Imax Corp (IMAX) 2004 Q1 法說會逐字稿

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

Thank you, operator, and thanks all of you for joining us today. With me today is 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 filings for a more detailed discussion of some of the factors that could affect our future results and occurrences.

Our first-quarter 2004 results were issued over the newswire in the form of a press release earlier today for all of you to review. The full text of the press release, along with the associated financial tables, are also available on our Website, www.IMAX.com.

With that said, on today's call we will discuss the key milestones of the first quarter and our financial results, update you on the progress we are making implementing our commercial strategy, and finally update our guidance. However, before we get into the quarter, we want address what we perceive to be a source of frustration to some of our shareholders regarding the timing and nature of our revenues, profits and forecasts.

In looking at our financials, it is important to keep in mind that our results due to the nature of our recognizing revenue per theater systems upon installation will fluctuate from quarter to quarter. In the normal course of our business, each year we will have customers who for a number of reasons, including the inability to obtain required consent sense or approval or financial problems like the ones faced by many of our customers in the years 2001 and 2002, are unable to proceed with theater construction. At the point in time that it is clear to us that they cannot go forward and are in default, we terminate the lease. We get released from any future obligations we might have and recognize the revenue that had previously been sitting in the deferred revenue account on our balance sheet.

While this has been going on since the beginning of time at IMAX, the challenges faced by exhibitors a few years ago had a particularly large impact on our revenues and profit recognitions from the leases we have terminated. It is also important to note that our results for the rest of the year will continue to reflect items like these that stem from events from prior years. Our guidance in 2004 incorporates these items to the best that we can forecast them, but I want to stress that these things can be somewhat difficult to predict. However, people should know that going forward our belief is that as our commercial strategy gains traction, a lot of these variables will begin to diminish.

One key measure of our progress is new theater systems signings. As most of you know, signings today turn into revenue and profit upon installation. Clearly improved content will help us get more signings.

Our potential commercial customers, the exhibitors, want a predictable calendar of Hollywood event movies as they consider entering the IMAX business. Our 2004 film slate just completed is the strongest commercial release schedule in the Company's history, which we believe will be well received by existing and obviously importantly potential new customers. We are currently in their IMAX due diligence process.

Since the beginning of the year, we have secured Harry Potter & the Prisoner of Azkaban as a day and date release in the second quarter, added Cat Woman as a day and date release for the third quarter, and just today confirmed the Polar Express as a 3-D day and date release -- clearly a busy and fruitful period for us here at IMAX.

2004 began with Disney's release of the Young Black Stallion, an original large format production and prequel to the classic film, Black Stallion.

Then in March we released NASCAR 3-D, the IMAX experience with Warner Bros., which was the widest domestic opening of an IMAX film to date. The film set a record for highest grossing opening weekend for an originally produced IMAX film and is the fastest grossing IMAX documentary ever. Also impressive is that the film opened in the number eleven position among all commercial movies, the best opening spot for any IMAX release on only 68 domestic screens. It remained in the top 20 five straight weeks and has grossed nearly $10 million to date.

Importantly, the film has also had strong legs, typical of IMAX films as NASCAR 3-D has averaged weekend to weekend declines of only 13 percent over its first eight weekends. This past weekend grosses were actually up about 1 percent versus the previous weekend. The success of NASCAR 3-D can be attributed in part to the strong word-of-mouth around the film, which has helped draw moviegoers who are brand-new to the IMAX experience.

Next on the film slate will be the IMAX DMR version of the next Harry Potter film, the third installment of the Harry Potter film series. We have recently confirmed that this will be a day and date release to IMAX theaters in the United States, Canada and some international markets on June 4th. This will be immediately followed by the day and date release of Cat Woman starring Halle Berry on July 23rd. Releasing IMAX DMR films concurrently allows IMAX theaters to take advantage of the multimillion dollar marketing campaigns that event releases receive and, more importantly, generate incremental revenues for both the studios releasing the film and the exhibitors showing them.

