Imax Corp (IMAX) 2003 Q3 法說會逐字稿

Welcome to this IMAX conference call. This call is being recorded. At this time I would like to turn the call over to Mr. Brad Wexler. Please go ahead, sir.

Thank you, operator, and thank you all for joining us today. With me today are my partner and Co-CEO, Rich Gelfond, also Frank Joyce, our CFO, and Steve Abraham, Senior Vice President of Corporate Development. Before we begin our lawyers have asked me to read the following forward-looking statement language. Our comments and answers to your questions on this call might include statements that are forward-looking in that they address future results or occurrences. Actual future results and occurrences may differ materially from these forward-looking statements.

You should refer to our SEC and OSC filings for a more detailed discussion of some of the factors that could affect our future results and occurrences. Additionally, our third-quarter 2003 financial results were issued over the newswire in the form of the press release earlier today for all of you to review. To read the full text of the press release along with the associated financial tables, please go to our homepage at www.IMAX.com. During today's call we will provide a financial and operational overview of the third-quarter and highlight activities accelerating IMAX's commercial strategy.

First, we will review highlights from the successful release of The Matrix Revolutions, The IMAX Experience, the first live-action Hollywood event film to be released concurrently in both IMAX and 35mm theaters. Next we will discuss balance sheet improvements followed by an update on theater signings. We decided to release our financial results today later than we normally do, so that we could share with you initial IMAX performance figures for The Matrix Revolutions which opened in 48 domestic and 12 international IMAX theaters last Wednesday.

With the opening of IMAX's first contemporaneous release of a Hollywood event film, IMAX has evolved into a fundamentally different company. The results are in, and there is no question that consumers love to see these big films in IMAX's format. Increasingly moviegoers are coming to view The IMAX Experience as a new and exciting way to experience event films. We expect The Matrix Revolutions to foster the IMAX revolution which rapidly accelerates commercial acceptance of IMAX and spurs ongoing integration of the IMAX business with studios and exhibitors establishing IMAX as the newest release window for Hollywood event films.

Since its release on Wednesday, The Matrix Revolutions has grossed over $3 million on 48 IMAX screens in North America. That's an amazing per screen average of over $63,000. Many IMAX theaters experienced one day and weekend box office records and we are obviously very pleased with the optimal performance of this film. Later in the call, Rich will provide more specific data on the opening weekend performance including some anecdotes and preliminary research results later during the call.

I would now like to review our third-quarter financial results. IMAX reported net losses of 7 cents per share on a basic and fully diluted basis which is consistent with prior guidance. For the quarter, our total revenues were roughly $21.5 million compared to $23 million in the third-quarter of last year. Breaking down revenue further, system revenues increased almost 20 percent to 11.5 million as we recognized revenue on one theater system consistent with both guidance and with the one system installed during last year's quarter.

Also included in systems revenue for the quarter was $3.4 million resulting from restructurings and/or settlements of previously signed lease agreements. Film revenues decreased 46 percent which was expected and is attributed to the last year's release of our record-breaking film, SPACE STATION. Other revenues were up 24 percent to 4.7 million. Gross margin was approximately 46.5 percent of revenues versus a little over 29 percent in the corresponding period last year. Moving down the income statement, SG&A was 8.3 million and R&D was $950,000 versus $900,000 last year.

Interest expense for the quarter was 3.6 million, down from last year's third-quarter reflecting our reduced debt level. These results are all in line with guidance. We advise shareholders that because of seasonal factors we would report a loss this quarter, so we suggest evaluating our results in the context of the financial progress achieved year-to-date and the inroads made with studios and exhibitors in terms of content and signings. While there will be more on this later, over the last 12 months we have signed 29 new theater system leases versus 18 in the previous twelve-month period.

As most of you know, signings is perhaps the best forward indicator of the trajectory of our business. We expect that the two innovations advancing our growth, IMAX DMR and the lower cost IMAX MPX theater projection system for multiplexes, will start to have a financial impact in 2004 as these technologies will begin to have an accelerating effect on new theater signings. With regard to our balance sheet, we ended the quarter with 23.5 million in cash and we continue to reduce our debt during the third-quarter through a series of debt for equity swaps lowering our outstanding Senior Notes balance by about $16 million in principal to $153 million as of October 31.

When combined with the company's prior debt retirements in 2001 and 2002, IMAX has reduced total debt by about 50 percent from 300 million in 2001 to 153 million today. Separately, the company announced today our plan to proceed with a new 144A Senior Notes offering in the United States to refinance the remainder of the 2005 bonds. The rule of such a transaction prevents us from commenting more specifically, however, over the past several quarters we have discussed our capital market strategies and the balance sheet implications and we feel this is an opportune time to pursue a refinancing strategy.

The 144A offering is the most common way that companies issue U.S. bonds today. Next, we would like to tell you about a development related to our Board. Murray Koffler, a longtime and valued member of our Board, has retired. We are very grateful to Murray for his years of dedicated service and wish him well in his pursuit of the other endeavors. While we will miss Murray, I am pleased to announce the appointment of David Lebron (ph), Dean and Professor of Columbia University School of Law, who will replace Mr. Koffler. David brings extensive legal experience to our Board and will oversee IMAX's corporate governance responsibilities.

Board membership remains at eight with only two current directors, my partner Rich and myself, employed by IMAX. As most of you know, Rich and I are also the company's largest individual shareholders. Now to review the operational side of our business. Again, as most of you know and I've said before, one of the most important forward indicators in our business is theater signings. This quarter we signed deals for five theater systems and as I said earlier, over the past twelve months we signed deals for 29 theaters, a 60 percent increase over the prior twelve-month period.

