE, and therefore it has not been consolidated. The difference between the Companys investment balance and the amount of underlying equity in net assets owned by the Company amounts to $1.4 million and relates to goodwill. In addition, the Company has 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 $1.3 million at June 30, 2012 (December 31, 2011 $1.0 million). In the three and six months ended June 30, 2012, the Company recognized an other-than-temporary impairment for its investment of $0.2 million and $0.2 million, respectively (2011 $nil and $nil, respectively). This investment is classified as an available-for-sale investment. The total carrying value of investments in new business ventures at June 30, 2012 is $5.0 million (December 31, 2011 $5.1 million) and is recorded in Other Assets.
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 theater systems (IMAX theater systems) and the sale, lease or contribution to customers under revenue-sharing arrangements of those systems. The IMAX theater systems are based on proprietary and patented technology developed over the course of the Companys 45-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 to exhibitors 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 663 IMAX theaters (549 commercial, 114 institutional) operating in 52 countries as at June 30, 2012. This compares to 560 IMAX theaters (442 commercial, 118 institutional) operating in 46 countries as at June 30, 2011.
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 securing of new film projects (particularly IMAX DMR films), the continuing ability to invest in and improve the Companys technology to enhance its differentiation from other cinematic experiences, 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.
The Company strives to remain at the forefront of advancements in cinema technology. Accordingly, one of the Companys key initiatives for in the short-term is the development of a next-generation laser-based digital projection system. In 2011, the Company announced the completion of a deal in which it secured certain exclusive license rights to a portfolio of intellectual property in the digital cinema field owned by the Eastman Kodak Company (Kodak). The transaction involves rights to technology related to laser projection as well as rights in the digital cinema field to a broader range of Kodak technology. On February 7, 2012, the Company announced an agreement with Barco N.V. to co-develop a laser-based digital projection system that incorporates Kodak technology. The Company believes that these arrangements with Kodak and Barco N.V. will enable IMAX projectors to present greater brightness and clarity, a wider color gamut and deeper blacks, and consume less power and last longer than existing digital technology. The Company believes that a laser projection solution, which it plans to introduce in the second half of 2013, will allow IMAXs network to show the highest quality digital content available. During 2012, the Company has re-invested in its brand with its consumer brand marketing campaign which encompasses social media, in-theater marketing and Internet advertising. Finally, the Company remains focused on growing its theater network, particularly, in key international territories such as Greater China, India, Central and South America and Western Europe.
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. Typically, both ongoing fees and maintenance and extended warranty fees are indexed to a local consumer price index.
The Company offers certain commercial clients joint revenue sharing arrangements pursuant to which the Company places an IMAX theater system at the theater operators venue and, in exchange for which, it receives a portion of the theaters box-office receipts, concession revenue and in some cases a small upfront or initial payment.
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.
Sales Backlog and Theater Network
The Companys sales backlog fluctuates in both number of systems and dollar value depending on the signing of new theater system arrangements from quarter to quarter, which adds to backlog, and its 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; however, it 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, operating leases, letters of intent or long-term conditional theater commitments. Certain theater systems under joint revenue sharing arrangements carry a backlog value based on contracted upfront payments. The Company believes that the contractual obligations for theater system installations that are listed in sales backlog are valid and binding commitments.
The Companys theater signings are as follows:
Sales Backlog. Signed contracts for theater systems are listed as sales backlog prior to the time of revenue recognition. The value of sales backlog represents the total value of all signed theater system agreements that are expected to be recognized as revenue in the future. Sales backlog includes initial fees along with the estimated present value of contractual fixed minimum fees due over the term, but excludes contingent fees in excess of contractual minimums and maintenance and extended warranty fees that might be received in the future.