This morning we announced that in the fall the highly anticipated holiday film, the Polar Express, will be released in IMAX 3-D. This is a milestone agreement with Warner Bros. pictures as it will allow us to make motion picture history by releasing the world's first Hollywood feature in larger-than-life IMAX 3-D. This holiday theme CGI stop-motion film based on the popular and award-winning children's book of the same title reunites academy award-winning directing and acting team Robert Zemekis and Tom Hanks whose previous collaborations have brought us movie favorites such as Forrest Gump and Castaway. By marrying premier Hollywood talent with the world's best 3-D images, this film will be a visual splendor and a progression in the way customers go to see blockbuster films. The Polar Express will be released day and date to both IMAX and conventional theaters on November 19th.

We think 3-D is a very attractive and untapped market, is highly incremental to box office draw and is very appealing to the family audience. Just think children who see the film at a conventional theater will have the opportunity to see it again in IMAX 3-D and grab snowflakes falling in front of their faces or duck as an oncoming train comes at them. We are hopeful that this will be the launchpad for an increasing amount of Hollywood content to be released in 3-D, particularly in IMAX 3-D.

The possibilities are endless. Picture fish swimming out of the screen into the audience and a film like Finding Nemo, or Buzz and Woody jumping off the screen in Toy Story.

The Polar Express will be digitally converted into IMAX's 15/70 format using IMAX 3-D and IMAX DMR conversion technologies. Based on the success of both IMAX DMR and IMAX 3-D, we believe Hollywood IMAX 3-D is a natural evolution of our business and that it will be received enthusiastically by the growing and evolving IMAX fan base.

Beyond blockbuster movies, we continue to produce unique programming for our theater network. During the first quarter, we secured the funding and began preproduction on Magnificent Desolation, our newest 3-D space film that celebrates man's walking on moon. Renewed interest in space exploration; the creative vision of Tom Hanks, who will host and coproduce the film, and the ability to experience this fascinating footage in IMAX 3-D all add enormous appeal to this film. We, therefore, believe it can have a significant impact on our financial results. In fact, we think that this can possibly contribute as much as Space Station did to our film revenue.

We feel very good about Hollywood's reception to IMAX, and we continue to actively discuss more projects with most of the major studios, especially films we are targeting for our 2005 slate. We are extremely encouraged by accolades from Hollywood talent such as Peter Jackson, who stated recently that he thinks "the future of theatrical presentations will move to larger event-type formats like IMAX."

In short, as most of you know, IMAX has a business model in transition. While the uptake has been a little slower than we would have liked, we strongly feel that we been hitting our strategic marks on the film side, which we believe will generate improved theater sales and financial milestones in the near-term.

Moving onto the first-quarter financial results. Our earnings were in line with our guidance, while our revenues came in at the low-end of our guided range. As we have discussed, quarterly revenues and earnings are dependent on theater insulations, the timing of which is primarily dictated by our third-party customers. The Company's revenues in the first quarter of 2004 are approximately $25 million compared to 33.6 million in the same quarter last year. Breaking down revenue further, systems revenue decreased approximately 28 percent to 16 million as we recognized revenue on two theater systems consistent with guidance versus eight installed in the first quarter of '03.

Included in systems revenue for the quarter was $4.5 million resulting from settlements relating to terminated lease agreements with customers who were unable to proceed with theater construction. We do anticipate the settlements will remain high this year as there will likely be a number of situations where the Company exercises its option to terminate and recognize revenue from agreements with the customers that have not installed systems in the past.

Film revenue decreased 34 percent compared to the same period last year. This decrease was expected and is largely due to the performance of Space Station throughout the first quarter of 2003. Theater operations revenue increased to 3.7 million in the first quarter of '04 compared to 3.2 million in the same period last year. The strong improvement in our theaters, which was even better from an operating income standpoint, is important as some potential customers do look at this data as part of their IMAX due diligence.

Other revenues were down 53 percent compared to the first quarter of '03. Gross margins was 49.7 percent of total revenue versus 47.6 percent in the corresponding period last year.

Moving down the income statement, SG&A was 8.3 million. R&D was 1.1 million versus 700,000 last year. We picked up about $900,000 in receivable recoveries, and as I described earlier, this is the reflection of working out deals resulting from prior year problems. Interest expense from the quarter was 4.1 million, down slightly as a result of our reduced debt level.

Also, as previously forecasted, we did recognize a loss of approximately $800,000 during the first quarter from the retirement of our senior note related to the refinancing last year that enabled us to extend our maturity until 2010. Excluding the costs associated with the senior note refinancing, we reported a net loss from continuing operations of 1 cent per share. Including those costs associated with refinancing, we lost 3 cents from continuing operations.

