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IMAX CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) GENERAL
IMAX Corporation, together with its wholly-owned subsidiaries (the "Company"),
is one of the world's leading entertainment technology companies, specializing
in motion picture technologies and presentations. The Company refers to all
theaters using the IMAX theater system as "IMAX theaters." The Company combines
proprietary software, architecture and equipment to create the highest-quality,
most immersive motion picture experience for which the IMAX® brand has become
known globally. Top filmmakers and studios are utilizing IMAX theaters to
connect with audiences in extraordinary ways, and, as such, IMAX's network is
among the most important and successful theatrical distribution platforms for
major event films around the world. As of December 31, 2012 there were 731 IMAX
theater systems (598 commercial multiplexes, 19 commercial destinations, 114
institutional) operating in 53 countries. This compares to 634 theater systems
(497 commercial multiplexes, 20 commercial destinations, 117 institutional)
operating in 50 countries as of December 31, 2011.
IMAX theater systems combine:
• IMAX DMR (Digital Re-Mastering) movie conversion technology, which results
in higher image and sound fidelity than conventional cinema experiences;
• advanced, high-resolution projectors with specialized equipment and
automated theater control systems, which generate significantly more
contrast and brightness than conventional theater systems;
• large screens and proprietary theater geometry, which result in a
substantially larger field of view so that the screen extends to the edge
of a viewer's peripheral vision and creates more realistic images;
• sound system components, which deliver more expansive sound imagery and
pinpointed origination of sound to any specific spot in an IMAX theater;
and
• specialized theater acoustics, which result in a four-fold reduction in
background noise.
The combination of these components causes audiences in IMAX theaters to feel as
if they are a part of the on-screen action, creating a more intense, immersive
and exciting experience than in a traditional theater. In addition, the
Company's IMAX 3D theater systems combine the same theater systems with 3D
images that further enhance the audience's feeling of being immersed in the
film.
As a result of the immersiveness and superior image and sound quality of The
IMAX Experience, the Company's exhibitor customers typically charge a premium
for IMAX DMR films over films exhibited in their other auditoriums. The premium
pricing, combined with the higher attendance levels associated with IMAX,
generates incremental box office for the Company's exhibitor customers and for
the movie studios releasing their films to the IMAX network. The incremental box
office generated by IMAX DMR films has helped establish IMAX as a key premium
distribution and marketing platform for Hollywood blockbuster films. Driven by
the introduction of its digital projection system into the marketplace in 2008,
the number of IMAX DMR films released to the theater network per year has
increased to 35 films in 2012, up from 25 films in 2011 and 6 films in 2007. The
Company expects to release a similar number of IMAX DMR films in 2013 as
compared to 2012.
As one of the world's leaders in entertainment technology, the Company strives
to remain at the forefront of advancements in cinema technology. Accordingly,
one of the Company's key short-term initiatives 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. ("Barco") to co-develop a laser-based
digital projection system that incorporates Kodak technology. The Company
believes that these arrangements with Kodak and Barco will enable IMAX laser
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 start to roll-out in the second half of 2014, will allow IMAX's network
to show the highest quality of digital content and provide the Company the
ability to illuminate the largest screens in its network, which are currently
film-based.
Important factors that the Company's Chief Executive Officer ("CEO") Richard L.
Gelfond uses in assessing the Company's business and prospects include:
• the signing, installation and financial performance of theater system
arrangements (particularly its joint revenue sharing arrangements);
• film performance and the securing of new film projects (particularly IMAX
DMR films);
• revenue and gross margins from the Company's operating segments;
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• operating leverage;
• earnings from operations as adjusted for unusual items that the Company views as non-recurring;
• short-and long-term cash flow projections;
• the continuing ability to invest in and improve the Company's technology
to enhance its differentiation of presentation versus other cinematic
experiences; and
• the overall execution, reliability and consumer acceptance of The IMAX Experience, related technologies and new initiatives.
The primary revenue sources for the Company can be categorized into two main
groups: theater systems and films. On the theater systems side, the Company
derives revenues from theater exhibitors primarily through either a sale or
sales-type lease arrangement or a joint revenue sharing arrangement. Theater
exhibitors also pay for associated maintenance and extended warranty services.
Film revenue is derived primarily from film studios for the provision of film
production and digital re-mastering services for exhibition on IMAX theater
systems around the world. A portion of the Company's film revenues are also
derived from the distribution of certain films and the provision of
post-production services. The Company also derives a small portion of other
revenues from the operation of its own theaters, the provision of aftermarket
parts for its system components, and camera rentals.
IMAX Theater Systems: IMAX Systems (Sales and Sales-type Leases), Joint Revenue
Sharing Arrangements and Theater System Maintenance
One of the Company's principal businesses is the design, manufacture and
delivery of premium theater systems ("IMAX theater systems"). The theater system
equipment components (including 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 are all elements of what the Company considers the system deliverable (the
"System Deliverable"). The IMAX theater systems are based on proprietary and
patented technology developed over the course of the Company's 45-year history.
The Company's customers who purchase, lease or otherwise acquire the IMAX
theater systems through joint revenue sharing arrangements are theater
exhibitors that operate commercial theaters (particularly multiplexes), museums,
science centers, or destination entertainment sites. The Company generally does
not own IMAX theaters, but licenses the use of its trademarks along with the
sale, lease or contribution of the IMAX theater system.
IMAX Systems
The Company provides IMAX theater systems to customers on a sales or long-term
lease basis, typically with an initial 10-year term. These agreements typically
comprise of initial fees and 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 between the time of system signing and the time of
system installation, which is when the total of these fees, in addition to the
present value of future annual minimum payments, are recognized as revenue.
Ongoing fees are paid 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.
Contingent payments in excess of fixed minimum ongoing payments are recognized
as revenue when reported by theater operators, provided collectibility is
reasonably assured. Typically, ongoing fees are indexed to a local consumer
price index. Finance income is derived over the term of a financed sale or
sales-type lease arrangement as the unearned income on that financed sale or
sales-type lease is earned.
Under a sales agreement, title to the theater system equipment components passes
to the customer. In certain instances, however, the Company retains title or a
security interest in the equipment until the customer has made all payments
required under the agreement. Under the terms of a sales-type lease agreement,
title to the theater system equipment components remains with the Company. The
Company has the right to remove the equipment for non-payment or other defaults
by the customer.
The revenue earned from customers under the Company's theater system sales or
lease agreements can vary from quarter to quarter and year to year based on a
number of factors, including the number and mix of theater system configurations
sold or leased, the timing of installation of the theater systems, the nature of
the arrangement and other factors specific to individual contracts.
Joint Revenue Sharing Arrangements
The Company also provides IMAX theater systems to customers under joint revenue
sharing arrangements, pursuant to which the Company provides the IMAX theater
system in return for a portion of the customer's IMAX box-office receipts, and
in some cases concession revenues and/or a small upfront or initial payment.
Pursuant to these revenue-sharing arrangements, the Company retains
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title to the theater system equipment components and rent payments are
contingent, instead of fixed or determinable, on film performance. Joint revenue
sharing arrangements generally have a 10-year initial term are typically
renewable by the customer for one or more additional terms of between 5 and 10
years. The Company has the right to remove the equipment for non-payment or
other defaults by the customer. The contracts are generally non-cancellable by
the customer unless the Company fails to perform its obligations.
The introduction of joint revenue sharing arrangements has been an important
factor in the expansion of the Company's commercial theater network, which has
grown by approximately 245% since 2008. Joint revenue sharing arrangements allow
commercial theater exhibitors to install IMAX theater systems without the
significant initial capital investment required in a sale or sales-type lease
arrangement. Since customers under joint revenue sharing arrangements pay the
Company a portion of their ongoing box office, joint revenue sharing
arrangements also drive recurring cash flows and earnings for the Company. The
retirement of a significant portion of the Company's debt during 2009, increased
cash flows from operations during subsequent years and the Company's expanded
credit facility has allowed the Company the financial flexibility to fund the
expansion of its joint revenue sharing strategy. As at December 31, 2012, the
Company had 316 theaters in operation under joint revenue sharing arrangements,
a 23.0% increase as compared to the 257 joint revenue sharing arrangements open
as at December 31, 2011. The Company also had contracts in backlog for an
additional 137 theaters under joint revenue sharing arrangements as at
December 31, 2012.
The Company cautions that as an increasing portion of its revenues are derived
from IMAX theaters under joint revenue sharing arrangements, it is increasingly
subject to the success or failure of its IMAX DMR film slate. The revenue earned
from customers under the Company's joint revenue sharing arrangements can vary
from quarter to quarter and year to year based on a number of factors including
film performance, the mix of theater system configurations, the timing of
installation of these theater systems, the nature of the arrangement, the
location, size and management of the theater and other factors specific to
individual arrangements. Ongoing revenue from theater systems under joint
revenue sharing arrangements is derived from box-office results and concession
revenues reported by the theater operator, provided collectibility is reasonably
assured.
Theater System Maintenance
For all IMAX theaters, theater owners or operators are also generally
responsible for paying the Company an annual maintenance and extended warranty
fee. Annual maintenance fees are generally paid throughout the duration of the
term of the theater agreements and are typically indexed to a local consumer
price index.
Films: Digital Re-Mastering (IMAX DMR) and other film revenue
Production and Digital Re-Mastering (IMAX DMR)
In 2002, the Company developed a proprietary technology to digitally re-master
Hollywood films into IMAX digital cinema package 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 Hollywood
films 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. In a typical IMAX DMR film
arrangement, the Company will receive a percentage of net box-office receipts of
any commercial films released in the IMAX network, which is generally 10-15%,
from a film studio for the conversion of the film to the IMAX DMR format and
access to its premium distribution platform. In 2012, 35 films converted through
the IMAX DMR process were released to theaters within the IMAX network (2011-25
films converted through the IMAX DMR process). To date, the Company has
announced the release of 23 IMAX DMR titles to theaters within the IMAX network
in 2013. The Company remains in active discussions with every major studio
regarding future titles for 2013 and beyond, and expects a similar number of
IMAX DMR films to be released to the IMAX network in 2013 as in 2012.
The Company believes that its international expansion is an important driver of
future growth for the Company. In fact, during 2012, 49.3% of the Company's
gross box-office from DMR films was generated in international markets, as
compared to 47.6% in 2011. To support growth in international markets, the
Company has sought to bolster its international film slate through local
language IMAX DMR releases in select international markets, as well as early
international releases. During 2012, five local language IMAX DMR films were
released, including one French film, Houba! On the Trail of the Marsupilami: The
IMAX Experience and four Chinese IMAX DMR titles: Tai Chi 0: An IMAX 3D
Experience, Tai Chi Hero: An IMAX 3D Experience, Back to 1942: The IMAX
Experience and CZ12: The IMAX Experience. In 2013, additional Chinese IMAX DMR
films are expected to be released to IMAX
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theaters in Greater China, including the recent releases of The Grandmaster: The
IMAX Experience and Journey to the West: Conquering the Demons: An IMAX 3D
Experience. Also in 2013, Dragon Ball Z: Battle of the Gods: An IMAX 3D
Experience, a Japanese IMAX DMR film, Stalingrad: An IMAX 3D Experience, a
Russian IMAX DMR film, Dhoom 3: The IMAX Experience, an Indian IMAX DMR film
will be released to IMAX theaters within the respective markets. The Company
expects to announce additional local language IMAX DMR films to be released to
the IMAX network in 2013 and beyond. Supplementing the Company's film slate of
Hollywood DMR titles with appealing local DMR titles is an important component
of the Company's international film strategy.
Film Distribution and Post-Production
The Company is also a distributor of large-format films, primarily catering to
its institutional theater partners. The Company generally distributes films
which it produces or for which it has acquired distribution rights from
independent producers. The Company generally receives a percentage of the
theater box-office receipts as a distribution fee.
Films produced by the Company are typically financed through third parties,
whereby the Company will generally receive a film production fee in exchange for
producing the film and a distribution fee for distributing the film. The
ownership rights to such films may be held by the film sponsors, the film
investors and/or the Company. The Company utilizes third-party funding for the
majority of original films it produces and distributes. In 2012, the Company,
along with Warner Bros. Pictures ("WB") and MacGillivray Freeman Films ("MFF")
released an original title, To the Artic 3D: An IMAX 3D Experience. In 2011, the
Company, along with WB, released Born to be Wild 3D: An IMAX 3D Experience. In
January 2013, the Company announced an agreement with MFF to jointly finance,
market and distribute up to four films (with an option for four additional
films) produced by MFF to be released exclusively to IMAX theaters. The
agreement will provide IMAX's institutional theater partners access to a steady
flow of the highest-quality, large-format documentaries over the years to come.
David Keighley Productions 70MM Inc., a wholly-owned subsidiary of the Company,
provides film post-production and quality control services for large-format
films (whether produced internally or externally), and digital post-production
services.
Other Revenues
The Company derives a small portion of its revenues from other sources. As at
December 31, 2012 and 2011, the Company had four owned and operated theaters. In
addition, the Company has a commercial arrangement with one theater resulting in
the sharing of profits and losses and provides management services to two
theaters. The Company also rents its proprietary 2D and 3D large-format film and
digital cameras to third party production companies. The Company maintains
cameras and other film equipment and also offers production advice and technical
assistance to both documentary and Hollywood filmmakers. Additionally, the
Company generates revenues from the sale of after-market parts and 3D glasses.
See "Critical Accounting Policies" below for further discussion on the Company's
revenue recognition policies.
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IMAX Theater Network
The following table outlines the breakdown of the theater network by type and
geographic location as at December 31:
2012 Theater Network Base 2011 Theater Network Base
Commercial Commercial Commercial Commercial
Multiplex Destination Institutional Total Multiplex Destination Institutional Total
United States 290 6 57 353 269 6 61 336
Canada 34 2 7 43 26 2 7 35
Greater China(1) 108 - 20 128 70 - 18 88
Asia (excluding
Greater China) 46 3 7 56 35 3 9 47
Western Europe 42 7 11 60 36 7 10 53
Russia & the CIS 32 - - 32 22 - - 22
Latin America(2) 19 - 10 29 15 - 10 25
Rest of the World 27 1 2 30 24 2 2 28
Total 598 19 114 731 497 20 117 634
(1) Greater China includes China, Hong Kong, Taiwan and Macau.
(2) Latin America includes South America, Central America and Mexico.
As of December 31, 2012, approximately 54.2% of IMAX systems in operation are
located in the United States and Canada compared to 58.5% as at the end of last
year. Approximately 19.9% of IMAX theater systems arrangements in backlog are
scheduled to be installed in the United States and Canada compared to 16.0% last
year. The commercial exhibitor market in the United States and Canada represents
an important customer base for the Company in terms of both collections under
existing arrangements and potential future theater system contracts. The Company
has targeted these operators for the sale or sales-type lease of its IMAX
digital projection system, as well as for joint revenue sharing arrangements.