We expect this momentum to continue with a growing acceptance of IMAX DMR and IMAX MPX. We expect a shortening of the sale cycle of between six and twelve-months for the new IMAX MPX system and we have been encouraged by the positive response from commercial exhibitors thus far. In addition to the first domestic signing of an IMAX MPX system announced when we unveiled the system in March, the company has sold two MPX systems in Shanghai and one in Moscow, demonstrating appeal with commercial operators beyond the domestic market.

The momentum continues in the fourth quarter with two more IMAX MPX system signings with a prominent commercial property developer in Dubai. We have also had a good response to the IMAX retrofit product as we have approximately 20 to 25 potential projects in discussion currently with multiplex operators considering this option. Signings for the quarter demonstrate IMAX's continued penetration of international multiplexes in China, India and Russia as a result of the growing demand for IMAX DMR. In Russia we signed a deal with the exhibitor, BFC Media Limited, for its second IMAX theater just five months after the extremely successful opening of the clients' first theater in Moscow.

This theater opened its doors to nearly 7,000 people its first weekend and has enjoyed many subsequent sold out weekends. It was also the top grossing cinema screen in Russia for The Matrix Reloaded, charging an average ticket price of $11.40, a $4.00 premium to its regular ticket price. Domestically we signed an important deal with Bella Films that could lead to contracts for additional IMAX theaters to be located in commercial destination locations around the world. Bella Films, which recently added Edgar Bronfman Sr. to its Board, may also produce large format films for IMAX theaters.

Moving onto guidance, for the fourth quarter we expect to install four to six systems, generate revenues in the low $40 million range, have gross margins of approximately 42 percent, and have slightly higher SG&A compared to this quarter offset by lower interest expense. That should translate into earnings of 10 to 15 cents per share for the quarter which excludes potential onetime cash and non-cash charges related to the retirement of our Senior Notes. For the full year, this translates into the 19 to 21 new theater system installations generating revenues in the low $130 million range and earnings of 10 to 15 cents per share, again excluding any onetime charges associated with the potential refinancing of our debt.

To reflect our positive business momentum we are providing the following guidance for 2004. Based on our current outlook, we expect to install between 25 and 30 new theater systems, achieved total revenues of between $135 and $140 million with gross margins expected to increase to between 43 and 45 percent of revenue. We expect to spend approximately $37 million in SG&A, about 3 million in R&D and approximately 15 million in interest expense. We expect EBITDA to be in the range of $35 to $38 million.

All of this should translate into earnings of between 25 cents and 35 cents per share. The company may report a loss in one quarter similar to the third-quarter of this year, due to the variability of installations which are dependent on our customers' construction schedules. To summarize IMAX's performance in the third-quarter, we are very pleased to reduce our net debt to around $130 million and with the performance of both the IMAX DMR Matrix releases.

We are also excited to see early signs of IMAX MPX receptivity from exhibitors which should drive future profitability. We view the consumer acceptance of IMAX DMR as the catalyst for several critical developments including an expanded content pipeline driven by studio economics, increased theater signings driven by greater box office receipts and film commitments, and a lower cost structure driven by economies of scale and volume all equating to better financial results for our shareholder. With that, let me turn it over to Rich who has some impressive data points to share with you about the opening weekend performance of The Matrix Revolutions, the IMAX experience.

Early indications of the success of our first contemporaneous release bode well for the furthering of the company's goal of making IMAX theaters the place to see Hollywood event films in the 21st century and the company's objective of firmly establishing IMAX as the newest release window for Hollywood films.

Thanks Brad. As Brad indicated earlier, IMAX has become a fundamentally different company with our DMR strategy and with the IMAX revolution officially beginning with our first contemporaneous release. The performance of The Matrix Revolutions in IMAX theaters will be a crucial data point for many Hollywood studios as well as commercial exhibitors that are determining how to best use the IMAX window. The contemporaneous release is critical to our strategy as it allows IMAX theaters to benefit from multimillion dollar marketing campaigns and showing event films in IMAX theaters, especially concurrent with the 35mm debut turns a release into an event driving strong word-of-mouth marketing.

Demand for IMAX DMR has increased with every new release. As IMAX has successfully opened each of its four DMR films closer to the 35mm debut date, more theaters have signed up to play each film, the total gross box office has steadily increased as a result. For example The Matrix Reloaded: The IMAX Experience, opened on 39 screens, while The Matrix Revolutions: The IMAX Experience, released just five months later opened on 60 screens. I am really pleased to share some very impressive performance figures for the opening weekend of The Matrix Revolutions: The IMAX Experience.

Over its five day opening period the film performed extremely well earning $3 million on just 48 screens in North America. A number of IMAX theaters not only in the U.S. but around the world, sold out every show through Sunday. In fact, crowds of people that numbered in the hundreds gathered at many of our theaters from New York to Tokyo to see the first shows at IMAX theaters. The feedback we have received thus far indicates that exhibitor customers are thrilled as many experienced one day and weekend box office records.

Now I'd like to share with you some specifics and anecdotes about the film's performance so far that illustrates the enormity of this film as an event. First let's look at per screen revenues. On November 5th, the opening day, per screen revenue of the IMAX version of the film was $16,000. In one day, this film generated per screen revenues very near what The Matrix Reloaded: the IMAX Experience, earned throughout its three-day opening weekend at IMAX theaters which we and Warner Bros. thought was extremely successful. Per screen revenue for the Friday, Saturday, and Sunday segment of the opening weekend of Revolutions in IMAX was approximately $37,000 which is more than double the per screen revenue earned by Reloaded in its first three-day weekend.