With that, let me turn it over to Rich.

Thanks, Brad. As Brad indicated, we remain very encouraged about the future, and despite the recent decline of our share price and the fact that the fruits of our strategy are not yet apparent in our financial results, we are highly confident and enthusiastic about IMAX's near and long-term potential. Our progress with our commercial theater strategy is evidence of that fact.

Our situation is simple. To create the large IMAX network that we envision, we need to reach a certain critical mass. We need to sell theaters systems, and we need to grow our network. Key to this process is to deliver strong economic return to potential theater customers by combining the strong revenues that IMAX, DMR and IMAX 3-D can generate with the reduced upfront and operating costs of an IMAX MPX theater system.

As Brad mentioned earlier, our 2004 film slate is strong, and our profits for 2005 and beyond are even stronger. 2004 is going to be a critical year for IMAX's commercial strategy as we have our best commercial film slate ever, including three day and date releases of big event movies. Strong success from any of these one releases can have a meaningful impact on theater signings and help drive us to our critical mass.

Let me take a minute to update you on the development of the IMAX MPX system and then discuss where we are with key North American exhibition customers. The first IMAX MPX theater has been up and running in a multiplex outside of Toronto where we have been testing the system and taking customers there as well.

One of the key questions that we asked ourselves in creating this product was, is this the IMAX experience? The answer is decidedly yes. In addition to using our own eyes to judge the new theater, we also conducted two focus groups to the theater, and the results were extremely favorable. 90 percent viewed it as a superior moviegoing experience, and more importantly, 75 percent said they would pay a price premium of at least $3.00 and 59 percent would pay a $5.00 premium to have the IMAX experience at an IMAX MPX theater.

Beyond allowing potential exhibitor customers to experience the product firsthand, we are also working with them as they go through their financial due diligence process. We have recently added some resources to our sales department that helped in the process, and the initial feedback has been positive. One of the big questions that we face from exhibitors and studios was, are the customers coming to the IMAX DMR version unique customers or simply cannibalized from 35mm? If it were cannibalized, then the economic model becomes more difficult to prove and the IMAX theater would only get credit for the incremental IMAX ticket premium, not the whole ticket price for the additional audience plus concessions. Importantly, we are able to demonstrate to exhibitors and studios through public data from EDI that the IMAX customer is additive and is not being cannibalized by the 35mm business. In other words, IMAX brings incremental gross box office.

We completed a study based on Matrix Revolutions that indicated that the 35mm theaters that are in the same market or the same complex as an IMAX theater showing the film were not negatively affected by the IMAX release and performed in line with how they have done historically and were expected to do. We have shared this data with both the exhibitors and studios, and it received strong positive feedback.

The central reason for our optimism about our near-term and long-term prospects is where we are with our discussions with the larger North American exhibitors. We are currently in active discussions with eight of the top 10 North American exhibitors and about a half-dozen smaller independent operators. These discussions vary from one theater to 10 theater deals. This is a level of activity that we have not seen since the late 90's. While we expect is a an acceleration of our signings domestically, the results of these efforts are already beginning to be felt as we signed deals for six theater systems in the first quarter, including four contracts for IMAX MPX systems. We have signed contracts for a total of 14 IMAX MPX systems since we unveiled the system about a year ago. Noteworthy IMAX MPX systems during the quarter included orders from two different leading cinema operators in St. Petersburg, Russia and one with an independent operator, Showplace Cinemas, here in Indiana.

Hollywood event films that have been digitally remastered through IMAX DMR technology have been drawing crowds of moviegoers to IMAX theaters in emerging markets like India and Russia, as well as established markets like London and Tokyo. IMAX DMR releases have also contributed a significant portion of the overall box office performance of films like the Matrix Revolutions in these countries.

For example, India's newest IMAX theater, the Prasad IMAX theater in Hyderabad, has reported attendance figures of over 350,000 people since it opened to the public in July 2003. Also noteworthy is that India's two IMAX theaters generated 26 percent of the entire gross box office for India for Revolutions. In Russia, BMC Media Ltd. signed a deal for its second IMAX theater and IMAX MPX system just five months after its very successful opening of the Nescafe IMAX theater in Moscow, which become the country's number one grossing screen for Revolutions. Overall premiums for Revolutions charged by IMAX theaters in international locations were up to triple the ticket price of conventional theaters.