While the Company is pleased with its progress in the U.S. and Canadian
exhibitor markets, there is no assurance that the Company's progress in these
markets will continue, particularly as a higher percentage of these markets are
penetrated. To minimize the Company's credit risk in this area, the Company
retains title to the underlying theater systems leased, performs initial and
ongoing credit evaluations of its customers and makes ongoing provisions for its
estimates of potentially uncollectible amounts.
While the Company continues to grow domestically, it believes that the majority
of its future growth will come from underpenetrated, international markets. As
at December 31, 2012, approximately 45.8% of IMAX systems in operation were
located within international markets (defined as all countries other than the
United States and Canada), as compared to 41.5% as at December 31, 2011. The
Company expects growth in international markets to be an increasingly
significant part of its business. There are, however, risks associated with the
Company's international business. See Risk Factors - "The Company conducts
business internationally, which exposes it to uncertainties and risks that could
negatively affect its operations, sales and future growth prospects" in Item 1A
of the Company's 2012 Form 10-K.
During 2011, the Company formed IMAX (Shanghai) Multimedia Technology Co., Ltd.
("IMAX China"), a wholly-owned subsidiary, to enable further growth in Greater
China, the Company's second-largest and fastest-growing market. The Company
believes that favorable market trends in China, including government initiatives
to foster cinema screen growth, to increase the number of Hollywood films
distributed in China (particularly IMAX and 3D films), and to support the film
industry, present opportunities for additional growth, though the Company
cautions that its expansion in China faces a number of challenges. See Risk
Factors - "The Company faces risks in connection with the continued expansion of
its business in China" in Item 1A of the Company's 2012 Form 10-K. In March
2011, the Company announced a 75-theater joint revenue sharing arrangement with
Wanda Cinema Line Corporation, China's largest cinema chain ("Wanda"). The
agreement with Wanda, which represents IMAX's largest single international joint
revenue sharing arrangement to date, brings the total number of IMAX theaters
open or in backlog in Greater China to 250. As at December 31, 2012, IMAX China
had offices in Shanghai and Beijing and a total of 51 employees. 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.
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The following table outlines the breakdown of the Commercial Multiplex theater
network by arrangement type and geographic location as at December 31:
2012 2011
IMAX Commercial Multiplex Theater Network IMAX Commercial Multiplex Theater Network
Sale / Sales- Sale / Sales-
JRSA type lease Total JRSA type lease Total
Domestic Total (United
States & Canada) 212 112 324 192 103 295
International:
Greater China 54 54 108 30 40 70
Asia (excluding Greater
China) 26 20 46 22 13 35
Western Europe 24 18 42 13 23 36
Russia & the CIS - 32 32 - 22 22
Latin America - 19 19 - 15 15
Rest of the World - 27 27 - 24 24
International Total 104 170 274 65 137 202
Worldwide Total 316 282 598 257 240 497
As at December 31, 2012, 212 (2011 - 192) of the 316 (2011 - 257) theaters under
joint revenue sharing arrangements in operation, or 67.1% (2011 - 74.7%) were
located in the United States and Canada, with the remaining 104 (2011 - 65) or
32.9% of arrangements being located in international markets. The Company
continues to seek to expand the number of theaters under joint revenue sharing
arrangements it has in select international markets.
Sales Backlog
The number of theater systems in the backlog and their dollar value fluctuates
depending on the number of new theater system arrangements signed 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. The value of theaters under joint revenue
sharing arrangements is generally excluded from the dollar value or sales
backlog, although certain theater systems under joint revenue sharing
arrangements provide for contracted upfront payments and therefore carry a
backlog value based on these payments. The Company believes that the contractual
obligations for theater system installations that are listed in sales backlog
are valid and binding commitments.
The Company's sales backlog is as follows:
December 31, 2012 December 31, 2011
Number of Dollar Value Number of Dollar Value
Systems (in thousands) Systems (in thousands)Sales and sale-type lease
arrangements 139 (1) $ 168,101 144 (1) $ 176,184
Joint revenue sharing
arrangements 137 31,652 119 21,516
276 $ 199,753 263 $ 197,700
(1) Includes 11 upgrades from a film-based theater system to a digital theater
system in an existing IMAX theater location (including one laser-based system
in a commercial theater and 4 laser-based systems in institutional theaters).
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The following table outlines the breakdown of the total backlog by arrangement
type and geographic location as at December 31:
2012 2011
Sale / Sales- Sale / Sales-
JRSA type lease Total JRSA type lease Total
Domestic Total (United States & Canada) 39 16 55 24 18 42
International:
Greater China 80 42 122 81 43 124
Asia (excluding Greater China) 14 19 33 9 16 25
Western Europe 4 1 5 5 1 6
Russia & the CIS - 23 23 - 23 23
Latin America - 35 35 - 38 38
Rest of the World - 3 3 - 5 5
International Total 98 123 221 95 126 221
Worldwide Total 137 139 (1) 276 (1) 119 144 (2) 263 (2)
(1) Includes 11 upgrades from a film-based theater system to a digital theater
system in an existing IMAX theater location (including one laser-based system
in a commercial theater and 4 laser-based systems in institutional theaters).
(2) Includes 10 upgrades from a film-based theater system to a digital theater
system in an existing IMAX theater location (all commercial theaters).
The Company believes that over time its commercial multiplex theater network
could grow to approximately 1,700 IMAX theaters worldwide from 598 commercial
multiplex IMAX theaters operating as of December 31, 2012 and expects the
majority of its future growth to come from underpenetrated, international
markets. Approximately 80.1% of IMAX theater system arrangements in backlog as
at December 31, 2012 are scheduled to be installed within international markets,
compared with 84.0% as at December 31, 2011. Of the Company's 121 new theater
signings in 2012, 77 were signings for theaters in international markets.
Years Ended December 31,
2012 2011
Theater System Signings:
Full new sales and sale-type lease arrangements 43 58
New joint revenue sharing arrangements 78 132
Total new theaters 121 190
Upgrades of IMAX theater systems 21 (1)(2) 19
Total theater signings 142 209
Years Ended December 31,
2012 2011
Theater System Installations:
Full new sales and sale-type lease arrangements 47 51
New joint revenue sharing arrangements 60 86
Total new installations 107 137
Upgrades of IMAX theater systems 18 33
Total theater installations 125 170
(1) Includes three IMAX theaters acquired from another existing customer that had
been operating under a joint revenue sharing
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arrangement. These theaters were purchased from the Company under a sales
arrangement. This transaction is not included in the Company's theater system
installations table presented above.
(2) Includes 17 upgrades from film-based theater systems to digital theater
systems in existing IMAX theater locations, including one laser-based system
in a commercial theater and 4 laser-based systems in institutional theaters.
The Company estimates that it will install approximately 110 to 125 new theater
systems (excluding digital upgrades) in 2013. Unlike in previous years in which
the Company's installation estimates were limited to scheduled installations
from backlog, the Company now includes in its estimates not only scheduled
systems from backlog, but also the Company's estimate of installations from
arrangements that will sign and install in the same calendar year. The Company
cautions, however, that theater system installations slip from period to period
in the course of the Company's business, usually for reasons beyond its control.
From time to time, in the normal course of its business, the Company, will have
customers who are unable to proceed with a theater system installation for a
number of reasons, including the inability to obtain certain consents, approvals
or financing. 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.
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 Company's significant accounting policies are discussed in
note 2 to its audited consolidated financial statements in Item 8 of the
Company's 2012 Form 10-K.
The Company considers the following significant estimates, assumptions and
judgments to have the most significant effect on its results:
Revenue Recognition
The Company generates revenue from various sources as follows:
• design, manufacture, sale and lease of proprietary theater systems for
IMAX theaters principally owned and operated by commercial and
institutional customers located in 53 countries as at December 31, 2012;
• production, digital re-mastering, post-production and/or distribution of
certain films shown throughout the IMAX theater network;
• operation of certain IMAX theaters primarily in the United States;
• provision of other services to the IMAX theater network, including ongoing
maintenance and extended warranty services for IMAX theater systems; and
• other activities, which includes short-term rental of cameras and
aftermarket sales of projector system components.
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Multiple Element Arrangements
The Company's 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.
Theater Systems
The Company has identified the projection system, sound system, screen system
and, if applicable, 3D glasses cleaning machine, theater design support,
supervision of installation, projectionist training and the use of the IMAX
brand to be a single deliverable and a single unit of accounting (the "System
Deliverable"). When an arrangement does not include all the elements of a System
Deliverable, the elements of the System Deliverable included in the arrangement
are considered by the Company to be a single deliverable and a single unit of
accounting. The Company is not responsible for the physical installation of the
equipment in the customer's 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 Company's System Deliverable arrangements involve either a lease or a sale
of the theater system. Consideration in the Company's 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 Company's 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 Company's
arrangements. If a material default by the Company exists, the customer has the
right to terminate the arrangement and seek a refund only if the customer
provides notice to the Company of a material default and only if the Company
does not cure the default within a specified period.
Sales Arrangements
For arrangements qualifying as sales, the revenue allocated to the System
Deliverable is recognized in accordance with the Revenue Recognition Topic of
the FASB ASC, when all of the following conditions have been met: (i) the
projector, sound system and screen system have been installed and are in full
working condition, (ii) the 3D glasses cleaning machine, if applicable, has been
delivered, (iii) projectionist training has been completed, and (iv) the earlier
of (a) receipt of written customer acceptance certifying the completion of
installation and run-in testing of the equipment and the completion of
projectionist training or (b) public opening of the theater, provided there is
persuasive evidence of an arrangement, the price is fixed or determinable and
collectibility is reasonably assured.
The initial revenue recognized consists of the initial payments received and the
present value of any future initial payments and fixed minimum ongoing payments
that have been attributed to this unit of accounting. Contingent payments in
excess of the fixed minimum ongoing payments are recognized when reported by
theater operators, provided collectibility is reasonably assured.
The Company has also agreed, on occasion, to sell equipment under lease or at
the end of a lease term. Consideration agreed to for these lease buyouts is
included in revenues from equipment and product sales, when persuasive evidence
of an arrangement exists, the fees are fixed or determinable, collectibility is
reasonably assured and title to the theater system passes from the Company to
the customer.
In a certain sales arrangement not subject to the provisions of the amended FASB
ASC 605-25, "Revenue Recognition: Multiple-Element Arrangements" ("ASC 605-25"),
the Company provided a customer with digital upgrades on several systems,
including several specified upgrades to an as-of-yet undeveloped product. At the
current period-end, the Company has not yet established the fair value of this
product, and as a result, the Company cannot determine the arrangement's
consideration, nor its allocation of consideration between delivered and
undelivered items. Consequently, revenue recognition has been deferred for all
delivered items in
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the arrangement. Once the Company determines an objective and reliable fair
value of the undeveloped specified upgrade, the Company will be able to
calculate total arrangement consideration and consequently, the Company will be
able to recognize revenue on the delivered elements of the arrangement. If the
arrangement is materially modified in the future such that contract
consideration becomes fixed, the arrangement in its entirety would be subject to
the provisions of the amended FASB ASC 605-25 and the Company would be required
to develop, absent an established selling price for the undeveloped specified
upgrade, a best estimated selling price for the undeveloped specified upgrade,
allocate the arrangement's consideration on a relative selling price allocation
basis, and recognize revenue on the delivered elements based on that allocation.
Lease Arrangements
The Company uses the Leases Topic of the FASB ASC to evaluate whether an
arrangement is a lease and the classification of the lease. Arrangements not
within the scope of the accounting standard are accounted for either as a sales
or services arrangement, as applicable.
For lease arrangements, the Company determines the classification of the lease
in accordance with the Leases Topic of the FASB ASC. A lease arrangement that
transfers substantially all of the benefits and risks incident to ownership of
the equipment is classified as a sales-type lease based on the criteria
established in the accounting standard; otherwise the lease is classified as an
operating lease. Prior to commencement of the lease term for the equipment, the
Company may modify certain payment terms or make concessions. If these
circumstances occur, the Company reassesses the classification of the lease
based on the modified terms and conditions.
For sales-type leases, the revenue allocated to the System Deliverable is
recognized when the lease term commences, which the Company deems to be when all
of the following conditions have been met: (i) the projector, sound system and
screen system have been installed and are in full working condition, (ii) the 3D
glasses cleaning machine, if applicable, has been delivered, (iii) projectionist
training has been completed, and (iv) the earlier of (a) receipt of the written
customer acceptance certifying the completion of installation and run-in testing
of the equipment and the completion of projectionist training or (b) public
opening of the theater, provided collectibility is reasonably assured.
The initial revenue recognized for sales-type leases consists of the initial
payments received and the present value of future initial payments and fixed
minimum ongoing payments computed at the interest rate implicit in the lease.
Contingent payments in excess of the fixed minimum payments are recognized when
reported by theater operators, provided collectibility is reasonably assured.
For operating leases, initial payments and fixed minimum ongoing payments are
recognized as revenue on a straight-line basis over the lease term. For
operating leases, the lease term is considered to commence when all of the
following conditions have been met: (i) the projector, sound system and screen
system have been installed and are in full working condition, (ii) the 3D
glasses cleaning machine, if applicable, has been delivered, (iii) projectionist
training has been completed, and (iv) the earlier of (a) receipt of the written
customer acceptance certifying the completion of installation and run-in testing
of the equipment and the completion of projectionist training or (b) public
opening of the theater. Contingent payments in excess of fixed minimum ongoing
payments are recognized as revenue when reported by theater operators, provided
collectibility is reasonably assured.
Revenue from joint revenue sharing arrangements with upfront payments that
qualify for classification as sales-type leases is recognized in accordance with
the sales-type lease criteria discussed above. Contingent revenues from joint
revenue sharing arrangements is recognized as box office results and concessions
revenues are reported by the theater operator, provided collectibility is
reasonably assured.
Equipment and components allocated to be used in future joint revenue sharing
arrangements, as well as direct labor costs and an allocation of direct
production costs, are included in assets under construction until such equipment
is installed and in working condition, at which time the equipment is
depreciated on a straight-line basis over the lesser of the term of the joint
revenue sharing arrangement and the equipment's anticipated useful life.
Finance Income
Finance income is recognized over the term of the lease or over the period of
time specified in the sales arrangement, provided collectibility is reasonably
assured. Finance income recognition ceases when the Company determines that the
associated receivable is not collectible.
Finance income is suspended when the Company identifies a theater that is
delinquent, non-responsive or not negotiating in good faith with the Company.