More highlights on the films in the domestic market. Another example of the marked improvement of performance of Revolutions versus Reloaded is the comparison of how both films performed in the 34 commercial theaters where each opened. In the first five days of the run, Revolutions earned 2.5 times more than Reloaded at the same theater. The film set a record as the highest grossing IMAX film in a single weekend at Loews’ IMAX theater with almost $200,000 in box office at a single screen over five days. On the opening day, almost all 6:00 AM IMAX screenings in California, 6:00 AM is before Starbucks opens, by the way, were sold out.

The theater in Ontario, California set up 50 extra chairs at 6:00 AM to accommodate patrons. A great example of demand for IMAX DMR at institutional theaters in the Pacific Science Center in Seattle which sold out every show on November 5th, and also throughout the weekend with a few tickets left for the 1:00 AM show. This is 1:00 AM at a Science Center in Seattle. Radio and TV reporters camped outside the IMAX theater in New Orleans to interview people as they left the theater. Our flash researcher, (indiscernible) Seaters in North America by an independent research firm, indicated that 65 percent of those polled would have paid more than the average $2.50 premium they paid for the IMAX version over the 35mm price.

And it's quite unusual for people who just paid a premium to say they would have been willing to pay more. And from our international theaters, in India, the IMAX theater in Hyderabad (ph) sold out all shows from Wednesday through Sunday and charged a premium three times the standard ticket price in that region. The opening of the IMAX theater in Morbi was so oversold that the theater had to line up plastic chairs in the back of the theater for patrons.

That theater is charging more than double the average ticket price for a 35mm film in that market. Nescafe IMAX theater in Moscow had a 98 percent occupancy rate over the five-day opening period and grossed over $93,000. In Moscow, where the average ticket price of conventional theaters is 6.50, the IMAX theater charged $13.42 for peak tickets which is a premium of more than double or almost $7.00, and a premium of $2.00 over the premium they charged for Reloaded. The IMAX theater in Madrid sold out Friday, Saturday and Sunday shows at a premium double what conventional theaters charged in a market that had never shown IMAX DMR before.

On November 5th, the combined box office from the three IMAX theaters in South Africa set a record in the region for the highest box office ever grossed by a single movie on a Wednesday. Preliminary data from independent exit poll research collected over the first five days of the films run returned the following results. Ninety-three percent of those polled indicated they were very satisfied with the film as presented in IMAX, 95 percent moviegoers who saw the film in an IMAX theater intend to recommend it to others and interest level in future IMAX DMR films was also high with 84 percent indicating they would like to see another film in this format.

In addition, this research data we collected had some encouraging information about the legs phenomenon similar to the legs we saw with our Reloaded -- with our release of Matrix Reloaded, 87 percent of IMAX viewers of Matrix Revolutions said they would recommend seeing the film in an IMAX theater for a second time to their friends who saw it for a first time in a 35mm theater. These results are even more powerful when you consider the economics for Hollywood studios. As acceptance of IMAX DMR and our new IMAX MPX grows and the number of screens expand, we believe that gross box office performances of IMAX DMR releases in the $40 to $50 million range could be achieved when the opening number is in the 100 area, and a potential of 80 to 100 million can be achieved on 200 screens.

As the IMAX DMR investment is the same for Hollywood studio irrespective of the number of screens its opening on except for print costs at approximately $5 million, including conversion and marketing, the cost of releasing an IMAX DMR film increases only modestly as you move from 50 to 100 screens. Therefore the economics become extremely compelling over the long-term. The impressive performance of The Matrix Reloaded: The IMAX Experience, which was released five months earlier, this is the one before the one that was released this week, which played in 80 theaters to date and has generated nearly $14 million in gross box office has secured a new position for IMAX in the movie business.

One, it provides a creative outlet for artists, favorable economics for studios and our exhibitor partners, and a solution to help offset the significant box office declines now typical of major Hollywood releases. The Matrix Reloaded proved to be another pivotal development as the film generated and sustained incremental box office through repeat business and added legs to the run. A great example of the legs is the strength of Reloaded's run at the BFI IMAX Theater in London, where the film opened six weeks after the 35mm version in that market. Last week, again the week that Revolutions opened, was the 20th week of the run of Reloaded. The theater was achieving occupancy rates of 95 percent and the average ticket price was $19.63.

We're very grateful to Warner Bros. for these two releases and think this partnership has worked well for both companies. IMAX DMR films have contributed to the elevated tone of our discussions with commercial exhibitors and we expect Revolutions to add momentum to that trend. In fact, year to date, we have already received double the number of inquiries for theater systems that we recorded for the full year in 2001. Based on our experience in elevated levels of inquiries, in time translates into increased signings. There was also a noticeable uptake in the volume of inquiries in July of this year following the release of Matrix Reloaded in June.

We see this jump in inquiries as an important early indicator of potential financial success. Our pipeline goes from inquiries to signings to installations to financial results and it would be naive to think that on a press release announcement you would install theaters. The way this cycle goes is these developments lead to inquiries and that's happening right now. The impressive results of our first IMAX DMR films have created significant buzz among commercial exhibitors. Elevated interest in our new lower-cost IMAX MPX product was apparent at the East Trade Show last month which was attended by both domestic and international exhibitors.

Numerous conversations at this show centered on the IMAX business becoming potentially more profitable for commercial theaters as the IMAX DMR films' slate broadens. Based on IMAX's scheduled film slate, the next available slot for an IMAX DMR film will be spring of 2004 when there are several Hollywood films with content appealing to general audiences and appropriate for an IMAX release. IMAX is now in active discussions with four of the major studios about this slot and have found each quite interested in using IMAX as a new release window.