International markets continue to represent a massive opportunity for IMAX, as a larger universe of potential buyers provides more diversified opportunity. International exhibitors have also been a bit quicker to adopt the IMAX MPX technology. We have identified over 600 potential international opportunities. It is important to remember that opening an IMAX theater in an international location is equally as profitable as a domestic contract.

Moving into guidance. We are reaffirming previously stated earnings guidance for full-year 2004 as the Company expects to earn between 25 and 35 cents per share before bond refinancing costs, and we continue to expect to install between 25 and 30 systems. We expect to achieve revenues of between $130 and $140 million for 2004. Given the fluctuations that Brad discussed earlier, we thought it was prudent to expand our potential revenue range. We expect gross margins to increase to between 48 percent and 51 percent of revenue and to spend approximately $35 million in SG&A and about $3 million in R&D.

In terms of guidance for the second quarter, we expect to install four to six theater system signings and have approximately $30 to $35 million in revenue. We expect gross margins of about 45 percent of revenue and to spend just under $90 million in SG&A and to have R&D expenses of about $1.1 million. This should translate into earnings per share of between 2 cents and 4 cents.

In conclusion, IMAX remains on track in achieving its goals. Compared to this time last year, we have a much stronger commercial film slate, and we have tangible evidence that our IMAX MPX system is compelling to commercial customers, including 14 signings before we even had a system to show. Ultimately we believe this success will feed on itself, attracting more content and driving more system signings as the economics are improving. And we believe this will create a widespread, profitable, domestic and international network of IMAX theaters for our shareholders.

At the same time, we continue to keep our eye on new and exciting applications for IMAX technology, such as the growing HDTV market where the combination of the IMAX brand and our content creating DMR technology presents a very interesting possibility. Of course, like any company, we may have short-term setbacks. But based on what we see right now, we have ever reason to believe that over the next few quarters we will see further traction in our business which should translate into strong returns for our shareholders.

In fact, five of the eight senior managers on our management call have bought IMAX stock during the previous quarter, which I think tells you where our management team thinks IMAX is going.

With that, I would like to open the call to questions.

(OPERATOR INSTRUCTIONS). Richard Ingrassia, Roth Capital Partners.

Can you tell me were there any theaters actually (technical difficulty)-- for the quarter?

Actually they were four theaters that closed. One was actually a simulator ride in Las Vegas. The race for Atlantis, and the other three is in a territory where we have actually been contracting in terms of some of our older theaters and museums and science centers in Japan.

If I remember correctly from fourth quarter, there was a contract for an installation that got delayed. Did that come in in the quarter, or did that get pushed out in the second?

Yes, it did. It was a lot in Israel.

And on the lease termination amount, how many actual (technical difficulty)-- what were the number of leases that were terminated, or was that just one?

Two or three, Rich.

Okay and last just CapEx for the quarter?

200,000.

Marla Backer, Research Associates.

A couple of questions on the film pipeline. Polar Express should be great. Could you talk a little bit about what the costs and the returns are expected to be on a 3-D film, a 3-D DMR versus a standard DMR project?

Yes, I think we should do that in raw terms only insofar as it has never been done before. I think our expectations, even seeing Harry Potter in 3-D takes a Hollywood film, and it makes it into more than of an event. Something like --

You mean in DMR.

Hollywood DMR. IMAX DMR makes it more of an event. When you move to 3-D, I think we feel it is a quantum leap in terms of what you are presenting to the public. In many ways, we do not know what is going to happen here, but we are pretty enthusiastic. Other people have analogized to the legitimate theater model where something plays and plays and plays and at a significant price premium.

Now our view it is, because obviously we have seen test footage, that the way it looks warrants that, and we are extremely enthusiastic. But at the end of the day, the public will determine that. Net net the cost -- a DMR film costs about a couple of million dollars. Take a 2-D film and convert it into IMAX. A 3-D film will be multiples of that. However, we think it will have substantially more legs, and actually the price premium that we receive, which is roughly about 35 to 40 percent for a 2-D film, actually we think it will be higher than that if the exhibitors and the studios want to go that route on a 3-D film. But we think net net it could be more profitable.