Once the collectibility issues are resolved the Company will resume recognition
of finance income.
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Terminations, Consensual Buyouts and Concessions
The Company enters into theater system arrangements with customers that provide
for customer payment obligations prior to the scheduled installation of the
theater system. During the period of time between signing and the installation
of the theater system, which may extend several years, certain customers may be
unable to, or elect not to, proceed with the theater system installation for a
number of reasons including business considerations, or the inability to obtain
certain consents, approvals or financing. Once the determination is made that
the customer will not proceed with installation, the arrangement may be
terminated under the default provisions of the arrangement or by mutual
agreement between the Company and the customer (a "consensual buyout").
Terminations by default are situations when a customer does not meet the payment
obligations under an arrangement and the Company retains the amounts paid by the
customer. Under a consensual buyout, the Company and the customer agree, in
writing, to a settlement and to release each other of any further obligations
under the arrangement or an arbitrated settlement is reached. Any initial
payments retained or additional payments received by the Company are recognized
as revenue when the settlement arrangements are executed and the cash is
received, respectively. These termination and consensual buyout amounts are
recognized in Other revenues.
In addition, the Company could agree with customers to convert their obligations
for other theater system configurations that have not yet been installed to
arrangements to acquire or lease the IMAX digital theater system. The Company
considers these situations to be a termination of the previous arrangement and
origination of a new arrangement for the IMAX digital theater system. For all
arrangements entered into or modified prior to the date of adoption of the
amended FASB ASC 605-25, the Company continues to defer an amount of any initial
fees received from the customer such that the aggregate of the fees deferred and
the net present value of the future fixed initial and ongoing payments to be
received from the customer equals the selling price of the IMAX digital theater
system to be leased or acquired by the customer. Any residual portion of the
initial fees received from the customer for the terminated theater system is
recorded in Other revenues at the time when the obligation for the original
theater system is terminated and the new theater system arrangement is signed.
Under the amended FASB ASC 605-25, as described in note 2(m) to the accompanying
notes to the audited consolidated financial statements, for all arrangements
entered into or materially modified after the date of adoption, the total
arrangement consideration to be received is allocated on a relative selling
price basis to the digital upgrade and the termination of the previous theater
system. The arrangement consideration allocated to the termination of the
existing arrangement is recorded in Other revenues at the time when the
obligation for the original theater system is terminated and the new theater
system arrangement is signed.
The Company may offer certain incentives to customers to complete theater system
transactions including payment concessions or free services and products such as
film licenses or 3D glasses. Reductions in, and deferral of, payments are taken
into account in determining the sales price either by a direct reduction in the
sales price or a reduction of payments to be discounted in accordance with the
Leases or Interests Topic of the FASB ASC. Free products and services are
accounted for as separate units of accounting. Other consideration given by the
Company to customers are accounted for in accordance with the Revenue
Recognition Topic of the FASB ASC.
Maintenance and Extended Warranty Services
Maintenance and extended warranty services may be provided under a multiple
element arrangement or as a separately priced contract. Revenues related to
these services are deferred and recognized on a straight-line basis over the
contract period and are recognized in Services revenues. Maintenance and
extended warranty services includes maintenance of the customer's equipment and
replacement parts. Under certain maintenance arrangements, maintenance services
may include additional training services to the customer's technicians. All
costs associated with this maintenance and extended warranty program are
expensed as incurred. A loss on maintenance and extended warranty services is
recognized if the expected cost of providing the services under the contracts
exceeds the related deferred revenue.
Film Production and IMAX DMR Services
In certain film arrangements, the Company produces a film financed by third
parties, whereby the third party retains the copyright and the Company obtains
exclusive distribution rights. Under these arrangements, the Company is entitled
to receive a fixed fee or to retain as a fee the excess of funding over cost of
production (the "production fee"). The third parties receive a portion of the
revenues received by the Company from distributing the film, which is charged to
costs and expenses applicable to revenues-services. The production fees are
deferred, and recognized as a reduction in the cost of the film, based on the
ratio of the Company's distribution revenues recognized in the current period to
the ultimate distribution revenues expected from the film.
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Revenue from film production services where the Company does not hold the
associated distribution rights are recognized in Service revenues when
performance of the contractual service is complete, provided there is persuasive
evidence of an agreement, the fee is fixed or determinable and collectibility is
reasonably assured.
Revenues from digitally re-mastering (IMAX DMR) films where third parties own or
hold the copyrights and the rights to distribute the film are derived in the
form of processing fees and recoupments calculated as a percentage of box-office
receipts generated from the re-mastered films. Processing fees are recognized as
Service revenues when the performance of the related re-mastering service is
completed, provided there is persuasive evidence of an arrangement, the fee is
fixed or determinable and collectibility is reasonably assured. Recoupments,
calculated as a percentage of box-office receipts, are recognized as Services
revenues when box-office receipts are reported by the third party that owns or
holds the related film rights, provided collectibility is reasonably assured.
Losses on film production and IMAX DMR services are recognized as costs and
expenses applicable to revenues-services in the period when it is determined
that the Company's estimate of total revenues to be realized by the Company will
not exceed estimated total production costs to be expended on the film
production and the cost of IMAX DMR services.
Film Distribution
Revenue from the licensing of films is recognized in Services revenues when
persuasive evidence of a licensing arrangement exists, the film has been
completed and delivered, the license period has begun, the fee is fixed or
determinable and collectibility is reasonably assured. When license fees are
based on a percentage of box-office receipts, revenue is recognized when
box-office receipts are reported by exhibitors, provided collectibility is
reasonably assured.
Film Post-Production Services
Revenues from post-production film services are recognized in Services revenue
when performance of the contracted services is complete provided there is
persuasive evidence of an arrangement, the fee is fixed or determinable and
collectibility is reasonably assured.
Other
The Company recognizes revenue in Services revenue from its owned and operated
theaters resulting from box-office ticket and concession sales as tickets are
sold, films are shown and upon the sale of various concessions. The sales are
cash or credit card transactions with theatergoers based on fixed prices per
seat or per concession item.
In addition, the Company enters into commercial arrangements with third party
theater owners resulting in the sharing of profits and losses which are
recognized in Service revenues when reported by such theaters. The Company also
provides management services to certain theaters and recognizes revenue over the
term of such services.
Revenues on camera rentals are recognized in Rental revenue over the rental
period.
Revenue from the sale of 3D glasses is recognized in Equipment and product sales
revenue when the 3D glasses have been delivered to the customer.
Other service revenues are recognized in Service revenues when the performance
of contracted services is complete.
Allowances for Accounts Receivable and Financing Receivables
Allowances for doubtful accounts receivable are based on the Company's
assessment of the collectibility of specific customer balances, which is based
upon a review of the customer's credit worthiness, past collection history and
the underlying asset value of the equipment, where applicable. Interest on
overdue accounts receivable is recognized as income as the amounts are
collected.
The Company monitors the performance of the theaters to which it has leased or
sold theater systems which are subject to ongoing payments. When facts and
circumstances indicate that there is a potential impairment in the accounts
receivable, net investment in lease or a financing receivable, the Company will
evaluate the potential outcome of either renegotiations involving changes in the
terms of the receivable or defaults on the existing lease or financed sale
agreements. The Company will record a provision if it is
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considered probable that the Company will be unable to collect all amounts due
under the contractual terms of the arrangement or a renegotiated lease amount
will cause a reclassification of the sales-type lease to an operating lease.
When the net investment in lease or the financing receivable is impaired, the
Company will recognize a provision for the difference between the carrying value
in the investment and the present value of expected future cash flows discounted
using the effective interest rate for the net investment in the lease or the
financing receivable. If the Company expects to recover the theater system, the
provision is equal to the excess of the carrying value of the investment over
the fair value of the equipment.
When the minimum lease payments are renegotiated and the lease continues to be
classified as a sales-type lease, the reduction in payments is applied to reduce
unearned finance income.
These provisions are adjusted when there is a significant change in the amount
or timing of the expected future cash flows or when actual cash flows differ
from cash flow previously expected.
Once a net investment in lease or financing receivable is considered impaired,
the Company does not recognize interest income until the collectibility issues
are resolved. When finance income is not recognized, any payments received are
applied against outstanding gross minimum lease amounts receivable or gross
receivables from financed sales.
Inventories
Inventories are carried at the lower of cost, determined on an average cost
basis, and net realizable value except for raw materials, which are carried out
at the lower of cost and replacement cost. Finished goods and work-in-process
include the cost of raw materials, direct labor, theater design costs, and an
applicable share of manufacturing overhead costs.
The costs related to theater systems under sales and sales-type lease
arrangements are relieved from inventory to costs and expenses applicable to
revenues-equipment and product sales when revenue recognition criteria are met.
The costs related to theater systems under operating lease arrangements and
joint revenue sharing arrangements are transferred from inventory to assets
under construction in property, plant and equipment when allocated to a signed
joint revenue sharing arrangement or when the arrangement is first classified as
an operating lease.
The Company records provisions for excess and obsolete inventory based upon
current estimates of future events and conditions, including the anticipated
installation dates for the current backlog of theater system contracts,
technological developments, signings in negotiation, growth prospects within the
customers' ultimate marketplace and anticipated market acceptance of the
Company's current and pending theater systems.
Finished goods inventories can contain theater systems for which title has
passed to the Company's customer, under the contract, but the revenue
recognition criteria as discussed above have not been met.
Asset Impairments
The Company performs a qualitative, and when necessary quantitative, impairment
test on its goodwill on an annual basis, coincident with the year-end, as well
as in quarters where events or changes in circumstances suggest that the
carrying amount may not be recoverable.
Goodwill impairment is assessed at the reporting unit level by comparing the
unit's carrying value, including goodwill, to the fair value of the unit.
Significant estimates and judgment are involved in the impairment test. The
carrying values of each unit are subject to allocations of certain assets and
liabilities that the Company has applied in a systematic and rational manner.
The fair value of the Company's units is assessed using a discounted cash flow
model. The model is constructed using the Company's budget and long-range plan
as a base.
Long-lived asset impairment testing is performed at the lowest level of an asset
group at which identifiable cash flows are largely independent. In performing
its review for recoverability, the Company estimates the future cash flows
expected to result from the use of the asset or asset group and its eventual
disposition. If the sum of the expected future cash flows is less than the
carrying amount of the asset or asset group, an impairment loss is recognized in
the consolidated statement of operations. Measurement of the impairment loss is
based on the excess of the carrying amount of the asset or asset group over the
fair value calculated using discounted expected future cash flows.
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The Company's estimates of future cash flows involve anticipating future revenue
streams, which contain many assumptions that are subject to variability, as well
as estimates for future cash outlays, the amounts of which, and the timing of
which are both uncertain. Actual results that differ from the Company's budget
and long-range plan could result in a significantly different result to an
impairment test, which could impact earnings.
Foreign Currency Translation
Monetary assets and liabilities of the Company's operations which are
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the end of the
period. Non-monetary items are translated at historical exchange rates. Revenue
and expense transactions are translated at exchange rates prevalent at the
transaction date. Such exchange gains and losses are included in the
determination of earnings in the period in which they arise. The Company has
determined that the functional currency of all its wholly-owned subsidiaries is
the United States dollar.
Foreign currency derivatives are recognized and measured in the balance sheet at
fair value. Changes in the fair value (gains or losses) are recognized in the
consolidated statement of operations except for derivatives designated and
qualifying as foreign currency hedging instruments. For foreign currency hedging
instruments, the effective portion of the gain or loss in a hedge of a
forecasted transaction is reported in other comprehensive income ("OCI") and
reclassified to the consolidated statement of operations when the forecasted
transaction occurs. Any ineffective portion is recognized immediately in the
consolidated statement of operations.
Pension Plan and Postretirement Benefit Obligations Assumptions
The Company's pension plan and postretirement benefit obligations and related
costs are calculated using actuarial concepts, within the framework of the
Compensation - Retirement Benefits Topic of the FASB ASC. A critical assumption
to this accounting is the discount rate. The Company evaluates this critical
assumption annually or when otherwise required to by accounting standards. Other
assumptions include factors such as expected retirement date, mortality rate,
rate of compensation increase, and estimates of inflation.
The discount rate enables the Company to state expected future cash payments for
benefits as a present value on the measurement date. The guideline for setting
this rate is a high-quality long-term corporate bond rate. A lower discount rate
increases the present value of benefit obligations and increases pension
expense. The Company's discount rate was determined by considering the average
of pension yield curves constructed from a large population of high-quality
corporate bonds. The resulting discount rate reflects the matching of plan
liability cash flows to the yield curves.
The discount rate used is a key assumption in the determination of the pension
benefit obligation and expense. At December 31, 2012, a 1.0% change in the
discount rate used could result in a $2.3 million - $2.7 million increase or
decrease in the pension benefit obligation with a corresponding benefit or
charge recognized in other comprehensive income in the year. A one year delay in
Mr. Gelfond's retirement date would increase the discount rate by 0.3% and would
result in a $0.4 million reduction in the pension benefit obligation as at
December 31, 2012.
Deferred Tax Asset Valuation
As at December 31, 2012, the Company had net deferred income tax assets of
$36.5 million. The Company's management assesses realization of its deferred tax
assets based on all available evidence in order to conclude whether it is more
likely than not that the deferred tax assets will be realized. Available
evidence considered by the Company includes, but is not limited to, the
Company's historic operating results, projected future operating results,
reversing temporary differences, contracted sales backlog at December 31, 2012,
changing business circumstances, and the ability to realize certain deferred tax
assets through loss and tax credit carry-back and carry-forward strategies.
When there is a change in circumstances that causes a change in judgment about
the realizability of the deferred tax assets, the Company would adjust the
applicable valuation allowance in the period when such change occurs.
Tax Exposures
The Company is subject to ongoing tax exposures, examinations and assessments in
various jurisdictions. Accordingly, the Company may incur additional tax expense
based upon the outcomes of such matters. In addition, when applicable, the
Company adjusts tax expense to reflect the Company's ongoing assessments of such
matters which require judgment and can materially increase or decrease its
effective rate as well as impact operating results. The Company provides for
such exposures in accordance with Income Taxes Topic of the FASB ASC.
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Stock-Based Compensation
The Company utilizes a lattice-binomial option-pricing model (the "Binomial
Model") to determine the fair value of stock-based payment awards. The fair
value determined by the Binomial Model is affected by the Company's stock price
as well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, the Company's
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. 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 Company's employee stock options and stock appreciation rights
("SARs") have certain characteristics that are significantly different from
traded options, and because changes in the subjective assumptions can materially
affect the estimated value, in management's opinion, the Binomial Model best
provides an accurate measure of the fair value of the Company's employee stock
options and SARs. Although the fair value of employee stock options and SARs are
determined in accordance with the Equity topic of the FASB ASC using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
Impact of Recently Issued Accounting Pronouncements
See note 3 to the audited consolidated financial statements in Item 8 of the
Company's 2012 Form 10-K for information regarding the Company's recent changes
in accounting policies and the impact of recently issued accounting
pronouncements impacting the Company.