We are now conducting tests on each of these various projects. The successful IMAX DMR releases are The Matrix Related and The Matrix Revolutions, have answered many of the questions studios have had about this process. Many studios executives are now actively discussing with us their best found and the ideal stage of a films' run for an IMAX DMR release. There is also no shortage of upcoming traditional films for IMAX theaters. In production are Disney's Young Black Stallion, which is scheduled to come out this Christmas.

A film we're doing, IMAX and Warner Bros., NASCAR 3-D, with the trailers were tested during the release of Matrix Revolutions and scored extremely high, and in development with Tom Hanks' company that did my Big Fat Greek Wedding, is a film about man walking on the moon, Magnificent Desolation. All of these films are scheduled to rollout in late 2003 and into 2004. In conclusion, during the third quarter and afterwards, we continue to address the challenges of the path while launching IMAX into the future with the release of our first contemporaneous film.

Based on the results we've shared with you today, we're extremely encouraged by consumer's appetite for Hollywood event films in IMAX's format and their willingness to pay more for The IMAX Experience. We are also encouraged by the reaction of studios and exhibitors. There are many positive indications that the IMAX revolution has indeed begun and that IMAX will establish itself as the news release window for Hollywood event films. We look forward to translating the additional acceptance of IMAX's business model by studios and exhibitors into financial returns in the future and significant shareholder return. Thank you. With that, we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Eric Wold with Merriman Curhan Ford & Co.

Just a couple of quick questions and one longer one. Can you give the backlog numbers at the end of Q3 systems and dollar amount?

Sixty-one systems and about 140 million.

Of the 25 to 30 systems you are looking to install next year, about how many of those do you think will come straight from the backlog that is in place now versus signings between now and next year?

Probably somewhere between 15 to 18 to 20 will probably come from the backlog, somewhere in that range, it's a rough number.

That is a function of, I think we indicated, we are seeing a shorter sales cycle on the new MPX product which means in essence a shorter time from certainly inquiry to signings to installs is getting compressed, which is great.

On that note then how many of the Q3 signings of the five do you think will fall into next year?

That's too detailed of a question.

Last quarter you said of the seven, four to five of those come --.

Several of them will but it's too detailed of a question.

In general, assuming we get one more new DMR announcement before the end of the year, you will roll into next year with one DMR of I guess a goal of two to three for next year. If you look into '05, where you want to do maybe four or five of these DMR films, where do you feel comfortable entering a year in terms of your number of DMR films you want to lock down?

I just want to answer the first part. I don't want to go into too much detail. You shouldn't assume that any one discussion with any one studio necessarily involves one picture. The predicate of your question may of may not be right.

The other thing, I would say, is because of the nature of the films we're doing which is event films, the slots that we are looking at, we're not looking at three IMAX DMR films, pick one out of the three for next February, it's really next May is when you would start to see the event films that we're focusing on be released. To answer your question, which is how much time in advance, the more visibility the better but what we are also seeing on the production side, it takes less and less time from the time a studio commits to doing an IMAX DMR film and to our ability to deliver it. I think on Revolutions for example, it was extremely compressed in our ability to deliver the film. Certainly if we were talking about four or five films in '05, I don't think one would need visibility of that until the end of 04.

It sound like things are going well. Thanks, I appreciate it.

Tony Gikas of Piper Jaffray.

Good morning, guys. Just as it relates to the backlog of systems as well; could you break that down in terms of U.S. and international, and then how many are commercial versus the traditional or the institutional theaters? Excuse me.

I'll give it to you by region; how is that? Of the backlog, 61 systems, about -- a little over 30 percent, 33 percent is Asia. Europe and North America are about 26 percent of these; South America about 10 percent. The rest of the world is the balance. In terms of commercial and institutional, it's about 8 percent or so institutional, and the balance is commercial.

Any update for us in terms of new signings with the larger commercial theater operators?

We are in discussions with several of the larger U.S. commercial operators. I was alluding to this, Tony, a little bit during the formal remarks. The exhibitors are waiting to see two things; one, what the performance is of the DMR films and future film announcements. We are in discussions with virtually -- well, with virtually all of them at some level. I'd say with several of them on a more serious basis. But I think if you were them, you want to see how this goes and what future DMR releases are and what the studios are saying. I think what just happened in the last five days is a very positive thing.

I'll give you one small anecdote, which is one of the exhibitors saw the results of Reloaded and was kind of amazed by the legs that it gave to the run. And when Warner Bros. approached this particular exhibitor and said let's do a day and date this time, the exhibitor said why do I want to do a day and date? It worked so well the last time around, I'm not sure it's going to do as well this time. Two days into the run, they sent us and the exhibitor a note which I'm paraphrasing, it says I was wrong, I was wrong, I was wrong.

So this is all real-time data that they are integrating and I would think that a combination of the success of the last film, the success of this film and DMR announcements when they come, will motivate the commercial exhibitors to come into our business. The other point related to that is these exhibitors have just come through their own restructuring. They promised Wall Street they're not going to be building more screens but they've also promised Wall Street some bottom-line growth.

We have a product that retrofits some of their existing screens which we just introduced in the last few months and actually in the last month or so it is the first time we're showing it to anybody, the exhibitors have excess cash flow and I think were quite encouraged, Tony, by the prospect.

Since you have introduced the DMR technology now going back to the Apollo 13 type, are you able to verify or quantify new signings that are responsible as a result of the new technology?