The Companys sales backlog is as follows:
Certain theater systems under joint revenue sharing arrangements carry a backlog value based on small contracted upfront payments with no value assigned to future performance payments. All other theater systems under joint revenue sharing arrangements carry no assigned backlog value. The value of the sales backlog does not include revenues from theaters in which the Company has an equity-interest, agreements covered by letters of intent or long-term conditional sale or lease commitments, though the systems contracted for under these arrangements is included calculating the number of systems in backlog.
The following chart shows the number of the Companys theater systems by configuration, opened theater network base and backlog as at June 30:
The Company estimates that approximately 74 (excluding digital upgrades) of theater systems arrangements currently in backlog will be installed in the remaining six months of 2012, with the remainder being installed in subsequent periods. In addition to the theaters in its backlog, each year the Company installs a number of systems that are signed in that same calendar year. 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.
In the normal course of its business, from time to time the Company, will have customers who, for a number of reasons, including the inability to obtain certain consents, approvals or financing, are unable to proceed with a theater system installation. Once the determination is made that the customer will not proceed with installation, the agreement with the customer is generally terminated or amended. If the agreement is terminated, once the Company and the customer are released from all their future obligations under the agreement, all or a portion of the initial rents or fees that the customer previously made to the Company are recognized as revenue.
The following table outlines the breakdown of the theater network by type and geographic location as at June 30:
The Company believes that over time its commercial multiplex theater network could grow to approximately 1,700 commercial multiplex IMAX theaters worldwide from 529 commercial multiplex IMAX theaters as of June 30, 2012. While the Company continues to grow domestically, particularly in small to mid-tier markets, it believes that the majority of its future growth will come from underpenetrated, international markets. Key international growth markets include Greater China, Russia and the Commonwealth of Independent States, Western Europe and Latin America.
Film Production and Digital Re-Mastering (IMAX DMR)
The Company developed a proprietary technology to digitally re-master Hollywood films into IMAX digital cinema package (DCP) format or 15/70-format film at a modest cost incurred by the Company for exhibition in IMAX theaters. This system, known as IMAX DMR, digitally enhances the image resolution of motion picture films for projection on IMAX screens while maintaining or enhancing the visual clarity and sound quality to levels for which The IMAX Experience is known. This technology enabled the IMAX theater network to release of Hollywood films, particularly new films which are released to IMAX theaters simultaneously with their broader domestic release. The development of this technology was critical in helping the Company execute its strategy of expanding its commercial theater network by establishing IMAX theaters as a key, premium distribution platform for Hollywood films.
IMAX films benefit from enhancements made by individual filmmakers exclusively for the IMAX release and filmmakers and studios have increasingly sought IMAX-specific enhancements to generate interest in and excitement for their films. Such enhancements include shooting selected scenes with IMAX cameras to enhance the audiences immersion in the film and taking advantage of the unique dimensions of the IMAX screen by shooting the film in a larger aspect ratio so that more of the films image is visible in IMAX theaters than in conventional theaters. Filmmaker Christopher Nolan used IMAX cameras to film over one hour of The Dark Knight Rises: The IMAX Experience, released in July 2012. Prometheus: An IMAX 3D Experience, which was released in June 2012, featured a larger projected aspect ratio that allowed audiences to see more of the films image on the screen, exclusively in
IMAX theaters. Two of the films announced to date for 2013, The Sequel to Star Trek: An IMAX 3D Experience and The Hunger Games: Catching Fire: The IMAX Experience, will feature select sequences shot with IMAX cameras. The Company seeks to differentiate its films not only through enhanced content, but through other important means as well. For example, in December 2011, Mission: Impossible Ghost Protocol: The IMAX Experience, not only featured 30 minutes of footage shot with IMAX cameras, but it was also released 5 days earlier in North America than its wide release to conventional theaters. The Company believes that this early release strategy helps make the release of the IMAX film an event, which drives audiences excitement and enthusiasm for a film. The Company intends to employ the early release strategy for additional films in the future.