ASSET IMPAIRMENTS AND OTHER CHARGES (RECOVERIES)
The following table identifies the Company's charges (recoveries) relating to
the impairment of assets:
Years Ended December 31, (in thousands of U.S. dollars) 2012 2011 2010
Asset impairments
Property, plant and equipment $ - $ 28 $ 45
Other charges (recoveries):
Inventories 898 - 999
Accounts receivable 606 333 499
Financing receivables (82 ) 1,237 944
Impairment of available-for-sale investment 150 - -
Property, plant and equipment 18 356 -
Other intangible assets 11 - 64
Other assets 6 - -
Total asset impairments and other charges $ 1,607 $ 1,954 $ 2,551
Asset Impairments
The Company records asset impairment charges for property, plant and equipment
after an assessment of the carrying value of certain asset groups in light of
their future expected cash flows. No such charges were recognized in 2012.
During 2011 and 2010, the Company recorded total asset impairment charges of
less than $0.1 million and less than $0.1 million, respectively, as the Company
recognized that the carrying values for the assets exceeded the expected
undiscounted future cash flows.
Other Charges (Recoveries)
The Company recorded a $0.9 million provision (2011 - $nil; 2010 - $1.0 million)
in costs and expenses applicable to revenues due to a reduction in the net
realizable value of its inventories. These charges primarily resulted from a
reduction in the net realizable value of its film-based projector inventories
and certain service part inventories due to a further market shift away from
film-based projector systems.
The Company recorded a net provision of $0.6 million in 2012 (2011 -
$0.3 million; 2010 - $0.5 million) in accounts receivable based on the Company's
assessment of the collectability of specific customer balances.
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In 2012, the Company also recorded a net recovery of $0.1 million in financing
receivables (2011 - $1.2 million provision; 2010 - $0.9 million provision).
Provisions of the Company's financing receivables is recorded when the
collectibility associated with certain financing receivables is uncertain. These
provisions are adjusted when there is a significant change in the amount or
timing of the expected future cash flows or when actual cash flows differ from
cash flows previously expected.
In 2012, the Company recognized a $0.2 million other-than-temporary impairment
of its available-for-sale investment 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.
In 2012, the Company recorded a less than $0.1 million charge (2011 - $0.4
million) reflecting assets that no longer meet capitalization requirements as
the assets were no longer in use. No such charges were recorded in 2010.
Non-GAAP Financial Measures
In this report, the Company presents adjusted net income and adjusted net income
per diluted share as supplemental measures of performance of the Company, which
are not recognized under U.S. GAAP. The Company presents adjusted net income and
adjusted net income per diluted share because it believes that they are
important supplemental measures of its comparable controllable operating
performance and it wants to ensure that its investors fully understand the
impact of its stock-based compensation, provision for arbitration award and
deferred income tax valuation allowance (net of any related tax impact) on its
net income. Effective the third quarter of 2012, the Company revised its
definition of adjusted net income and adjusted earnings per diluted share.
Comparative numbers have been adjusted to conform to the current year
presentation. The Company presents gross margin from its joint revenue sharing
arrangements segment excluding initial launch costs because it believes that it
is an important supplemental measure used by management to evaluate ongoing
joint revenue sharing arrangement theater performance. Management uses these
measures to review operating performance on a comparable basis from period to
period. However, these non-GAAP measures may not be comparable to similarly
titled amounts reported by other companies. Adjusted net income and adjusted net
income per diluted share should be considered in addition to, and not as a
substitute for, net income and other measures of financial performance reported
in accordance with U.S. GAAP.
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RESULTS OF OPERATIONS
As identified in note 20 to the audited consolidated financial statements in
Item 8 of the Company's 2012 Form 10-K, 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, which is comprised of the design, manufacture,
sale or lease of IMAX theater projection system equipment.
• The theater system maintenance segment, which consists of the maintenance
of IMAX theater projection system equipment in the IMAX theater network.
• The joint revenue sharing arrangements segment, which is comprised of the
provision of IMAX theater projection system equipment to an exhibitor in
exchange for a certain percentage of box-office receipts, and in some
cases, concession revenue and a small upfront or initial payment.
• The film production and IMAX DMR segment, which is comprised of the
production of films and performance of film re-mastering services.
• The film distribution segment, which includes the distribution of films
for which the Company has distribution rights.
• The film post-production segment, which includes the provision of film
post-production and film print services.
• The other segment, which 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 in Item 8 of the
Company's 2012 Form 10-K.
The Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations have been discussed with respect to the above stated
segments. Management feels that a discussion and analysis based on its segments
is significantly more relevant as the Company's consolidated statements of
operations captions combine results from several segments.
The following table sets forth the breakdown of revenue and gross margin by
segment:
Revenue Gross Margin
(In thousands of U.S. dollars) Years Ended December 31, Years Ended December 31,
2012 2011 2010 2012 2011 2010
Theater Systems
IMAX Systems
Sales and sales-type leases(1) $ 69,988 $ 81,310 $ 63,023 $ 36,974 $ 45,251 $ 31,452
Ongoing rent, fees, and
finance income(2) 13,417 11,890 12,981 13,271 11,678 12,531
83,405 93,200 76,004 50,245 56,929 43,983
Theater System Maintenance 28,629 24,840 21,444 10,970 9,437 10,084
Joint Revenue Sharing
Arrangements 57,526 30,764 41,757 37,308 17,605 31,703
Film
Production and IMAX DMR 78,050 50,592 63,462 49,355 23,574 41,159
Distribution 14,222 16,074 17,937 2,356 3,025 5,205
Post-production 7,904 8,235 7,702 1,954 2,985 2,891
100,176 74,901 89,101 53,665 29,584 49,255
Other 14,554 12,851 20,308 545 (337 ) 2,627
$ 284,290 $ 236,556 $ 248,614 $ 152,733 $ 113,218 $ 137,652
(1) Includes initial payments and the present value of fixed minimum payments
from equipment, sales and sales-type lease transactions.
(2) Includes rental income from operating leases, contingent rents from operating
and sales-type leases, contingent fees from sales arrangements and finance
income.
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Year Ended December 31, 2012 versus Year Ended December 31, 2011
The Company reported net income of $41.3 million or $0.63 per basic share and
$0.61 per diluted share for the year ended December 31, 2012 as compared to net
income of $15.3 million or $0.24 per basic share and $0.22 per diluted share for
the year ended December 31, 2011. Net income for the year ended
December 31, 2012 includes a $13.1 million charge or $0.19 per diluted share
(2011 - $11.7 million or $0.17 per diluted share) for stock-based compensation.
Net income for December 31, 2011 also includes a one-time $2.1 million pre-tax
charge ($0.03 per diluted share) due to an arbitration award arising from an
arbitration proceeding brought against the Company in connection with a
discontinued subsidiary. Adjusted net income, which consists of net income
excluding the impact of stock-based compensation, the charge for arbitration
award and the related tax impact, was $54.3 million or $0.80 per diluted share
for the year ended December 31, 2012 as compared to adjusted net income of $28.0
million or $0.41 per diluted share for the year ended December 31, 2011. A
reconciliation of net income, the most directly comparable U.S. GAAP measure, to
adjusted net income and adjusted net income per diluted share is presented in
the table below:
Year Ended December 31,
2012 2011 As Revised
Net Income Diluted EPS Net Income Diluted EPS
Reported net income $ 41,337 $ 0.61 $ 15,260 $ 0.22
Adjustments:
Stock-based compensation 13,113 0.19 11,681 0.17
Provision for arbitration
award - - 2,055 0.03
Tax impact on items listed
above (160 ) - (973 ) (0.01 )
Adjusted net income $ 54,290 $ 0.80 $ 28,023 $ 0.41
Weighted average diluted
shares outstanding 67,933 67,859
Revenues and Gross Margin
The Company's revenues for the year ended December 31, 2012 increased 20.2% to
$284.3 million from $236.6 million in 2011 due in large part to increases in
revenue from the Company's film and joint revenue sharing arrangement segments,
partially offset by lower revenue from the IMAX systems segment. The gross
margin across all segments in 2012 was $152.7 million, or 53.7% of total
revenue, compared to $113.2 million, or 47.9% of total revenue in 2011. The
increase in gross margin is attributable to improved operating leverage and
continued theater network growth.
IMAX Systems
IMAX systems revenue decreased 10.5% to $83.4 million in 2012 as compared to
$93.2 million in 2011.
Revenue from sales and sales-type leases decreased 13.9% to $70.0 million in
2012 from $81.3 million in 2011, resulting primarily from the installation of
fewer digital upgrades and slightly fewer systems under sales and sales-type
leases as compared to the prior year. The Company recognized revenue on 12
digital upgrades and one 3D GT upgrade (from a 2D GT system) in 2012, with a
total value of $5.4 million, as compared to 25 digital upgrades in 2011 with a
total value of $11.6 million. Digital upgrades have lower sales prices and gross
margin than a full theater installation. The Company has decided to offer
digital upgrades at lower selling prices for strategic reasons since the Company
believes that digital systems increase flexibility and profitability for the
Company's existing exhibition customers. The Company recognized revenue on
47 full, new theater systems which qualified as either sales or sales-type
leases in 2012, with a total value of $60.7 million, as compared to 50 in 2011
with a total value of $63.4 million. There were no used systems installed in
2012, as compared to one used system with a total value of $1.2 million in 2011.
Average revenue per full, new sales and sales-type lease system was $1.3 million
in 2012, which is consistent with the $1.3 million experienced in 2011. Average
revenue per digital upgrade was $0.4 million in 2012, as compared to
$0.5 million in 2011.
The breakdown in mix of sales and sales-type lease and joint revenue sharing
arrangement installations by theater system configuration for 2012 and 2011 is
outlined in the table below:
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2012 2011
Sales and Sales-type lease systems-installed and recognized
IMAX 3D GT 1 1 (1)
IMAX 3D SR 1 -
IMAX digital 45 50
Total new theater systems 47 51
Upgrades of IMAX theater systems 13 25
60 76
IMAX digital upgrades-installed and deferred 3 8
Total sales and sales-type leases-installed 63 84
Joint revenue sharing arrangements-installed and operating
New IMAX digital theater systems 60 86
Upgrades of IMAX theater systems 2 -
125 170
(1) Includes one used IMAX 3D GT system
As noted in the table above, 3 and 8 theater systems under a digital upgrade
sales arrangement were installed in 2012 and 2011, respectively, but revenue
recognition was deferred. The arrangement contained provisions providing the
customer with standard digital upgrades, which were installed, and a number of
as-of-yet undeveloped upgrades. The Company's policy is such that once the fair
value for the undeveloped upgrade is established, the Company allocates total
contract consideration, including any upgrade revenues, between the delivered
and undelivered elements on a relative fair value basis and recognizes the
revenue allocated to the delivered elements with their associated costs. If the
arrangement is materially modified in the future such that contract
consideration becomes fixed, the arrangement in its entirety would be subject to
the provisions of the amended ASC 605-25 and the Company would be required to
develop, absent an established selling price or third party evidence of the
selling price for the undeveloped specified upgrade, a best estimated selling
price for the undeveloped specified upgrade, allocate the arrangement's
consideration on a relative selling price allocation basis, and recognize
revenue on the delivered elements based on that allocation.
Revenues from sales and sales-type leases include settlement revenue of $0.7
million in 2012 as compared to $3.8 million in 2011. The amount recognized in
2012 is a result of agreements entered into with customers to terminate their
existing obligations pertaining to a theater in the IMAX network, whereas
settlement revenue recognized in 2011 primarily relates to a consensual buyout
for one uninstalled theater system.
In 2012, one of the Company's customers acquired 3 IMAX theaters from another
existing customer that had been operating under a joint revenue sharing
arrangement. These theaters were purchased from IMAX under a sales arrangement.
As a result of this sale transaction, the Company recorded revenue and margin of
$3.0 million and $2.1 million, respectively. These above-referenced theaters
were included in the Company's 2012 signings total. In addition, during the
period the Company recognized the digital upgrade of two theaters under a joint
revenue sharing arrangement, which theaters were previously operated under
sales/sales-type lease arrangements.
Gross margin from IMAX sales and sales-type lease systems (including new,
upgrades and settlements) was $37.0 million, or 52.8% in 2012 compared to $45.3
million, or 55.7% in 2011. Gross margin from full, new sales and sales-type
leases, excluding the impact of settlements and upgrades decreased to 62.4% in
2012 from 66.0% in 2011. The gross margin on digital upgrades was $1.4 million
in 2012 in comparison with $2.6 million in 2011, which is a reflection of the
number of systems upgraded, the particular systems upgraded and the costs
associated with such upgrades in their respective periods. There were no used
systems installed during 2012, compared to one used system with a gross margin
of $0.1 million installed and recognized in 2011. In addition, in 2012, the
Company incurred a charge of $1.7 million for equipment to enable certain
theaters to elect to exhibit films such as The Dark Knight Rises in either
digital or analog format. Furthermore, in 2012, the Company recorded a
write-down of certain film-based projector inventories of $0.8 million. No such
costs were experienced in 2011.
Ongoing rent revenue and finance income increased to $13.4 million in 2012 from
$11.9 million in 2011. Gross margin for ongoing rent and finance income
increased to $13.3 million in 2012 from $11.7 million in 2011. Contingent fees
included in this caption amounted to $3.0 million and $2.7 million in 2012 and
2011, respectively.
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Theater System Maintenance
Theater system maintenance revenue increased 15.3% to $28.6 million in 2012 as
compared to $24.8 million in 2011. Theater system maintenance gross margin
increased to $11.0 million in 2012 from $9.4 million in 2011. The increase in
revenue and gross margin, respectively, was primarily due to the larger theater
network. Maintenance revenue continues to grow as the number of theaters in the
IMAX network expands. Maintenance margins vary depending on the mix of theater
system configurations in the theater network and the timing and the date(s) of
installation and/or service. In 2012, the Company recorded a write-down of
$0.1 million for certain service parts inventories as compared to $nil in 2011.