Okay. And you said before that you are currently in discussion for other possible projects in '05. Obviously it is too early for you to really give us any names. But you are talking to studio to studios outside of the Warner Bros. franchise, correct?

We are talking to all the studios that have large films, and you are right. We cannot give you specific names, but we certainly can tell you what is public knowledge in terms of the release slate of the majors in '05 in terms of the event nature of the 35mm films. You see films like King Kong, you see films like X-Files 2, Fat Man, Charlie & the Chocolate Factory, Star Wars, there are a whole number of very large films that will be released in '05, and those are clearly our targets. We are in conversations with the studios that release these films.

Eric Wold, Merriman Curham Ford.

Good morning. Two quick housekeeping ones first. Can you get the system backlog at the end of Q1, and then of the Q2 revenue guidance of 30 to 35, how much of that is coming from the terminated lease agreements?

Backlog at the end of the quarter was 64 systems on 138 million.

In terms of terminated lease agreements, I don't think we are going to break it out that specifically in terms of guidance. Because when you look forward to a quarter, you have a number of pieces. If it was all done at an exact science, you would not have to run the company. It would be on it would be on automatic pilot. But you will see some terminated lease agreements in the quarter. But since they are binary agreements that you have to negotiate with other parties, it is really impossible to predict what that number will be.

Is there any way you can give a range if it is closer to what we saw in Q4 of a couple of million, or is it more on the higher side than the 4.5 is on this quarter?

Again, if it was agreed to, we would have booked it already since you have to talk to another party. I don't think it would be responsible of us to try and guess. But I think certainly it would be in the millions.

Okay on a longer-term issue or point, could you talk about the new leases that are being signed now, the six you signed, not obviously specific with each one, but how the contract looks versus how it may have looked a year or two ago in terms of minimum guarantees, if those are changed or if you are going for more of a percentage and no guarantee?

And then secondly, looking at the theaters that were in operation in '03, obviously one of the big parts is obviously with a better slate of movies, those theaters theoretically have a better chance of performing above a minimum guarantee. Can you give any indication or even just a range or a percentage of the number of theaters in '03 that were contributing these payments above the minimum guarantee level?

On the per first part of your question, our standard pricing for our list price for our MPX projector is 1.5 million and minimums in the $35,000 to $50,000 a year range, and virtually all of the deals we have signed in that quarter, I think maybe with one exception, fell generally within that parameter, what we would call standard pricing.

Because the MPX is a lower cost product and it was priced that way with upfront and minimums, accordingly we would expect there to be a higher percentage of theaters over the minimum going forward than there were historically. But since none were installed in '03 and we had only two DMR releases in '03 and none playing on MPX systems, you would not have seen any variance from our historical overage rate, which was usually in about the 15 percent range.

Okay. Thank you.

Tony Gikas, Piper Jaffray.

I apologize if this first one was already answered. What were the revenues from the termination fees in the quarter and what could that be for the year?

Number two, could you give us an update on the free cash flow projection for the year? And could you also just explain again what the receivable provision was in the quarter?

On your first question, it was 4.5 for the quarter. Tony, we cannot give guidance for the year because of what I just said a minute ago that they are bilateral agreements. So I want to agree with the other side. You do not know what it is going to be, so it could be extremely misleading. So we don't want to put a number out there that we are not really prepared to stand behind.

There will be more in the quarter. We made that clear -- in the year, we made that clear during the call. In terms of free cash flow, Frank?

Your question was on receivables?

There were two questions. One was on free cash flow, and the other was the receivable recovery.

Right. Receivable recovery was basically a couple of receivables and net invested in leases where we had issues that were settled on more favorable terms than what we had thought when we put the provision down a number of years ago. Free cash flow, however, by itself is not something that we give guidance on. However, the first-quarter Q statement of cash flows will show cash flow from operations somewhere in the $5, $5.1 million range, if that is helpful to you.

I thought previously you guys had given guidance -- I could be mistaken -- on free cash flows for the year in the 5 to 10 million range. Is that correct?

