IMAX

IMAX Corporation Q1 2007 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2007. IMAX Corporation designs, manufactures, and sells theater systems for large-format theaters, produces and distributes films, and operates certain theaters. As of March 31, 2007, there were 284 IMAX theaters operating in 40 countries. The filing includes restated comparative figures for the first quarter of 2006 due to the discovery of accounting errors related to revenue recognition, film accounting, and tax liabilities.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 16.7% year-over-year, driven primarily by a 317% increase in Film Production and IMAX DMR revenue ($4.6M vs $1.1M) due to the box office performance of 300: An IMAX Experience and Night at the Museum.
• Margin Expansion: Gross margin improved to 41.9% from 34.3%, largely due to the high-margin performance of the film segment.
• Loss Reduction: Net loss from continuing operations narrowed to $4.8 million from $6.0 million, despite higher R&D expenses ($1.5M vs $0.9M) related to digital projector development.
• Restatement Impact: The Q1 2006 figures were restated to correct errors in revenue recognition (theater systems), film accounting (marketing costs capitalized incorrectly), and tax liabilities. The restatement increased Q1 2006 revenue by $3.2 million and net earnings by $2.1 million compared to originally reported figures.

Guidance, Outlook, and Risks

• Digital Transition: Management aims to deliver a digital projection system by early 2009 to reduce print costs and increase profitability. However, this transition carries risks of revenue deferral if customers delay purchases pending digital upgrades.
• Backlog: The company has 22 complete theater systems in backlog anticipated for installation in 2007, though management cautions that installation slippage is a recurring risk.
• Debt Covenant Default: The company was in default of a financial reporting covenant under its Senior Notes due to delayed filing of its 2006 10-K. A consent solicitation was completed in April 2007 to waive the default, extending the cure period. The company paid $1.5 million in consent fees. A subsequent default occurred on July 1, 2007, due to missed filing deadlines, triggering a 30-day cure period.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of March 31, 2007. Seven material weaknesses were identified, primarily regarding revenue recognition, film accounting, and cross-departmental communication.
• Litigation: The company faces multiple class-action lawsuits in the U.S. and Canada alleging securities fraud related to revenue recognition practices. Additionally, there are ongoing arbitrations regarding patent infringement and contract breaches.

Investor Verification Checklist

• Debt Covenant Status: Verify the current status of the Senior Notes default and whether the 30-day cure period was successfully utilized to avoid acceleration of debt.
• Restatement Finality: Confirm that all accounting errors identified in the 2002-2006 review have been fully corrected and that no further restatements are anticipated.
• Internal Control Remediation: Review the progress of the remediation plan for the seven identified material weaknesses in internal controls over financial reporting.
• Digital Projector Timeline: Assess the feasibility of the early 2009 digital projector launch and the potential impact of revenue deferral on future earnings.
• Litigation Exposure: Monitor developments in the securities class-action lawsuits and the arbitration with 3DMG regarding potential financial impact.