Joint Revenue Sharing Arrangements
Revenue from joint revenue sharing arrangements increased 87.0% to $57.5 million
in 2012 compared to $30.8 million in 2011. The Company ended the year with 316
theaters operating under joint revenue sharing arrangements as compared to 257
theaters at the end of 2011, an increase of 23.0%. The increase in revenues from
joint revenue sharing arrangements was primarily due to the higher per-screen
gross box office realized from the films released to joint revenue sharing
theaters and the increase in the number of theaters in the IMAX theater network
from the prior year. During 2012, the Company installed 60 full, new theaters
under joint revenue sharing arrangements, as compared to 86 full new theaters
during 2011.
The gross margin from joint revenue sharing arrangements in 2012 increased
111.9% to $37.3 million compared to $17.6 million in 2011. The increase was
primarily due to higher revenues experienced in 2012 compared to 2011, as well
as lower advertising, marketing and selling expenses. Included in the
calculation of the 2012 gross margin were certain advertising, marketing, and
selling expenses primarily associated with new theater launches of $3.4 million,
as compared to $5.4 million for such expenses in 2011. Adjusted gross margin
from joint revenue sharing arrangements, which excludes these expenses from both
periods, was $40.7 million in 2012, compared to $23.0 million in 2011. A
reconciliation of gross margin from the joint revenue sharing arrangement
segment, the most directly comparable U.S. GAAP measure, to adjusted gross
margin is presented in the table below:
(In thousands of U.S. Dollars) 2012 2011
Gross margin from joint revenue sharing arrangements $ 37,308 $ 17,605
Add:
Advertising, marketing and selling expenses 3,382 5,432
Adjusted gross margin from joint revenue sharing arrangements $ 40,690
$ 23,037
Film
The Company's total revenues from its three film segments increased 33.7% to
$100.2 million in 2012 from $74.9 million in 2011 and the related gross margin
increased 81.4% in 2012 to $53.7 million from $29.6 million in 2011.
Film production and IMAX DMR revenues increased 54.3% to $78.1 million in 2012
from $50.6 million in 2011. The increase in film production and IMAX DMR
revenues was primarily due to an increase in the number of theaters in the IMAX
theater network as well as higher gross box office from the films released
during the period. Global gross box office generated by IMAX DMR films increased
48.8% to $620.6 million in 2012 versus $417.2 million in 2011. IMAX DMR gross
box office per screen for 2012 averaged $1,153,200 globally, in comparison to
$1,069,300 in 2011.
Film production and IMAX DMR gross margins more than doubled to $49.4 million,
or 63.2% of revenues, from $23.6 million, or 46.6% of revenues in 2011 largely
due to an increase in IMAX DMR revenue coupled with a relatively consistent
level of DMR costs as compared to the prior year.
In 2012, gross-box office was generated primarily from the exhibition of
39 films listed below (35 new and 4 carryovers), as compared to 26 (25 new and 1
carryover) films exhibited in 2011:
2012 Films Exhibited 2011 Films Exhibited
Happy Feet Two: An IMAX 3D Experience TRON: Legacy: An IMAX 3D Experience
Mission: Impossible - Ghost Protocol:
The IMAX Experience The Green Hornet: An IMAX 3D Experience
The Adventures of Tintin: The Secret of Tangled: An IMAX 3D Experience
the Unicorn: An IMAX 3D Experience Sanctum: An IMAX 3D Experience
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Flying Swords of Dragon Gate: An IMAX 3D
Experience I Am Number Four: The IMAX Experience
Underworld: Awakening: An IMAX 3D Mars Needs Moms: An IMAX 3D
Experience Experience
Journey 2: The Mysterious Island: An
IMAX 3D Experience Sucker Punch: The IMAX Experience
The Lorax: An IMAX 3D Experience Fast Five: The IMAX Experience
John Carter: An IMAX 3D Experience Thor: An IMAX 3D Experience
The Hunger Games: An IMAX 3D Experience
Wrath of the Titans: An IMAX 3D Pirates of the Caribbean: On Stranger
Experience Tides: An IMAX 3D Experience
Titanic: An IMAX 3D Experience The Founding of a Party: The IMAX
Experience
Houba! On the Trail of the Marsupilami: Kung Fu Panda 2: An IMAX 3D
The IMAX Experience Experience
Battleship: The IMAX Experience Super 8: The IMAX Experience
The Avengers: An IMAX 3D Experience Cars 2: An IMAX 3D Experience
Dark Shadows: The IMAX Experience Transformers: Dark of the Moon: An
IMAX 3D Experience
Men In Black III: An IMAX 3D Experience Harry Potter and the Deathly Hallows
Prometheus: An IMAX 3D Experience Part II: An IMAX 3D Experience
Madagascar 3: Europe's Most Wanted: An Final Destination 5: An IMAX 3D
IMAX 3D Experience Experience
Rock of Ages: The IMAX Experience Cowboys & Aliens : The IMAX
Experience
The Amazing Spiderman: An IMAX 3D
Experience Sector 7: An IMAX 3D Experience
The Dark Knight Rises: The IMAX
Experience Contagion: The IMAX Experience
Total Recall: The IMAX Experience Real Steel: The IMAX Experience
The Bourne Legacy: The IMAX Experience Puss in Boots: An IMAX 3D Experience
Indiana Jones and the Raiders of the Happy Feet Two: An IMAX 3D Experience
Lost Ark: The IMAX Experience Flying Swords of Dragon Gate: An IMAX
3D Experience
Resident Evil: Retribution: An IMAX 3D Mission: Impossible - Ghost Protocol:
Experience The IMAXExperience
Tai Chi 0: An IMAX 3D Experience The Adventures of Tintin: The Secret
Frankenweenie: An IMAX 3D Experience of the Unicorn: An IMAX 3D Experience
Paranormal Activity 4:The IMAX
Experience
Tai Chi Hero: An IMAX 3D Experience
Cloud Atlas: The IMAX Experience
Skyfall: The IMAX Experience
Cirque du Soleil: Worlds Away: An IMAX
3D Experience
The Twilight Saga: Breaking Dawn - Part
2: The IMAXExperience
Back to 1942: The IMAX Experience
Rise of the Guardians: An IMAX 3D
Experience
Life of Pi: An IMAX 3D Experience
CZ12: An IMAX 3D Experience
The Hobbit: An Unexpected Journey: An
IMAX 3D Experience
Les Misérables: The IMAX Experience
Film distribution revenues decreased 11.5% to $14.2 million in 2012 from
$16.1 million in 2011, primarily due to lower box-office performance. In 2012,
the Company released an original title, To the Arctic 3D; during 2011, the
Company released the original film Born To Be Wild 3D. Film post-production
revenues decreased 4.0% to $7.9 million in 2012 from $8.2 million in 2011
primarily due to a decrease in third party business.
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The film distribution margin of $2.4 million in 2012 was lower than the
$3.0 million experienced in 2011, primarily due to the decrease in film
distribution revenues. Film post-production gross margin decreased by
$1.0 million due to a decrease in third party business as compared to the prior
year.
Other
Other revenue increased to $14.6 million in 2012 compared to $12.9 million in
2011. Other revenue primarily includes revenue generated from the Company's
owned and operated theaters, camera rentals and after - market sales of
projection system parts and 3D glasses.
The gross margin on other revenue was $0.9 million higher in 2012 as compared to
2011.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $81.6 million in 2012,
as compared to $73.2 million in 2011. The $8.4 million increase experienced from
the prior year comparative period was largely the result of the following:
• a $8.6 million increase in staff-related costs and compensation costs,
including increased staffing (resulting in part from increased staffing
costs of $3.5 million from the Company's wholly-owned subsidiary in China)
and normal merit increases;
• a $3.8 million increase from brand-related advertising and promotion in
2012 as compared to the prior year; and
• a $1.4 million increase in the Company's stock-based compensation.
These increases were offset by:
• a $2.5 million decrease due to a change in foreign exchange rates. During
the year ended December 31, 2012, the Company recorded a foreign exchange
gain of $1.2 million for net foreign exchange gains/losses related to the
translation of foreign currency denominated monetary assets and
liabilities and unhedged foreign currency forward contracts as compared to
a loss of $1.3 million recorded in 2011. See note 16(b) of the audited
consolidated financial statements in Item 8 of the Company's 2012
Form 10-K for more information; and
• a $2.9 million decrease in legal, professional and other general corporate
expenditures.
Provision for Arbitration Award
During 2011, the Company recorded a provision of $2.1 million regarding an award
issued in connection with an arbitration proceeding brought against the Company.
The arbitration related to agreements entered into in 1994 and 1995 by the
Company's former Ridefilm subsidiary, whose business the Company discontinued
through a sale to a third party in March 2001. The award was vacated as the
parties entered into a confidential settlement agreement in which the parties
agreed to dismiss any outstanding disputes among them. See note 14(c) of the
audited consolidated financial statements in Item 8 of the Company's 2012
Form-10K for more information.
Research and Development
Research and development expenses increased to $11.4 million in 2012 compared to
$7.8 million in 2011 and are primarily attributable to the development of the
Company's new laser-based digital projection system. The Company is developing
its next-generation laser projectors, which is expected to provide greater
brightness and clarity, a wider colour gamut and deeper blacks, while consuming
less power and lasting longer than existing digital technology, to ensure that
the Company continues to provide the highest quality, premier movie-going
experience available to consumers. 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 Kodak, which supports
the Company's efforts to develop a next-generation laser digital projection
system.
A high level of research and development is expected to continue in 2013 as the
Company continues its efforts to develop its next-generation laser-based
projection system. In addition, the Company plans to continue to fund research
and development activity in other areas considered important to the Company's
continued commercial success, including further improving the reliability of its
projectors, developing and manufacturing more IMAX cameras, enhancing the
Company's 2D and 3D image quality, expanding the
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applicability of the Company's digital technology, developing IMAX theater
systems' capabilities in both home and live entertainment and further enhancing
the IMAX theater and sound system design through the addition of more channels,
improvements to the Company's proprietary tuning system and mastering processes.
Receivable Provisions, Net of Recoveries
Receivable provisions, net of recoveries for accounts receivable and financing
receivables, amounted to a net provision of $0.5 million in 2012, as compared to
$1.6 million in 2011.
The Company's accounts receivables and financing receivables are subject to
credit risk. These receivables are concentrated with the leading theater
exhibitors and studios in the film entertainment industry. To minimize the
Company's credit risk, the Company retains title to underlying theater systems
leased, performs initial and ongoing credit evaluations of its customers and
makes ongoing provisions for its estimate of potentially uncollectible amounts.
Accordingly, the Company believes it has adequately protected itself against
exposures relating to receivables and contractual commitments.
Asset Impairments and Other Charges
The Company recorded an asset impairment charge of $nil, compared to less than
$0.1 million in the prior year, against property, plant and equipment after the
Company assessed the carrying value of certain assets in its theater operations
segment in light of their future expected cash flows. The Company recognized
that the carrying values for the assets exceeded the expected undiscounted
future cash flows.
In 2012, the Company recognized a $0.2 million other-than-temporary impairment
of its available-for-sale investment 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.
In 2012, the Company recorded a less than $0.1 million charge as compared to a
$0.4 million charge in the prior year comparative period reflecting assets that
no longer meet capitalization requirements as the assets were no longer in use.
Interest Income and Expense
Interest income was $0.1 million in 2012, as compared to less than $0.1 million
in 2011.
Interest expense decreased to $0.7 million in 2012, as compared to $1.8 million
in 2011. Consistent with its historical financial reporting, the Company has
elected to classify interest and penalties related to income tax liabilities,
when applicable, as part of the interest expense in its consolidated statements
of operations rather than income tax expense. The Company recovered
approximately $0.8 million and expensed $0.1 million in potential interest and
penalties associated with unrecognized tax benefits for the years ended
December 31, 2012 and December 31, 2011, respectively. Also included in interest
expense is the amortization of deferred finance costs in the amount of
$0.2 million and $0.4 million in 2012 and 2011, respectively. The Company's
policy is to defer and amortize all the costs relating to debt financing which
are paid directly to the debt provider, over the life of the debt instrument.
Income Taxes
The Company's 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 Company's valuation allowance based on the Company's recoverability
assessments of deferred tax assets, and favorable or unfavorable resolution of
various tax examinations.
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 $0.5 million
in the year ended December 31, 2012. In 2012, there was a $0.1 million decrease
in the Company's estimates of the recoverability of its deferred tax assets
based on an analysis of both positive and negative evidence including projected
future earnings, as compared to a $1.9 million decrease in the valuation
allowance resulting from the utilization of loss carryforwards and deductible
temporary differences against income in the prior year comparative period. The
Company recorded an income tax provision of $15.1 million for 2012, of which
$0.8 million is related to a decrease in unrecognized tax benefits. For 2011,
the Company recorded an income tax provision of $9.3 million, of which $0.1
million was related to a decrease in unrecognized tax benefits.
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During the year ended December 31, 2012, after considering all available
evidence, both positive (including recent profits, projected future
profitability, backlog, carryforward periods for utilization of net operating
loss carryovers and tax credits, discretionary deductions and other factors) and
negative (including cumulative losses in past years and other factors), it was
concluded that the valuation allowance against the Company's deferred tax assets
should be increased by approximately $0.1 million. The remaining $6.1 million
balance in the valuation allowance as at December 31, 2012 is primarily
attributable to certain U.S. federal and state net operating loss carryovers and
federal tax credits that likely will expire without being utilized.
The Company anticipates utilizing the majority of its currently-available tax
attributes over the next two years.
Equity-Accounted Investments
The Company accounts for investments in new business ventures using the guidance
of the FASB ASC 323. December 31, 2012, the equity method of accounting is being
utilized for an investment with a carrying value of $3.1 million (December 31,
2011-$4.1 million). For the year ended December 31, 2012, gross revenues, cost
of revenue and net loss for the investment were $9.0 million, $12.7 million and
$13.4 million, respectively (2011-$2.3 million, $9.8 million and $17.7 million,
respectively). The Company recorded its proportionate share of the net loss
which amounted to $1.4 million for 2012 compared to $1.8 million in 2011.
Pension Plan
The Company has an unfunded defined benefit pension plan, the Supplemental
Executive Retirement Plan (the "SERP"), covering Messrs. Gelfond and Bradley J.
Wechsler, the Company's former Co-CEO and current Chairman of its Board of
Directors. As at December 31, 2012, the Company had an unfunded and accrued
projected benefit obligation of approximately $20.4 million (December 31, 2011 -
$19.0 million) in respect of the SERP.
The net periodic benefit cost was $0.6 million and $0.5 million in 2012 and
2011, respectively. The components of net periodic benefit cost were as follows:
Years ended December 31
2012 2011
Interest cost $ 272 $ 279
Amortization of actuarial loss 365 214
Pension expense $ 637 $ 493
The plan experienced an actuarial loss of $1.1 million and $0.6 million during
2012 and 2011, respectively, resulting primarily from the continuing decrease in
the Pension Benefit Guaranty Corporation ("PBGC") published annuity interest
rates year-over-year used to determine the lump sum payment under the plan.