No. I think what we said in terms of free cash flow is probably probably nearer to flat than it is to 5 to 10 million. I think also we have gotten questions about EBITDA projections in the year, and I think we had indicated it was mid-30s or a little higher than that.

Just another angle on the termination fees. What was that number for a trailing twelve-month period?

I think we are going to have to get back to you on that. We don't have it here.

Ken Silver, CRT Capital.

Good morning. Just to be clear, these revenues from termination are non-cash, right?

No, they are complete cash. What happens, just to be clear, is that they are non-cash. At the end of the quarter, you get them. But what happens is people pay us up front for systems so we get the cash. (multiple speakers). But we do not recognize the cash until the system is installed.

In these cases, it is clear they are never going to install the system because of issues related to them, such as they could not get the real estate they thought, they could not get a consent they needed, their financing fell apart. So we are recognizing cash that we have received.

Not in this quarter, previously?

But our financials always work that way because when we get the cash it goes into deferred revenue. So whether it's by installation or termination, it is irrelevant. We always get cash before we recognize it. That is not the way our financials work. You are asking the time of recognition, and there is no difference between revenue recognized from a termination than revenue recognized from an installation. It is actual cash we have received.

Okay. Is this a major reason why you are going to have the EBITDA in the '30s that your free cash flow is flat for the year?

No. Because again cash flow is a different measurement (multiple speakers) than earnings in our company because of the way we get upfronts and the way we have minimum royalties paid each year. They are not necessarily related.

Okay. Were the receivable provisions, that $1 million or so, was that cash in the quarter?

No. That was a reversal of provisions we had set up in the past.

Okay. The six signings, you said four of them were MPX. Were those all commercial, and can you talk about how many were domestic and how many foreign?

Yes, they were all commercial. Two were domestic and four were international. And a little color of the six, four were with exhibitors.

Okay. Did you get cash from them yet, or that is going to come in the second quarter?

Some of them we have gotten cash -- virtually all of them (multiple speakers).

We get a percentage of payments (inaudible) close to signing.

Last question. Brad, you quickly gave some of the films that are coming out from the majors in '05. Can you add to that list at all?

Sure, I guess. There is a film from Fox that is getting interesting buzz. The guy who did Ice Age called Robots. There is -- I don't know if it is Miramax -- one of them is doing I think the Green Hornet, which is an interesting film, and there is a film that will be a big film called from Sony called Ghost Rider. I am not sure if the Indiana Jones film is going to be in '05 or was pushed to '06. It was initially considered an '05 film, but I am not sure if it was pushed back.

Brad, I am not sure whether you mentioned King Kong.

Okay. All right. Thanks.

Peter Cashnik (ph), Harris Nesbitt.

I was just trying to get an idea of the lease termination for the 4.5 million. What was the profit contribution during the quarter from that?

I do not think we know it offhand. I think we would have to look at (multiple speakers) what was carried on the books (multiple speakers).

On the balance sheet cost side.

We can get back to you about that certainly.

Nick Spar (ph), Travlade & Company (ph).

Good morning. My question is regarding what is your interest expense scheduled to be for this year?

Around 15 or so.

15 million. At this point, excluding termination fees, if I just back that out, you guys are actually generating negative EBITDA. Is there any concern on your part that you might not be able to make the interest payments this year or going forward?

One second. We have about $35 million in EBITDA we are expecting this year. We are not generating negative EBITDA this year.

But in this quarter excluding --

Termination bookings have nothing to do with cash. We have gotten that cash already -- sorry for being a little bit aggressive on this, but it is really important you understand this. Termination payments are the same as installs. We have gotten the cash. (multiple speakers). We have over $20 million in cash at the end of the quarter. We have a $20 million undrawn facility. After interest payments, we expect to be cash free neutral this year. There is absolutely no concern we have that we will not be able to meet interest expense this year.

Okay. But going forward past that on the current run-rate, because you have already received the cash from the termination fees if I am correct, so that is on the balance sheet already at $23 million, call it 24 million including restricted, on a run-rate of Q1, you're not generating any operating profit?

I think it is fair to say that if we never sold another system in our company and never leased another film, our SG&A and interest costs would eventually eat us up. And at some point in the future, if no cash ever came into this Company, we would have a problem. But we feel there is cash in the Company, and every time we look at our books, we see cash coming into the Company. So we do not share your concern.

