Wednesday, September 05, 2007

Reel-to-Reel Problems at Imax Corp.

On September 10, Imax Corp. (IMAX-$4.56) will hold its annual meeting of shareholders. As both the share price and revenue of the maker of movie projection systems have not budged in five years, the 10Q Detective finds it disingenuous for Co-Chairmen and Co-Chief Executive Officers, Richard Gelfond and Bradley Wechsler, in their welcome letter to shareholders, to say:

“We are pleased to report to you that IMAX’s underlying business momentum is continuing to improve, particularly with regard to our two key corporate initiatives implemented in 2006: supplementing IMAX’s existing theatre system sales/lease model through attractive joint ventures, and transitioning the IMAX system to digital for a large portion of our client base by late 2008 to mid-2009.”

Management’s newly founded belief that the Company is positioned to achieve attractive growth and enhanced value over the long term contradicts their earlier business outlook—issued less than one month prior: “Theater system installations slip from period to period in the course of the Company’s business, and the Company has seen a significant number of theater system installations originally anticipated for the third and fourth quarters of 2006 move to anticipated installations for 2007 and beyond. The Company currently has 17 complete theater systems in its backlog that it anticipates will be installed in the second half of 2007, however it cautions that slippages remain a recurring and unpredictable part of its business.”

Despite a five-year history of non-performance, the Board—on February 15, 2007—extended the employment contracts of both Mr. Gelfond and Mr. Wechsler to December 31, 2007. Each Co-Chairman also received an incentive retention bonus of 300,000 stock appreciation rights (with an exercise price of $4.34).

If Gelfond and Wechsler elected voluntary retirement, they are entitled to receive estimated lump sum payments of approximately $11.2 million and $16.5 million, respectively, under terms of their Supplemental Executive Retirement Plans (value as of June 07, 2007). Shareholders might note, too, that these projected benefit obligations are unfunded, which means that IMAX’s reports these monies owed as accrued liabilities of about $27.7 million on its balance sheet!

Oh—throw in lump sum payments for salary and bonus, a defined contribution plan, and provision of health benefits, the amounts owed grow to $18.2 million and $17.2 million, respectively.

Never you mind that current shareholder value is $(63.8) million, or a book value of $(1.49) per share.

Should I stay or should I go now?
Should I stay or should I go now?
If I go there will be trouble
An if I stay it will be double
So come on and let me know
~ The Clash

In the recent quarter ended June 30, IMAX said it lost $4.57 million from continuing operations, or 11 cents per share, compared to a profit of $1.63 million, or 4 cents per share, during the same period last year.

The loss was wider than the consensus estimate of 6 cents per share.

Revenue during the quarter fell by 27.9% to $27.5 million, down from $38.1 million previously. Management attributed much of the decline to slipping equipment, product, and film distribution sales.

Institutional holders own about 30 percent of the outstanding common stock of IMAX. The reticence of these stakeholders, including MFC Global Investment Management (U.S.), LLC., First Wilshire Securities Management, Inc., and Goldman Sachs Group, which beneficially own 6.41 percent, 5.95 percent, and 2.62 percent, respectively, in voicing any concerns on the management record and/or performance payouts of/to Gelfond and Wechsler is puzzling to us.

Given the (unfunded) monies owed to the Co-Chairmen, institutional holders are damned if they do, and damned if they don't—in petioning Gelfond and Wechsler to retire come December 2007.

Editor David J. Phillips does not hold a financial interest in Imax. The 10Q Detective has a Full Disclosure policy.

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