Under the terms of the SERP, if Mr. Gelfond's employment is 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. Gelfond's
current employment agreement has been extended through December 31, 2013,
although Mr. Gelfond has not informed the Company that he intends to retire at
that time. 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 this entitlement under the SERP.
The Company has a postretirement plan to provide health and welfare benefits to
Canadian employees meeting certain eligibility requirements. As at December 31,
2012, the Company had an unfunded benefit obligation of $4.6 million (December
31, 2011 - $4.1 million). See note 4 to the audited consolidated financial
statements in Item 8 of the Company's 2012 Form 10-K for additional details. In
February 2013, the Company amended the Canadian postretirement plan to reduce
future benefits provided under the plan. As a result of this change, the Company
anticipates the postretirement liability to be reduced by $2.7 million,
resulting in a pre-tax curtailment gain in the first quarter of 2013 of
approximately $2.4 million.
In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond
and Wechsler upon retirement. As at December 31, 2012, the Company had an
unfunded benefit obligation recorded of $0.5 million (December 31, 2011 - $0.5
million).
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Stock-Based Compensation
The Company utilizes the Binomial Model to determine the fair value of
stock-based payment awards. The fair value determined by the Binomial Model is
affected by the Company's stock price as well as assumptions regarding a number
of highly complex and subjective variables. These variables include, but are not
limited to, the Company's expected stock price volatility over the term of the
awards, and actual and projected employee stock option exercise behaviors. 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 Company's employee stock options and SARs have
certain characteristics that are significantly different from traded options,
and because changes in the subjective assumptions can materially affect the
estimated value, in management's opinion, the Binomial Model best provides an
accurate measure of the fair value of the Company's employee stock options and
SARs. Although the fair value of employee stock options and SARs are determined
in accordance with the Equity topic of the FASB ASC using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
Stock-based compensation expense recognized under FASB ASC 718, "Compensation -
Stock Compensation" ("ASC 718") for 2012 and 2011 was $13.1 million and
$11.9 million, respectively.
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Years Ended December 31, 2011 versus Years Ended December 31, 2010
The Company reported net income of $15.3 million or $0.24 per basic share and
$0.22 per diluted share for the year ended December 31, 2011 as compared to net
income of $101.2 million or $1.59 per basic share and $1.52 per diluted share
for the year ended December 31, 2010. The year ended December 31, 2010 included
the record-breaking performance of the film Avatar: An IMAX 3D Experience. Net
income for the year ended December 31, 2011 includes a $11.7 million charge, or
$0.17 per diluted share (2010 - $26.0 million or $0.39 per diluted share) for
stock-based compensation and a one-time $2.1 million pre-tax charge ($0.03 per
diluted share), due to an arbitration award arising from an arbitration
proceeding brought against the Company in connection with a discontinued
subsidiary. Net income for the year ended December 31, 2010 also includes a
one-time deferred income tax valuation allowance of $55.5 million or $0.83 per
diluted share. Adjusted net income, which consists of net income excluding the
impact of the stock-based compensation expense, the charge for arbitration
award, deferred income tax valuation allowance and the related tax impact, was
$28.0 million or $0.41 per diluted share for the year ended December 31, 2011 as
compared to adjusted net income of $66.0 million or $0.99 per diluted share for
the year ended December 31, 2010. A reconciliation of net income, the most
directly comparable U.S. GAAP measure, to adjusted net income and adjusted net
income per diluted share is presented in the table below:
Year Ended December 31,
2011 As Revised 2010 As Revised
Net Income Diluted EPS Net Income Diluted EPS
Reported net income $ 15,260 $ 0.22 $ 101,240 $ 1.52
Adjustments:
Stock-based compensation 11,681 0.17 26,028 0.39
Provision for arbitration
award 2,055 0.03 - -
Deferred income tax
valuation allowance - - (55,512 ) (0.83 )
Tax impact on items listed
above (973 ) (0.01 ) (5,792 ) (0.09 )
Adjusted net income $ 28,023 $ 0.41 $ 65,964 $ 0.99
Weighted average diluted
shares outstanding 67,859 66,684
Revenues and Gross Margin
The Company's revenues for the year ended December 31, 2011 decreased by 4.8% to
$236.6 million from $248.6 million in 2010 due to decreases in revenue from the
Company's film and joint revenue sharing arrangement segments partially offset
by higher revenue from the IMAX systems segment. The year ended December 31,
2010, included the record breaking performance of Avatar: An IMAX 3D Experience.
The gross margin across all segments in 2011 was $113.2 million, or 47.9% of
total revenue, compared to $137.7 million, or 55.4% of total revenue in 2010.
IMAX Systems
IMAX systems revenue increased 22.6% to $93.2 million in 2011 as compared to
$76.0 million in 2010, resulting primarily from the installation of 15 more new,
full systems (excluding digital upgrades) under sales and sales-type leases as
compared to the prior year.
Revenue from sales and sales-type leases increased 29.0% to $81.3 million in
2011 from $63.0 million in 2010. The Company recognized revenue on 50 full, new
theater systems which qualified as either sales or sales-type leases in 2011,
with a total value of $63.4 million, as compared to 35 in 2010 with a total
value of $48.0 million. Additionally, the Company recognized revenue on 25
digital upgrades in 2011, with a total value of $11.6 million, as compared to
30 in 2010 with a total value of $12.7 million. Digital upgrades have lower
sales prices and gross margin than a full theater installation. The Company has
decided to offer digital upgrades at lower selling prices for strategic reasons
since the Company believes that digital systems increase flexibility and
profitability for the Company's existing exhibition customers. There was one
used system installed and recognized in 2011 with a total value of $1.2 million,
as compared to 2 used systems with a total value of $1.5 million in 2010.
Average revenue per full, new sales and sales-type lease system was $1.3 million
in 2011, which is slightly lower than the $1.4 million experienced in 2010.
Average revenue per digital upgrade was $0.5 million in 2011, as compared to
$0.4 million for 2010.
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The breakdown in mix of sales and sales-type lease, operating lease and joint
revenue sharing arrangement installations by theater system configuration in
2011 and 2010 is outlined in the table below:
2011 2010
Sales and Sales-type lease systems-installed and recognized
2D SR Dome - 1
IMAX 3D GT 1 1
IMAX 3D SR - 2
IMAX digital 75 (1) 63 (3)
76 67
IMAX digital - installed and deferred 8 (2) -
84 67
Joint revenue sharing arrangements-installed and operating
IMAX digital 86 56 (3)
170 123
(1) Includes the digital upgrade of 25 systems from film-based to digital.
(2) Includes the digital upgrade of 8 systems (all sales arrangements) from
film-based to digital.
(3) Includes the digital upgrade of 32 systems (30 sales arrangements and 2
systems under joint revenue sharing arrangements) from film-based to digital.
As noted in the table above, 8 theater systems under a digital upgrade sales
arrangement were installed in 2011 but revenue recognition was deferred. The
arrangement contained provisions providing the customer with standard digital
upgrades, which were installed, and a number of as-of-yet undeveloped upgrades.
The Company's policy is such that once the fair value for the undeveloped
upgrade is established, the Company allocates total contract consideration,
including any upgrade revenues, between the delivered and undelivered elements
on a relative fair value basis and recognizes the revenue allocated to the
delivered elements with their associated costs. If the arrangement is materially
modified in the future such that contract consideration becomes fixed, the
arrangement in its entirety would be subject to the provisions of the amended
ASC 605-25 and the Company would be required to develop, absent an established
selling price or third party evidence of the selling price for the undeveloped
specified upgrade, a best-estimate selling price for the undeveloped specified
upgrade, allocate the arrangement's consideration on a relative selling price
allocation basis, and recognize revenue on the delivered elements based on that
allocation. In 2010, the Company did not defer any recognitions.
Settlement revenue was $3.8 million in 2011 as compared to $0.4 million in 2010.
IMAX theater systems gross margin from full, new sales and sales-type leases,
excluding the impact of settlements and asset impairment charges, increased to
66.0% in 2011 from 65.0% in 2010. The gross margin on digital upgrades was $2.6
million in 2011 in comparison with $2.6 million in 2010. The gross margin on
used systems was $0.1 million in 2011 in comparison with $0.3 million in 2010.
Ongoing rent revenue and finance income decreased to $11.9 million in 2011 from
$13.0 million in 2010. Gross margin from ongoing rent and finance income
decreased to $11.7 million in 2011 from $12.5 million in 2010. The change in
revenue and gross margin is primarily due to additional contingent fees
resulting from a stronger film slate in 2010, including the record-breaking
performance of Avatar: An IMAX 3D Experience and the weaker performance of films
in 2011, particularly animated films, offset slightly by a finance income on new
systems under sales arrangements that began operations in 2011. Contingent fees
included in this caption amounted to $2.7 million and $4.3 million in 2011 and
2010, respectively.
Theater System Maintenance
Theater system maintenance revenue increased 15.8% to $24.8 million in 2011 as
compared to $21.4 million in 2010. Theater system maintenance gross margin
decreased to $9.4 million in 2011 from $10.1 million in 2010 due to an increase
in general service costs resulting from a larger theater network and
preventative maintenance efforts expanded during the year. In 2010, the Company
recorded a write-down of its film-based service parts inventories of
$0.2 million due to the accelerated installation of the MPX system upgrades to
digital based systems. Maintenance revenue continues to grow as the number of
theaters in the IMAX network grows. Maintenance margins vary depending on the
mix of theater system configurations in the theater network and the timing and
nature of service visits in the period.
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Joint Revenue Sharing Arrangements
Revenue from joint revenue sharing arrangements decreased 26.3% to $30.8 million
in 2011 compared to $41.8 million in 2010. The Company ended the year with 257
theaters operating under joint revenue sharing arrangements as compared to 171
theaters at the end of 2010, an increase of 50.3%. The decrease in revenues from
joint revenue sharing arrangements was primarily due to the lower per-screen
gross box office realized from the films released to joint revenue sharing
theaters during 2011, as compared to 2010, which included the record-breaking
performance of Avatar: An IMAX 3D Experience, which contributed approximately
$13.7 million in revenue from joint revenue sharing arrangements, offset
slightly by the greater number of theaters operating. During 2011, the Company
installed 86 full, new theaters under joint revenue sharing arrangements, as
compared to 54 new theaters during 2010.
The gross margin from joint revenue sharing arrangements in 2011 decreased to
$17.6 million compared to $31.7 million in 2010. The decrease was largely due to
lower revenues and higher advertising, marketing and selling expenses
experienced in the current year as compared to the prior year. Included in the
2011 gross margin were certain advertising, marketing, and selling expenses of
$5.4 million, as compared to $4.2 million for such expenses in 2010. Adjusted
gross margin from joint revenue sharing arrangements, which excludes these
expenses from both periods, was $23.0 million in 2011, compared to $35.9 million
in 2010. A reconciliation of gross margin from the joint revenue sharing
arrangement segment, the most directly comparable U.S. GAAP measure, to adjusted
gross margin is presented in the table below:
(In thousands of U.S. Dollars) 2011 2010
Gross margin from joint revenue sharing arrangements $ 17,605 $ 31,703
Add:
Advertising, marketing and selling expenses 5,432 4,236
Adjusted gross margin from joint revenue sharing arrangements $ 23,037
$ 35,939
Film
The Company's revenues from its film segments decreased 15.9% to $74.9 million
in 2011 from $89.1 million in 2010.
Film production and IMAX DMR revenues decreased 20.3% to $50.6 million in 2011
from $63.5 million in 2010. The decrease in film production and IMAX DMR
revenues was due primarily to a stronger film slate in 2010 as compared to 2011.
2011 featured fewer event type films released during the period, compared with
the record breaking performance of Avatar: An IMAX 3D Experience during 2010,
which contributed $187.9 million in IMAX gross box office and $18.6 million in
DMR Revenue. In 2010, there were 10 films that recorded gross domestic box
office of over $200.0 million, 9 of which were released to the IMAX network. By
contrast, 6 films in 2011 recorded gross domestic box office of over $200.0
million, of which 4 were released to the IMAX network. IMAX DMR films released
to IMAX theaters during the period, however, continued to significantly
outperform lower-cost formats on a per screen basis. Gross box office generated
by IMAX DMR films decreased 23.6% to $417.2 million in 2011 versus
$545.9 million in 2010. Gross box office per screen for 2011 averaged
$1,069,300, in comparison to $1,821,900 in 2010. In 2011, gross-box office was
generated primarily from the exhibition of 26 films listed below, as compared to
16 films exhibited in 2010:
2011 Films Exhibited 2010 Films Exhibited TRON: Legacy: An IMAX 3D Experience Avatar: An IMAX 3D Experience
The Green Hornet: An IMAX 3D Experience Alice in Wonderland: An IMAX 3D
Experience
Tangled: An IMAX 3D Experience How To Train Your Dragon: An IMAX 3D
Experience
Sanctum: An IMAX 3D Experience Iron Man 2: The IMAX Experience
I Am Number Four: The IMAX Experience Shrek Forever After: An IMAX 3D
Experience
Mars Needs Moms: An IMAX 3D Experience Prince of Persia: The Sands of Time:
The IMAX Experience
Sucker Punch: The IMAX Experience Toy Story 3: An IMAX 3D Experience
Fast Five: The IMAX Experience The Twilight Saga: Eclipse: The IMAX
Experience
Thor: An IMAX 3D Experience Inception: The IMAX Experience
Pirates of the Caribbean: On Stranger Aftershock: The IMAX Experience
Tides: An IMAX 3D Experience Resident Evil: Afterlife: An IMAX 3D
Experience
The Founding of a Party: The IMAX Legends of the Guardian: The Owls of
Experience Ga'Hoole: An IMAX 3D Experience
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Kung Fu Panda 2: An IMAX 3D Experience Paranormal Activity 2: The IMAX
Super 8: The IMAX Experience Experience
Cars 2: An IMAX 3D Experience Megamind: An IMAX 3D Experience
Transformers: Dark of the Moon: An IMAX Harry Potter and the Deathly Hallows
3D Experience Part I: The IMAX Experience
Harry Potter and the Deathly Hallows Tron Legacy: An IMAX 3D Experience
Part II: An IMAX 3D Experience
Final Destination 5: An IMAX 3D
Experience
Cowboys & Aliens : The IMAX Experience
Sector 7: An IMAX 3D Experience
Contagion: The IMAX Experience
Real Steel: The IMAX Experience
Puss in Boots: An IMAX 3D Experience
Happy Feet Two: An IMAX 3D Experience
Flying Swords of Dragon Gate: An IMAX 3D
Experience
Mission: Impossible - Ghost Protocol:
The IMAX Experience
The Adventures of Tintin: The Secret of
the Unicorn: An IMAX 3D Experience
Film distribution revenues decreased 10.4% to $16.1 million in 2011 from
$17.9 million in 2010 primarily due to lower revenues from the distribution of
library films in ancillary markets. Film post-production revenues increased 6.9%
to $8.2 million in 2011 from $7.7 million in 2010 primarily due to an increase
in third party business.