I think it's more intangible than that. In some sense all signings are partly a function of DMR except your strict institutional sense, because when a commercial operator looks at it they're looking at what revenues drive your -- how to drive their top line, how to drive their revenue line and they see that whether it's Apollo or Star Wars or Reloaded, all of these -- it just makes the case stronger and stronger and it makes their pro forma stronger when they enter the IMAX business before they sign up with us.

To be more concrete about it, the last nine-month signings are 18 versus 10 for the similar period last year and the trailing twelve-month signings are 29 versus 18 for LTM a year ago. You can see the concrete results.

Point taken. Thanks guys.

Leland Westerfield with Jeffries & Company.

My questions really are two. The first regarding the legs that we might see out of Matrix 3, Revolutions, and secondly regarding conversion if you will of some of the U.S. domestic prospects in the MPX format. I guess one of the things I'm focusing on is what we might see in the upcoming weekends in terms of drop-off. I wonder if you might remind us what Matrix 2 on your format did in its first and second weekends and contrast that with for example what Matrix in the 35mm -- Matrix 2 did in 35mm?

One of the things that is most interesting about IMAX is the dynamic nature of our business. If you look at the four DMR films, Apollo was released a decade after initial release, Star Wars was released six months after initial release, Reloaded was four months and Revolutions is contemporaneous. There is not a vast data pool to make analogies. So I think in terms of legs, I think we feel quite confident that you are going to see legs in revolutions.

Now what does legs mean and what is the benchmark against which you use it? I personally would expect that any sort of drop-off would be less than 50 percent of the drop-off you see in 35mm. I think that would be a strong indication showing legs on a day and date release. Is it, what's 35mm? I don't know and literally what's IMAX going to be? I don't know and I don't think we have specific expectations here. We do expect it to show durability. That was I think the first half of your question. I forgot what the second half was.

Reloaded 2.

Reloaded was launched the fourth week after opening. Between the fourth and the 13th week of the run which is the first through the ninth week at IMAX, it never fell more than 15 percent week over week. It also, over that period of time, it fell a total of 55 percent over that nine week period which was actually less than the Hulk fell in conventional cinema from a first weekend to the second weekend. So the legs were quite durable and as I said during the opening remarks, Reloaded last weekend in some places it was showing still had very very high occupancy rates. The second question, Lee?

The second question focuses on really actually the negotiations in Missouri and what, if any, timeframe we can look forward to for whether those screens may be installed would be contracted?

Which ones are you talking about Lee?

Bella Films.

I think we can't comment on specific negotiations there.

But they are ongoing?

Yes.

Excellent. Thank you very much.

Rich Ingrassia.

One moment. Rich Ingrassia with Roth Capital Partners. Mr. Ingrassia, your line is open.

We're not hearing anything operator.

We'll move on then to Jeff Logsdon (ph) Harris Nesbitt.

We're not hearing the question.

One moment. Anthony DeClemsey (ph) with Lehman Brothers.

Last week on the Pixar conference call, the question was posed to Pixar management as to whether or not they would consider adapting the Incredibles or one of their subsequent Disney Pixar films onto the IMAX format given that it seems like those films would be ideal for adapting to the IMAX format. We were a little bit surprised to hear that the answer was that the cost, and I'm paraphrasing here, but the answer was that the cost was prohibitive and they would just have to spend too much money to convert the 35mm using the DMR technology. I was just wondering if you can remind us again of what that cost is and just talk a little bit about how can you dispel the notion that the cost of conversion to the IMAX format is two high for the studios?

What happened on that call was there were apples and oranges being mixed together. Ann Mathers' (ph) response wasn't to DMR, which is the way a lot of people heard it. We have been talking to Pixar over the years, about converting some of their films into a 3-D IMAX version. So you would take Toy Store or Finding Nemo and do a 3-D version. That cost is probably in the neighborhood of about $10 million.

In fact, for their own reasons we don't -- we disagree with them on the cost. Pixar thinks they might be slightly more than that, we think maybe slightly less. But we've never spoken with them about a DMR project. The conversion cost of 2-D to 2-D like Matrix Revolutions, is about $2 to $3 million plus the cost of print. So it's $5 million all in. She was responding to turning a 2-D movie into 3-D.

That is very clear. Thank you.

Morgan Rettman (ph) with Harvest Management.

Just to clarify an answer you made to a previous question. You are in active discussions with four studios and you implied that they could be on multiple picture deals with one or more of those four, is that correct?

That is correct.

You mentioned that the first big release date would be spring of '04. The way you look at it, are there basically three release windows which you would be interested in next year being the spring of '04, the July 4th time period and then this time period sometime between early November and middle of December?

Generally speaking, yes, but as more event films -- that is exactly right for next year, but as more event films and it gets more crowded, the studios are beginning to spread their event films and you are going to begin to see two time slots also develop not only in the summer but also in the Christmas time. There is sort of the early November and then there may be the mid to late December slots, which also develops. I can't remember the specifics, but increasingly there are examples.

The films don't get bunched, but you also seeing films around Washington's birthday, or the spring break you are seeing some event films when we look at next year's slate. The good part of our strategy is we know what films we're talking about and you don't have to be in the movie business to look six months ahead and see which films are going to be performing on a pretty significant basis. There is really nothing in the February March range of '04 that is really a film that we really want to do.

So it's more April May, would be the first window?

Yes.

Is it correct because I knew that we've gotten the time down, how much leadtime do we now need? Are we down to four to six weeks to be able to actually from the time we sign to the time we can actually do a conversion when we get the final cut?

I was going to say two months, but I was being a little abstract. If you had a film you really want to do you turn -- you can turn two months into five weeks if you have to.