The original soundtrack of a movie is re-mastered for the IMAX five or six-channel digital sound systems for the IMAX DMR release. Unlike the soundtracks played in conventional theaters, IMAX re-mastered soundtracks are uncompressed and full fidelity. IMAX sound systems use proprietary loudspeaker systems and proprietary surround sound configurations that ensure every theater seat is in a good listening position.
In addition to the 20 DMR films that have already been shown in the IMAX theater network in the first six months of 2012, 9 additional DMR films are scheduled to be released to its theater network during the remaining six months of 2012:
To date, the Company announced the following 7 titles to be released in 2013 to its theater network:
The Company remains in active negotiations with all of Hollywoods studios for additional films to fill out its short and long-term film slate and ultimately expects a similar number of IMAX DMR films to be released to the IMAX network in 2012 as were released in 2011.
A significant portion of the Companys revenues is generated by customers located outside the United States and Canada. For the first six months of 2012 and 2011, approximately 46.7% and 42.2%, respectively, of the Companys revenue was derived outside the United States and Canada. The Company believes that its international expansion is an important driver of future growth for the Company. In the first six months of 2012, 65.1% of the Companys 63 theater signings were for theaters in international markets. As at June 30, 2012, approximately 85.7% of IMAX theater systems arrangements in backlog were scheduled to be installed in international markets. Accordingly, the Company expects that international operations will continue to be a significant portion of the Companys revenue in the future and the Company intends to actively expand its international presence, including by expanding its number of theaters under international joint revenue sharing arrangements.
During 2011, the Company formed a subsidiary, IMAX (Shanghai) Multimedia Technology Co, Ltd. (IMAX China), to enable further growth in China, the Companys second-largest and fastest-growing market. As at June 30, 2012, the Company had a total of 97 theaters operating in Greater China with an additional 131 theaters in backlog that are scheduled to be installed in Greater China by 2017. The Company believes that favorable market trends in China, including government initiatives to help enable cinema screen growth and to support the film industry, present opportunities for significant additional growth. In March 2011, the Company
announced a 75-theater joint revenue sharing arrangement with Wanda Cinema Line Corporation, Chinas top grossing cinema chain (Wanda). This agreement with Wanda represents IMAXs first full and largest revenue-sharing arrangement in China to date. IMAX has installed its digital technology in 32 of Wandas multiplex locations to date, with the remaining theaters scheduled to be rolled out in the remainder of 2012, 2013 and 2014. On February 18, 2012, the U.S. and Chinese governments announced the terms of an agreement to expand the number of Hollywood films to be released in China to include 14 additional IMAX or 3D format films, and to permit distributors to receive higher distribution fees. The Company believes this is a positive development for its business in China and elsewhere.
To support growth in international markets, the Company has sought to bolster its international film slate through international DMR releases in select international markets, as well as early international releases. In April 2012, HOUBA! On the Trail of the Marsupilami: The IMAX Experience, a French IMAX DMR film, was released to IMAX theaters and the Company is scheduled to release CZ12: The IMAX Experience, a Chinese IMAX DMR film in December 2012. The Company expects to announce additional IMAX international DMR films in both Asia and Europe in the remainder of 2012 and 2013. In recent years, the Company, along with its studio partners, has also employed a strategy of releasing certain IMAX DMR films earlier than the films broader release in select international markets. The Company anticipates announcing additional IMAX international early releases in the future.
During 2012, the Company intends to continue its focus increasingly on a number of its less penetrated international markets, including Greater China, Western Europe, India and Latin America. On January 17, 2012, the Company announced that it had restructured its master license agreement in South America with Giencourt Investments, S.A., in order to play a more active role in that market and to help accelerate the roll-out of IMAX theaters across South America.
CRITICAL ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP).
The preparation of these 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 Item 8 of the Companys Annual Report on Form 10-K for the year ended December 31, 2011 (the 2011 Form 10-K).
The Company considers the following significant estimates, assumptions and judgments to have the most significant effect on its results:
The Company generates revenue from various sources as follows:
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 the 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.
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.