The Company's gross margin from its film segments decreased 39.9% in 2011 to
$29.6 million from $49.3 million in 2010. Film production and IMAX DMR gross
margins decreased to $23.6 million from $41.2 million in 2010 largely due to a
decrease in IMAX DMR revenue resulting from the films exhibited in the current
year as compared to the prior year. The film distribution margin of $3.0 million
in 2011 was lower than the $5.2 million experienced in 2010, primarily due to
the decrease in film distribution revenues. Film post-production gross margin
increased by $0.1 million due to an increase in third party business as compared
to the prior year.
Other
Other revenue decreased to $12.9 million in 2011 compared to $20.3 million in
2010. Other revenue primarily includes revenue generated from the Company's
owned and operated theaters, camera rentals and after-market sales of projection
system parts and 3D glasses. The decrease in other revenue was largely due to a
decrease in revenue from theater operations attributable to a decrease in
average ticket prices and attendance as result of comparatively weaker film
performance in 2011 as compared to 2010.
The gross margin on other revenue was $3.0 million lower in 2011 as compared to
2010. In particular, the theater operations margin decreased $2.8 million from
2010 primarily due to a decrease in theater operations revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $73.2 million in 2011,
as compared to $78.8 million in 2010. The $5.6 million decrease experienced from
the prior year comparative period was largely the result of the following:
• a $14.3 million decrease in the Company's stock-based compensation
(including a decrease of $20.3 million for variable share-based awards).
This decrease was offset by:
• a $5.0 million increase in staff-related costs and compensation costs,
including an increase in salaries and benefits of $3.8 million as a result
of higher average Canadian dollar denominated salary expense, increased
staffing and normal merit increase, partially offset by lower pension plan
costs;
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• a $2.8 million increase due to foreign exchange. During the year ended
December 31, 2011, the Company recorded a foreign exchange loss of
$1.3 million due to the impact of a decrease in exchange rates on foreign
currency denominated working capital balances and unmatured and un-hedged
foreign currency forward contracts, as compared to a gain of $1.5 million
recorded in 2010. See note 16(b) of the audited consolidated financial
statements in Item 8 of the Company's 2011 Form 10-K for more information;
and
• a $0.9 million increase in legal, professional and other general corporate expenditures.
Provision for Arbitration Award
During 2011, the Company recorded a provision of $2.1 million regarding an award
issued in connection with an arbitration proceeding brought against the Company,
relating to agreements entered into in 1994 and 1995 by its former Ridefilm
subsidiary, whose business the Company discontinued through a sale to a third
party in March 2001. On January 12, 2012, the Company, Ridefilm and Robots of
Mars, Inc. ("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. See note 14(c) of the audited consolidated
financial statements in Item 8 of the Company's 2011 Form-10K for more
information.
Research and Development
Research and development expenses increased to $7.8 million in 2011 compared to
$6.2 million in 2010. The increased research and development expenses for 2011
compared to 2010 are primarily attributable to ongoing enhancements to the
Company's digital projection technology to ensure that the Company continues to
provide the highest-quality, premier movie going experience available to
consumers. In the fourth quarter of 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 Kodak, which the
Company believes will support its efforts to deliver the highest quality digital
content available to the largest IMAX film-based screens.
Receivable Provisions, Net of Recoveries
Receivable provisions, net of recoveries for accounts receivable and financing
receivables, amounted to a net provision of $1.6 million in 2011, as compared to
$1.4 million in 2010.
The Company's accounts receivables and financing receivables are subject to
credit risk. These receivables are concentrated with the leading theater
exhibitors and studios in the film entertainment industry. To minimize the
Company's credit risk, the Company retains title to underlying theater systems
that are leased, performs initial and ongoing credit evaluations of its
customers and makes ongoing provisions for its estimate of potentially
uncollectible amounts. Accordingly, the Company believes it has adequately
protected itself against exposures relating to receivables and contractual
commitments.
Asset Impairments and Other Significant Charges
The Company recorded an asset impairment charge of less than $0.1 million, which
is consistent with the prior year, against property, plant and equipment after
the Company assessed the carrying value of certain assets in its theater
operations segment in light of their future expected cash flows. The Company
recognized that the carrying values for the assets exceeded the expected
undiscounted future cash flows.
In 2010, the charge relating to inventory primarily resulted from a reduction in
the net realizable value of its GT and SR film-based projector inventories and
associated parts due to a further market shift away from the film-based
projector systems. No such charges were recognized in 2011.
In 2011, the Company recorded a $0.4 million charge reflecting assets that no
longer meet capitalization requirements as the assets were no longer in use. No
such charges were recorded in 2010.
Interest Income and Expenses
Interest income decreased to less than $0.1 million in 2011, as compared to
$0.4 million in 2010. The decrease was largely due to interest recorded during
2010 related to tax refunds.
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Interest expense was consistent at $1.8 million in 2011 and 2010. Included in
interest expense is the amortization of deferred finance costs in the amount of
$0.4 million and $0.3 million in 2011 and 2010, respectively. The Company's
policy is to defer and amortize all the costs relating to a debt financing which
are paid directly to the debt provider, over the life of the debt instrument.
Income Taxes
The Company's 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 Company's valuation allowance based on the Company's recoverability
assessments of deferred tax assets, and favorable or unfavorable resolution of
various tax examinations.
There was a $1.9 million decrease in the valuation allowance resulting from
utilization of loss carryforwards and deductible temporary differences against
current period income and the Company's estimates of the recoverability of its
deferred tax assets based on an analysis of both positive and negative evidence
including projected future earnings. The Company recorded an income tax
provision of $9.3 million for 2011, of which $0.1 million is related to a
decrease in unrecognized tax benefits. For 2010, the Company recorded an income
tax recovery of $52.6 million, of which $0.1 million was related to an increase
in unrecognized tax benefits.
During the year ended December 31, 2011, after considering all available
evidence, both positive (including recent profits, projected future
profitability, backlog, carryforward periods for utilization of net operating
loss carryovers and tax credits, discretionary deductions and other factors) and
negative (including cumulative losses in past years and other factors), it was
concluded that the valuation allowance against the Company's deferred tax assets
should be further reduced by approximately $1.9 million. The remaining
$6.1 million balance in the valuation allowance as at December 31, 2011 is
primarily attributable to certain U.S. federal and state net operating loss
carryovers and federal tax credits that likely will expire without being
utilized. As at December 31, 2010, the Company had determined that based on the
improvement of the Company's operating results in 2009 and 2010 and the
Company's assessment of projected future results of operations, realization of a
deferred income tax benefit is now more likely than not. As a result, the
judgment about the need for a full valuation allowance against deferred tax
assets changed, and a reduction in the valuation allowance was recorded as a
benefit within the recovery for income taxes from continuing operations. The
recovery for income taxes in the year ended December 31, 2010 includes a net
non-cash income tax benefit of $55.5 million in continuing operations related to
a decrease in the valuation allowance for the Company's deferred tax assets and
other tax adjustments. The net income tax benefit during the year ended
December 31, 2010 is primarily attributable to the estimated realization of
deferred tax assets resulting from the utilization of deductible temporary
differences and certain net operating loss carryforwards and tax credits against
future years' taxable income.
The Company anticipates utilizing the majority of its currently available tax
attributes over the next three years.
Equity-Accounted Investments
The Company accounts for investments in new business ventures using the guidance
of the FASB ASC 323 Investments - Equity Method and Joint Ventures ("ASC
323"). At December 31, 2011, the equity method of accounting is being utilized
for an investment with a carrying value of $4.1 million (December 31, 2010-$1.6
million). For the year ended December 31, 2011, gross revenues, cost of revenue
and net loss for the investment were $2.3 million, $9.8 million and $17.7
million, respectively (2010-$nil, $0.2 million and $4.3 million, respectively).
The Company recorded its proportionate share of the net loss which amounted to
$1.8 million for 2011 compared to $0.5 million in 2010.
Pension Plan
The Company has an unfunded defined benefit pension plan, the Supplemental
Executive Retirement Plan (the "SERP"), covering Messrs. Gelfond and Bradley J.
Wechsler, the Company's former Co-CEO and current Chairman of its Board of
Directors. As at December 31, 2011, the Company had an unfunded and accrued
projected benefit obligation of approximately $19.0 million (December 31, 2010 -
$18.1 million) in respect of the SERP. At the time the Company established the
SERP, it also took out life insurance policies on Messrs. Gelfond and Wechsler
with coverage amounts of $21.5 million in aggregate. During 2010, the Company
obtained $7.8 million representing the cash surrender value of the policies.
These amounts were used to pay down the term loan under the Prior Credit
Facility (as defined on page 70, "Liquidity and Capital Resources - Prior Credit
Facility") and fund part of the $14.7 million lump sum payment made to
Mr. Wechsler on August 1, 2010 under the SERP which settled in full
Mr. Wechsler's entitlement under the SERP.
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The net periodic benefit cost was $0.5 million and $0.4 million in 2011 and
2010, respectively. The components of net periodic benefit cost were as follows:
Years ended December 31
2011 2010
Service cost $ - $ 448
Interest cost 279 351
Amortization of actuarial loss 214 -
Realized actuarial gain on settlement of
pension liability - (385 )
Pension expense $ 493 $ 414
The plan experienced an actuarial loss of $0.6 million during 2011, resulting
primarily from a decrease in the PBGC published annuity interest rates used to
determine the lump sum payment under the plan.
Under the terms of the SERP, monthly annuity payments payable to Mr. Wechsler,
whose employment as Co-CEO terminated effective April 1, 2009, were deferred for
six months and were paid in the form of a lump sum plus interest on the deferred
amount on October 1, 2009. These monthly annuity payments continued through to
August 1, 2010. On August 1, 2010, the Company made a lump sum payment of $14.7
million to Mr. Wechsler in accordance with the terms of the plan, representing a
settlement in full of Mr. Wechsler's entitlement under the SERP.
The Company has a postretirement plan to provide health and welfare benefits to
Canadian employees meeting certain eligibility requirements. As at December 31,
2011, the Company had an unfunded benefit obligation of $4.1 million (December
31, 2011 - $3.4 million). See note 4 to the audited consolidated financial
statements in Item 8 of the Company's 2012 Form 10-K for additional details. In
February 2013, the Company amended the Canadian postretirement plan to reduce
future benefits provided under the plan. As a result of this change, the Company
anticipates the postretirement liability to be reduced by $2.7 million,
resulting in a pre-tax curtailment gain in the first quarter of 2013 of
approximately $2.4 million.
In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond
and Wechsler upon retirement. As at December 31, 2011, the Company had an
unfunded benefit obligation recorded of $0.5 million (December 31, 2010-$0.5
million).
Stock-Based Compensation
The Company utilizes the Binomial Model to determine the fair value of
stock-based payment awards. The fair value determined by the Binomial Model is
affected by the Company's stock price as well as assumptions regarding a number
of highly complex and subjective variables. These variables include, but are not
limited to, the Company's expected stock price volatility over the term of the
awards, and actual and projected employee stock option exercise behaviors. 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 Company's employee stock options and SARs have
certain characteristics that are significantly different from traded options,
and because changes in the subjective assumptions can materially affect the
estimated value, in management's opinion, the Binomial Model best provides an
accurate measure of the fair value of the Company's employee stock options and
SARs. Although the fair value of employee stock options and SARs are determined
in accordance with the Equity topic of the FASB ASC using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
Stock-based compensation expense recognized under FASB ASC 718, "Compensation -
Stock Compensation" ("ASC 718") for 2011 and 2010 was $11.9 million and
$27.7 million, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Prior Credit Facility
On June 2, 2011, the Company amended and restated the terms of its senior
secured credit facility. The Company's amended and restated senior secured
credit facility (the "Prior Credit Facility"), with a scheduled maturity of
October 31, 2015, had 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. Certain
of the Company's subsidiaries served as guarantors (the "Guarantors") of the
Company's obligations under the Prior Credit Facility. The Prior Credit Facility
was collateralized by a first priority security interest in substantially all of
the present and future assets of the Company and the Guarantors.
The Company's indebtedness under the Prior Credit Facility includes the
following:
December 31, December 31,
2012 2011
Revolving Term Loan $ 11,000 $ 55,083
As at December 31, 2012, the Company's current borrowing capacity under the
revolving asset-based portion of the Prior 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 Prior Credit Facility
was $49.0 million (December 31, 2011 - $4.9 million).
The terms of the Prior Credit Facility was set forth in the Second Amended and
Restated Prior Credit Agreement (the "Prior 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 Canada")
and Export Development Canada, as lender ("EDC", together with Wells Fargo
Canada, the "Prior Lenders") and in various collateral and security documents
entered into by the Company and the Guarantors. Each of the Guarantors had also
entered into a guarantee in respect of the Company's obligations under the Prior
Credit Facility.
The revolving asset-based portion of the Prior Credit Facility permitted 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 Company's 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 Company's owned real property,
reduced by certain accruals and accounts payable and subject to other
conditions, limitations and reserve right requirements.
The revolving asset-based portion and the revolving term loan portion of the
Prior Credit Facility bore interest, at the Company's option, at (i) LIBOR plus
a margin of 2.00% per annum, or (ii) Wells Fargo Canada's prime rate plus a
margin of 0.50% per annum. Under the Prior Credit Facility, the effective
interest rate for the year ended December 31, 2012 for the revolving term loan
portion was 2.42% (2011 - 2.50%). There was no amount drawn on the revolving
asset-based portion of the Prior Credit Facility.
The Prior Credit Facility provides that the Company will be required to
maintain a ratio of funded debt (as defined in the Prior Credit Agreement) to
EBITDA (as defined in the Prior 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 Prior Credit Agreement) of not less than 1.1:1.0. At all times
under the terms of the Prior Credit Facility, the Company was required to
maintain minimum Excess Availability of not less than $5.0 million and minimum
Cash and Excess Availability of not less than $15.0 million. The ratio of funded
debt to EBITDA was 0.10:1 as at December 31, 2012, where Funded Debt (as defined
in the Prior Credit Agreement) is the sum of all obligations evidenced by notes,
bonds, debentures or similar instruments and was $11.0 million. EBITDA was
calculated as follows:
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EBITDA per Credit Facility:
(In thousands of U.S. Dollars)
Net income $ 41,337
Add:
Loss from equity accounted investments 1,362
Provision for income taxes 15,079
Interest expense net of interest income 604
Depreciation and amortization including film asset amortization(1) 32,618
Write-downs net of recoveries including asset impairments and
receivable provisions(1)
1,607
Stock and other non-cash compensation 14,220
$ 106,827
(1) See note 19 to the audited consolidated financial statements in Item 8 of the
Company's 2012 Form 10-K.