Got it. In the 20 to 25 retrofits that you are talking about with multiplex operators, those were all in the United States?

I'm sorry --?

The first part of the call you said -- you were talking about 20 to 25 retrofits with multiplex operators?

That is the -- it is not just in the United States. This is a product that is obviously appealing internationally as well.

Can you give us a sense of how many of those might be in United States?

I would be guessing too much, it's more than half, but I would be guessing too much.

You would talk about North America dividing into 250, 280 IMAX zones and whatever multiplex retrofits you would be doing would be falling into this zone concept, correct?

Correct.

Thank you very much.

Rich Ingrassia with Roth Capital Partners.

Good morning guys. I apologize, my audio went dark there for a while, if I ask something that has already been asked. On the timing of installations for next year of 25 to 30, any sense for where the weak quarter is going to be?

It's a little early to give quarterly guidance. I think on the 25 to 35 sense, we want to be in a position to give preliminary guidance that was reasonably well thought out. But we are actually still in the midst of our budgeting process. Since installations is a function as Rich said, of other people's schedules, it is a little easy for things to slip between quarters. I don't think we want to nail that down yet.

Do you have a breakout you can give us on the systems side between upfront royalties and maintenance?

For '04 --?

Or just past, yes.

Sure, Frank can -- he was asking for general breakout on the systems line first nine months between the upfront versus maintenance and royalties, on a percentage basis.

Or just the quarter is fine.

Upfront is a vast majority of the revenues if that is what you are referring to. I don't have the specific breakout by quarter.

Steve will call you back and give that to you.

That would be a better way to do that.

That is fine and films as well would be great. While I've got you Frank, a couple of housekeeping things. The Q4 cash you expect to get from mainframe, do have a number for that yet?

The deal isn't finalized. It could be certainly north of one million.

Stock based comp in the last quarter?

I would have to ouija board for that. It is triggered by the stock price but it will be higher.

(multiple speakers). Current quarter.

About 700,000.

Theater closings, any givebacks on the systems this quarter?

I don't think so, but I don't have it. Steve will follow that one up with you also. I don't think there were any Rich.

Finally, do you have a sense for how far in advance of the release studios might be comfortable letting us know they are going to have an IMAX DMR release? I know generally those dates can shift and you don't get them more than a couple of months in advance. If we are looking at a May release, any chance we are going to get it this quarter?

There is a chance, but from the studio's perspective in all due deference they don't care about IMAX's constituencies, they care about their constituencies. As long as they can get the films delivered to them in a big beautiful IMAX, if they announce it two months in advance, then they can have it on-time for their release dates, that's what they focus on. Now what we focus on with them is what Rich said, if these guys are making $20 million of gross from a DMR film now, as the IMAX theater network grows, they should look out to the time where they can make $40 million or $50 million of gross.

For our network to grow, visibility of future film is important. It's an accelerator in growing our network. When we go to the studios and they say okay, this is good, we've got this film coming, we say listen the faster that we can announce these films, the faster you embrace the IMAX business as an ancillary business to Hollywood that can really grow your ancillary revenue streams, your profit will increase. So there is an incentive for you to show people future visibility and that's the nature of the dialogue. That dialogue is going on.

Rich, there was one closure during the quarter.

Thanks Rich. For what it's worth, my kids vote for Shrek 2.

We will put it in the hopper. What do you vote for?

I vote for Shrek too.

Michael Gallant (ph) from CIBC World Markets.

This is actually Dan Chung (ph) for Mike Gallant. Just two quick questions. Not sure if you already answered this, but can you give us a sense of how many new full system installs you had domestic versus international year-to-date? And can you compare that with your mix last year?

Frank is checking.

I would say installations so far this -- installations so far this year, let's say four, five, six, nine -- roughly ten were in North America if that is helpful. I have something like three in Europe, two in Asia, does that help?

Ten versus five then. Secondly, I'm not sure how much visibility you have into next year, but can you give me the sense of what the mix is looking like for '04?

You mean installations?

(indiscernible)

Again, that is again off the preliminary budget that we put together that shows that 25 to 35 percent. We don't want to bore down too deep on that. We are going to be giving increasingly focused guidance as we move forward, as we move forward through our budgeting process and we have more visibility into the installs because of our customers' construction schedule. I think we would like to stay away from that now.

Thank you.

Peter Cyrus (ph) with Guerilla (ph) Capital.

Good morning guys. I have a couple of questions. First, just so I understand the economics. It cost two to three million to convert a movie and with the prints that is five million. Is that correct?

Yes.

And the total -- you gave us the U.S. volume for the weekend but if I add them, the five million would be the total cost including worldwide prints, right?

Yes.

And the worldwide volume was how much?

We don't have it exactly, but it's probably around three five to three seven, something like that Peter. Probably around three five.

So breakeven, breakeven comes where? Breakeven because --?

If you assumed, and this is really not our business and we don't even know the answer, but the split between Warner and the exhibitors, is what Warner -- they do that for a living. But if you used a number like 55 percent, your breakeven is around what, 10 million of gross.

So it doesn't seem like this is -- it doesn't seem like getting to breakeven on a movie like this is that hard?

I don't think so.

And Peter, the last one, Reloaded, which they released four weeks late into the run, they grossed 14 million. So if you just do the math without even knowing the splits, they made a reasonable return already.

Warner just told us that they made money on Reloaded.

The second question is just, again, to understand; you were talking about the spring and the schedule for next year. It is still possible that you would have both a spring and a July 4th release; not that you would definitely have it, but it's possible to have it.