The Prior Credit Facility contained 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 Prior Credit Facility also contained 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 Guarantor. If an event of
default occurs and is continuing under the Prior Credit Facility, the Prior
Lenders may, among other things, terminate their commitments and require
immediate repayment of all amounts owed by the Company.
New Credit Facility
On February 7, 2013, the Company amended and restated the terms of its Prior
Credit Facility. The amended and restated facility (the "New Credit Facility"),
with a scheduled maturity of February 7, 2018, has a maximum borrowing capacity
of $200.0 million. The Prior Credit Facility had a maximum borrowing capacity of
$110.0 million. Certain of the Company's subsidiaries will serve as guarantors
(the "Guarantors") of the Company's obligations under the New Credit Facility.
The New 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 New Credit Facility are set forth in the Third Amended and
Restated Credit Agreement (the "Credit Agreement"), dated February 7, 2013,
among the Company, the Guarantors, the lenders named therein, Wells Fargo Bank,
National Association ("Wells Fargo"), as agent and issuing lender (Wells Fargo,
together with the lenders named therein, the "Lenders") and Wells Fargo
Securities, LLC, as Sole Lead Arranger and Sole Bookrunner 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 Company's obligations under the New Credit Facility.
The New Credit Facility permits the Company to undertake up to $150.0 million in
stock buybacks and dividends, provided certain covenants in the Credit Agreement
are maintained. In the event that the Company undertakes stock buybacks or makes
dividend payments, any amounts outstanding under the revolving portion of the
New Credit Facility up to the first $75.0 million of any such stock buybacks and
dividend payments will be converted to a term loan.
At closing, the Company borrowed $18.0 million from the New Credit Facility to
repay outstanding indebtedness under the Prior Credit Facility and to pay fees
and closing costs related to entry into the New Credit Facility.
The amounts outstanding under the New Credit Facility bear interest, at the
Company's option, at (i) LIBOR plus a margin of (a) 1.50%, 1.75% or 2.00%
depending on the Company's Total Leverage Ratio (as defined in the Credit
Agreement) per annum, or (ii) Wells Fargo's prime rate plus a margin of
0.50% per annum. Term loans, if any, under the New Credit Facility must be
repaid under a 5-year straight line amortization, with a balloon payment due at
maturity. The Company is required to provide an interest rate hedge for 50% of
any term loans outstanding.
The New Credit Facility provides that the Company will be required to maintain a
Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less
than 1.1:1.0. The Company will also be required to maintain minimum EBITDA (as
defined in the Credit Agreement) of $70.0 million between closing and
December 30, 2013, which requirement increases to $80.0 million on
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December 31, 2013, $90.0 million on December 31, 2014, and $100.0 million on
December 31, 2015. The Company must also maintain a Maximum Total Leverage Ratio
(as defined in the Credit Agreement) of 2.5:1.0 between closing and December 30,
2013, which requirement decreases to (i) 2.25:1.0 on December 31, 2013;
(ii) 2.00:1:0 on December 31, 2014; and (iii) 1.75:1.0 on December 31, 2015.
The New 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 New 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 New Credit Facility, the Lenders may,
among other things, terminate their commitments and require immediate repayment
of all amounts owed by the Company.
Letters of Credit and Other Commitments
As at December 31, 2012, the Company did not have any letters of credit and
advance payment guarantees outstanding (December 31, 2011 - $3.0 million), under
the Prior Credit Facility.
The Company also has a $10.0 million facility for advance payment guarantees and
letters of credit through the Bank of Montreal for use solely in conjunction
with guarantees fully insured by EDC (the "Bank of Montreal Facility"). The Bank
of Montreal Facility is unsecured and includes typical affirmative and negative
covenants, including delivery of annual consolidated financial statements within
120 days of the end of the fiscal year. The Bank of Montreal Facility is subject
to periodic annual reviews. As at December 31, 2012, the Company had letters of
credit and advance payment guarantees outstanding of $0.9 million under the Bank
of Montreal facility as compared to $0.8 million as at December 31, 2011.
Cash and Cash Equivalents
As at December 31, 2012, the Company's principal sources of liquidity included
cash and cash equivalents of $21.3 million, the Prior Credit Facility,
anticipated collection from trade accounts receivable of $42.0 million including
receivables from theaters under joint revenue sharing arrangements and DMR
agreements with studios, anticipated collection from financing receivables due
in the next 12 months of $13.6 million and payments expected in the next 12
months on existing backlog deals. As at December 31, 2012, the Company had drawn
down $11.0 million on the revolving term loan portions of the Prior Credit
Facility (with remaining availability of $49.0 million) and had drawn down $nil
on the revolving asset-based portion of the Prior Credit Facility (with
remaining availability of $50.0 million). There were $nil letters of credit and
advance payment guarantees outstanding under the Prior Credit Facility and
$0.9 million under the Bank of Montreal Facility.
During the year ended December 31, 2012, the Company's operations provided cash
of $73.6 million and the Company used cash of $35.5 million to fund capital
expenditures, principally to build equipment for use in joint revenue sharing
arrangements, to purchase other intangible assets, including costs to develop
the Company's new ERP system, and to purchase property, plant and equipment.
Based on management's current operating plan for 2013, the Company expects to
continue to use cash to deploy additional theater systems under joint revenue
sharing arrangements, to fund DMR agreements with studios and invest in research
and development activities. Cash flows from joint revenue sharing arrangements
are derived from the theater box-office receipts, and in some cases, concession
revenue and a small upfront or initial payment and the Company invested directly
in the roll out of 60 new theater systems under joint revenue sharing
arrangements in 2012.
The Company believes that cash flow from operations together with existing cash
and borrowing available under the New Credit Facility will be sufficient to fund
the Company's business operations, including its strategic initiatives relating
to existing joint revenue sharing arrangements for the next 12 months.
The Company's operating cash flow will be adversely affected if management's
projections of future signings for theater systems and film performance, theater
installations and film productions are not realized. The Company forecasts its
short-term liquidity requirements on a quarterly and annual basis. Since the
Company's future cash flows are based on estimates and there may be factors that
are outside of the Company's control (see "Risk Factors" in Item 1A in the
Company's 2012 Form 10-K), there is no guarantee that the Company will continue
to be able to fund its operations through cash flows from operations. Under the
terms of the Company's typical sale and sales-type lease agreement, the Company
receives substantial cash payments before the Company
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completes the performance of its obligations. Similarly, the Company receives
cash payments for some of its film productions in advance of related cash
expenditures.
Operating Activities
The Company's net cash provided by operating activities is affected by a number
of factors, including the proceeds associated with new signings of theater
system lease and sale agreements in the year, costs associated with contributing
systems under joint revenue sharing arrangements, the box office performance of
films distributed by the Company and/or released to IMAX theaters, increases or
decreases in the Company's operating expenses, including research and
development, and the level of cash collections received from its customers.
Cash provided by operating activities amounted to $73.6 million in 2012. Changes
in other non-cash operating assets as compared to 2011 include: an increase of
$7.3 million in financing receivables; a decrease of $4.1 million in accounts
receivable; an increase of $0.4 million in inventories; an increase of $0.7
million in prepaid expenses; $0.1 million increase in other assets which
includes a $0.4 million decrease in insurance recoveries receivable, a $0.3
million decrease in commissions and other deferred selling expenses and a $0.8
million increase in other assets. Changes in other operating liabilities as
compared to December 31, 2011 include: a decrease in deferred revenue of
$0.5 million related to backlog payments received in the current year, offset by
amounts relieved from deferred revenue related to theater system installations;
a decrease in accounts payable of $8.1 million and a decrease of $2.3 million in
accrued liabilities.
Included in accrued liabilities at December 31, 2012, was $20.4 million of
accrued pension obligations.
Investing Activities
Net cash used in investing activities amounted to $35.5 million in 2012 compared
to $63.5 million in 2011, which includes an investment in joint revenue sharing
equipment of $23.3 million, purchases of $6.1 million in property, plant and
equipment, an additional investment in business ventures of $0.4 million and an
increase in other intangible assets of $5.8 million. Net cash used in investing
activities in 2011 included the license of certain intellectual property rights
related to the Company's development of a laser projection system.
Financing Activities
Net cash used in financing activities in 2012, amounted to $34.8 million,
primarily due to the net repayment of bank indebtedness of $44.0 million, as
compared to cash provided by financing activities of $45.1 million in 2011.
Capital Expenditures
Capital expenditures, including the Company's investment in joint revenue
sharing equipment, purchase of property, plant and equipment, net of sales
proceeds, other intangible assets and investments in film assets were
$52.0 million in 2012 as compared to $73.3 million in 2011. In 2013 the Company
anticipates continued capital expenditures due in large part to the roll-out of
theaters pursuant to joint revenue sharing arrangements.
Prior Year Cash Flow Activities
Net cash provided by operating activities amounted to $6.2 million in the year
ended December 31, 2011. Changes in other non-cash operating assets as compared
to 2010 include: an increase of $14.6 million in financing receivables; an
increase of $7.5 million in accounts receivable; an increase of $1.3 million in
inventories; an increase of $0.3 million in prepaid expenses; $1.0 million
increase in other assets which includes a $0.4 million decrease in commissions
and other deferred selling expenses and a $1.0 million decrease in insurance
recoveries receivable and an increase in other assets of $2.4 million. Changes
in other non-cash operating liabilities as compared to December 31, 2010
include: an increase in deferred revenue of $0.7 million related to amounts
added to deferred revenue for backlog payments received in the current year,
offset by amounts relieved from deferred revenue related to theater system
installations; an increase in accounts payable of $5.6 million and a decrease of
$31.1 million in accrued liabilities including payments of $23.7 million for
stock-based compensation. Net cash used in investing activities in the year
ended December 31, 2011 amounted to $63.5 million, which includes an investment
in joint revenue sharing equipment of $33.3 million, purchases of $5.5 million
in property, plant and equipment, an additional investment in business ventures
of $2.5 million and an increase in other intangible assets of $22.2 million. Net
cash provided by financing activities in 2011 amounted to $45.1 million due to
an increase in net bank indebtedness of $37.5 million and proceeds from the
issuance of common shares from stock option exercises of $7.9 million, offset by
a $0.3 million in payment of fees relating to the Prior Credit Facility
amendment.
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Capital expenditures including the Company's investment in joint revenue sharing
equipment, purchase of property, plant and equipment net of sales proceeds and
investments in film assets were $73.3 million in the year ended December 31,
2011.
CONTRACTUAL OBLIGATIONS
Payments to be made by the Company under contractual obligations are as follows:
Payments Due by Period
Total(In thousands of U.S. Dollars) Obligations 2013 2014
2015 2016 2017 Thereafter
Pension obligations(1) $ 21,058 $ - $ 21,058 $ - $ - $ - $ -
Prior Credit Facility(2) 11,000 - - 11,000 - - -Operating lease obligations(3) 15,085 6,931 5,142
1,177 511 511 813
Purchase obligations(4) 12,053 11,553 500 - - - -
Postretirement benefits
obligations(5) 5,130 83 79 88 128 128 4,624
Capital lease obligations(6) 20 20 - - - - -
$ 64,346 $ 18,587 $ 26,779 $ 12,265 $ 639 $ 639 $ 5,437
(1) The SERP assumptions are that Mr. Gelfond will receive a lump sum payment six
months after retirement at the end of the current term of his employment
agreement (December 31, 2013), although Mr. Gelfond has not informed the
Company that he intends to retire at that time.
(2) Interest on the Prior Credit Facility was payable monthly in arrears based on
the applicable variable rate and is not included above. On February 7, 2013,
the Company amended and restated the terms of its credit facility. The
Comapany's borrowing capacity under the New Credit Facility is up to
$200.0 million. On the closing date, the Company borrowed $18.0 million under
the New Credit Facility to repay outstanding indebtedness under the Prior
Credit Facility and to pay fees and closing costs related to entry into the
New Credit Facility.
(3) The Company's total minimum annual rental payments to be made under operating
leases, mostly consisting of rent at the Company's properties in New York and
Santa Monica, and at the various owned and operated theaters.
(4) The Company's total payments to be made under binding commitments with
suppliers and outstanding payments to be made for supplies ordered but yet to
be invoiced.
(5) In February 2013, the Company amended the Canadian postretirement plan to
reduce future benefits provided under the plan. As a result of this change,
the Company anticipates the postretirement liability to be reduced by $2.7
million, resulting in a pre-tax curtailment gain in the first quarter of 2013
of approximately $2.4 million.
(6) The Company's total minimum annual payments to be made under capital leases,
mostly consisting of payments for IT hardware and various other fixed assets.
Pension and Postretirement Obligations
The Company has an unfunded defined benefit pension plan, the SERP, covering
Messrs. Gelfond and Wechsler. As at December 31, 2012, the Company had an
unfunded and accrued projected benefit obligation of approximately $20.4 million
(December 31, 2011 - $19.0 million) in respect of the SERP.
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 of
Mr. Wechsler's entitlement under the SERP. Under the terms of the SERP, if
Mr. Gelfond's employment is 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. Gelfond's current employment agreement has been
extended through December 31, 2013, although Mr. Gelfond has not informed the
Company that he intends to retire at that time. 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 Company has a postretirement plan to provide health and welfare benefits to
Canadian employees meeting certain eligibility requirements. As at December 31,
2012, the Company had an unfunded benefit obligation of $4.6 million (December
31, 2011 - $4.1 million). See note 4 to the audited consolidated financial
statements in Item 8 of the Company's 2012 Form 10-K for additional details. In
February 2013, the Company amended the Canadian postretirement plan to reduce
future benefits provided under the plan. As a result of this change, the Company
anticipates the postretirement liability to be reduced by $2.7 million,
resulting in a pre-tax curtailment gain in the first quarter of 2013 of
approximately $2.4 million.
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In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond
and Wechsler upon retirement. As at December 31, 2012, the Company had an
unfunded benefit obligation of $0.5 million (December 31, 2011 - $0.5 million).
OFF-BALANCE SHEET ARRANGEMENTS
There are currently no off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on the Company's
financial condition.
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