It is possible. It is something that we are juggling in our conversations with the studios right now.

The third question, the last guy asked, he voted for Shrek. So I just want to understand again, if something like Shrek -- if you did Shrek. I'm not saying you should or should not, but if you did Shrek, that would be a 2D release, right?

Correct.

So the economics are, it's 2 to 3 million for a 2D release, and it's 10 million for a 2D to 3D conversion?

Correct.

And the MPX theaters, will they be able to show 3D as well as 2D?

Absolutely.

One final question, and I know this sounds like a snotty question, and I don't mean it that way.

We're offended already.

I apologize. Obviously -- not obviously, but it looks to me from the beginning that the Matrix revolution obviously was not as successful as Reloaded, at least in its opening. You know, people talking about the movie might be disappointing. This may sound like a weird question, but are you -- could you actually be better off if the movie didn't do that well overall, but did well in IMAX, as opposed to having something that would be a complete blockbuster?

Listen, Peter, I don't think we like comparing the IMAX performance with 35mm performance. What we need -- pardon the French -- is kick-ass performance in IMAX, and we got that in the opening weekend. If that sustains, that just demonstrates to the theater exhibitors who are our customers that IMAX is a moneymaking business. It's a business that they should be in. We are not suggesting it's a business that they should be at the expense of 35mm. We are not suggesting it's a business they should be in instead of 35mm.

Give consumers choice. There are lots of consumers out there that are happy to pay a price premium for the best images, the best sound, the best site lines. And I think our feeling is, let the economics of IMAX be judged on a stand-alone basis; 35 mm, we hope the films and our partners in 35mm do absolutely as best as they can in the 35mm world. And we view the IMAX profits as additive.

Thank you very much, guys.

Ken Silver (ph) with CRT Capital.

I missed part of the call. So if this is a repeat, I apologize. Did you give depreciation for the quarter?

We didn't.

Between 2.5 and 3 million.

When you have earnings, are you a cash taxpayer?

We are not an income tax cash payer.

And what about next year?

We don't believe that we will be.

So if you do the EBITDA that you just threw out there, 35 to 38 million, I assume CAPEX next year is 3 to 5 million?

Closer to five.

You're going to have some free cash flow here, it seems like. Have you thought about -- you're not going to have any debt to repay because assuming you're going to issue these new bonds. What are your thoughts for free cash flow usage?

Well, there are a lot of opportunities as our business grows. One in particular would be, that we've shied away from, is to somehow participate in the cost of conversion of Hollywood DMR movies into IMAX, and then to share in the window in the IMAX release window. Especially as you get more studios interested in the same slots, it may be very valuable for us to have the opportunity to invest in the IMAX release window.

So I could see a day, Ken, where three studios want the same slot and you say, okay, make us a proposal. We're going to put up the DMR costs and share with us on some basis the recoupment. That is one thing that immediately comes to mind as something that would be positive. I think we have been running our business in the last several years after the North American exhibitors kind of went through that difficult time, in an extremely, extremely cautious way. I think while we are going to keep that conservativism certainly, I think there are opportunities that have been available that we haven't taken because we were cash constrained.

I'll give you another example, Ken, and just again not on the table particularly. But I think as the DMR results keep coming in and as it really looks like it's working, if somebody -- if a large theater owner wanted us to contribute the cost of our projection system and we participated on a joint venture where we got a royalty, a percentage of the gross from that IMAX theater, in many instances we think that could be very profitable -- that could be profitable. So there aren't specific plans, but Rich and I are talking generally opportunities that we think could develop out there over the next couple of years.

So a common dividend is way down the list?

As if our investors are really screaming for a common dividend; I don't know.

Okay, thanks.

David Marsh with Friedman Billings Ramsey.

Just looking at the refi, I know you guys probably can't say too much, but is there a certain rate at which it would not make a lot of economic sense to proceed with the refi and perhaps pursue other refinancing alternatives?

We have announced on previous calls that our plan was to reduce the debt level to a point at which we could refinance at attractive rates. That is one reason that we delevered during this recent period from the 170 to the 153. High-yield market conditions now we believe are quite positive. The CSFB index is at all-time records. We think it's the right time to go. Of course, there are rates at which we would re-evaluate the strategy. But we would not go now if we didn't think that the market wasn't the right time.

Just looking at the DMR calendar, is there any potential that one of the Christmas films this year could be remade and actually have one that would roll into the first quarter?

No, I think we made -- we had already made the decision that we were only going to do the one film this holiday season, which is the Matrix film, which we expect. We expect and hope that it will still be getting some decent play in the IMAX theaters as we move into the holiday season.

Then Disney's releasing its film, The Young Black Stallion, on Christmas Day.

Looking ahead into next year, I guess I will just add my two cents. I would vote for the Harry Potter film in June.

We have two votes. Everybody who asks questions has to vote for next spring. I'm serious, we like to hear what people's points of view are.

I think that would make a lot of sense and potentially lead to some more down the road. Thanks, guys, appreciate it.

Dennis MacAlpine with MacAlpine Associates, LLC.

Good morning. Based on what you have seen so far with the four films conclude that most of the attendance at the DMR films is additive as opposed to somebody seeing it again or seeing it for the first time; or somebody that would have gone back to see it again?

Again, the great thing about our business, and I'm serious, one of the -- it's not that people are asking about what gives Rich and I satisfaction, but our business is so dynamic. With Apollo, obviously it was additive. With Star Wars, six months later, obviously it was additive. With Reloaded on the basis of the research, indicated that an awful lot of the people initially had seen the 35 mm exhibition and come back to see it in IMAX. And as we moved out six, seven weeks, there were a lot of new, first-time viewers that were coming in and seeing it in IMAX and we view that that wasn't cannibalization because people weren't waiting eight, nine, ten weeks to see it in 35mm.

They were attracted because of IMAX. The precise measurement on cannibalization, we did some studies, it looked clearly -- on a market by market basis, it looked additive, meaning there was more gross available for the exhibitor and for the -- and in particular for the studio than if there was no IMAX release. Now the early, very preliminary stuff over the first five days, indicate again clearly additives and very little cannibalization which is extremely interesting and good news on a day and date film, but the jury is still out. This is the first weekend.

Based on Revolutions, do you think going forward that you are going to try and push the day and date release?

Day and date release isn't a religious belief for us. What we want to do is we want to see the IMAX network grow. If -- and it's like tuning a carburetor. If Warner Bros. or the studios and the exhibitors think that it is better for them the industry and better for exhibition to have, to stagger it, to have some films, some portions on the first weekend, another 20 percent, 30 percent on the second weekend, another 20 or 30 percent on the fourth weekend.

That's okay for us, we want to maximize their profits. It was our insight that you can make the most money through a contemporaneous release, and we believe that is so and we believe that will be demonstrated. But I think the most important thing is that exhibition and distribution make money through this strategy. Rich, do you want to add anything?

The only thing I would add is that the early results and I gave you the anecdote before, indicate that what Brad said, distribution exhibition makes the most money. It is our current belief that they are going to make the most money from the contemporaneous release which we are seeing now because you leverage off the studio's marketing dollars where as a later release like Star Wars you have to do marketing dollars later, but we will see what the data shows.

Have you -- or you alluded to a 55 percent split. Is your sense that the splits did not change between the regular theatrical and the IMAX theatrical on Revolutions?

I just use that Dennis, it's picking a number. That is really something that our noses are not into. It's really something that is case-by-case, Warner in negotiating deals with their exhibitors.

Have you gotten any sense from the, I guess it's going to be the movie distributor, that they would welcome you to come in and finance a DMR conversion?

Each distributor has a different profile. Some guys -- you go to a company that we're not doing business with right now, the Disney Company. It was one of our first experiences pre-DMR with Fantasia. When they were going to do Fantasia: The IMAX Experience in IMAX, the first thing that Rich and I said to Dick Cook is, we'll put up the money and we will share in the upside. Dick said to us, no, no, our intellectual property. We don't want to see any money from you and upside, downside Disney and we don't need your money. Other companies will approach it differently. Each studio has its own profile.

Thank you.

That is all the time we have for questions today. At this time I would like to turn the conference back to our speakers for any additional or closing remarks.

Are there any questions waiting out there?

Yes, there were other questions.

How many were there?

One moment, and I will get the number for you. It looks like we have eight other participants.

Why don't we take two more.

Tony Gikas of Piper Jaffray.

Just a quick follow-up for you. I would vote for Spiderman by the way in July of next year.

I was waiting for that vote.

Has the shelf gone effective? Can you give us a quick update on the timing of the debt refinance?

The shelf is effective, Tony. The debt refinancing will not be done pursuant to the shelf, so it will be done under 144A. It was more expedient to do it that way. What we announced is that we would be a filing the debt deal shortly. That is our current plan. Obviously this is a heavily regulated area so there is not much we can say about it.

Thanks.

One more question, operator.

Eric Wold with Merriman Curham Ford & Co.

Just a follow-up question. Is it still your thinking that you believe that a six to eight-week release window for DMR film is the right strategy? And then on that, since we've gotten votes for both Harry Potter and Spiderman 2, which come out about four weeks away from each other, if you did get both of those, I was just thinking off the top of my head, would you have to delay one of them or do you think you could shorten it to a four weeks away window?

Two things. We are still thinking that six to eight is optimum. We also think that some studios that we are dealing with would like that which means that when Harry Potter and Spiderman would be mutually exclusive, if you did day or dates. So you would have to delay one if you were going to do those two films. Other films you would not have to delay because they just sync up in terms of schedule and you can be contemporaneous on both.

Thanks a lot.

I think we are going to wrap up the call here and I'm just going to quote my partner, Rich Gelfond, who said some wise things to me this morning, which is, basically when we look at where we are we are extremely comfortable. We are extremely enthusiastic. We look at our business on a short-term basis and on a long-term basis. Short-term breaks into two areas, financial and strategic, and on a financial basis we are confirming our guidance that we been talking about the last year of 10 to 15 cents per share.

On a strategic basis we just knocked out $63,000 per screen on the first contemporaneous release of a Hollywood film in 35mm and IMAX which is just a phenomenal number. When we look to the long run, again financially and strategically, financially we see tractions. From our strategy, we see more installs, we see board momentum, we see earnings and EBITDA going up nicely into '04. We see nice responses from the studios as we look toward future visibility of film. We find ourselves both on the financial side and on the strategic side firing on all cylinders. With that, because it's an important call, I'm going to turn it over to Rich who I think has a couple more comments.

The only thing I would like to add Brad and it is consistent is that at the beginning of this year on our call for those of you who were with us, we kind of set out major goals for ourselves. They included, we wanted to delever and refinance our debt. We said we wanted a studio deal including our first day and date release. We said we wanted to launch and sell our lower cost MPX system and we said we wanted to earn between 10 and 15 cents a share. And here we are ten months later and I think would made a lot of progress in all those areas. I agree with you. I think things are going quite well.

Thank you everybody for joining us and if there are certain specific questions that people had, Steve will get back to them. Bye-bye.

That concludes today's conference call. Thank you for your participation.