I would also add you are mixing up numbers because you are saying cash flow neutral after interest expense.

No, that is --

That is what we are talking about cash flow neutral after interest expense. If you back out interest expense, we are quite cash flow positive. So I really don't understand the point.

I agree with Rich. I gave a bad number before. Net interest is about 16.3. Just want to clarify that.

16.3.

And we are predicting stable cash for the rest of the year.

I guess I would add since we have six signings in the quarter, of which we got cash, and since Brad's analysis forgot to mention we get ongoing royalties from all of our theaters, we get ongoing maintenance fees from all of our theaters. You know (multiple speakers). The lawyers would probably smack me for being too direct, but I would not lose a minute's sleep about our ability to pay our interest expense.

But just based on the recurring royalty, the maintenance from the theater base , that is not covering even -- would that cover even your SG&A and R&D?

Well, our reoccurring cash flow is around 25 million a year. We are projecting 30 to 35 signings. Using Brad's point, probably if we did not have any signings for the next two years, we would downsize our SG&A and our R&D a little bit if we had no business whatsoever for two years. But we don't really think that is a likely result.

But that 25 to 35 million in cash flow, that includes termination fees, which is cash that is already received, correct?

No. (multiple speakers)

That is recurring. I am sorry. You might want to call Steve Abraham, our Head of IR, to get sort of a more basic understanding of our cash flow.

Jessica Brewer, Credit Suisse First Boston.

Not to be left out of the party on the contract cancellations, can you just tell us at what stage those systems were at when they were canceled? Did you take back equipment from those, and is that equipment that you can then remarket?

I am just going to give you a general comment. Systems terminations have been a part of this business for 10 years. Because people think they are going to build a system, they give us the money upfront, and then it turns out for whatever reason, their financing, their approval, they do not do -- they do not it. In some cases, although rarely -- no, it is 50-50. Like you ship the system and as part of the agreement you take the system back. In some cases, they just paid you money, and you just recognize it at that point in time.

In terms of in the quarter, Frank, I do not recall whether we took systems back or not during the quarter.

I think in one or two cases we took systems back, which we plan on remarketing.

The point being that this is just pure revenue in your pocket. You never really had to deliver anything for it.

Absolutely correct.

The second part of my question is on the installs. It looks like for the first six months you are going to do somewhere between six and eight installs, but the full-year number is 25 to 30. Typically you do not do that many in the third quarter, so I am wondering if you are expecting sort of unseasonally large third quarter in installs, or is there something in your backlog that is telling you are going to do 15 to 20 in the fourth quarter?

I think we are more fourth quarter. Again, I think the third quarter, as you say, is never a really strong quarter in terms of installs, but I think it will be okay. But I think it is the fourth quarter where we expect a significant number.

It is a really good question, though. One answer to the question is because of the MPX system, which is a retrofit product and has a much quicker turn, the lag time between signings and installations is much quicker. So several of the discussions that we have going on right now are even to take existing theaters and open them up before the end of the year, which is something you never could have done before you had your MPX product.

All right. So that goes to my second part of the question then. Potentially in that 25 to 30 number, are a few theaters that are not even in your backlog today?

There are a few. Not a huge number, but there are a few.

Bishop Jean (ph), Wachovia.

I just wanted to move the discussion to two things. One, just for the record, we had the big discussion about EBITDA. Would you just state your EBITDA for Q1 versus Q1 '03, please?

Yes. For Q1 '04 it is about 5.8 million and versus about 9 million in the prior year.

Okay.

Because of eight installations last year versus primarily the two this year.

Okay. Secondly again to the slate of products for both 3-D and DMR, DMR looks like it is focusing more on an adult action where traditional IMAX 3-D still seems to -- with the new and exciting releases still seem to have a kid focus. Because of the premium that is required for kids, at what point do you try to take more 3-D away from the kid -- may be targeted more at adult? And I say this with the great Space Station and NASCAR notwithstanding.

That is a good question. Some of it is technology driven. Right now it is easiest from a technology point of view to take them that are created in computers in 3-D like Toy Story or Nemo or Polar Express and convert those into 3-D IMAX images. We are working on a technology that takes 2-D live-action, which is the Matrix or such as King Kong or whatever that would enable us to turn that into 3-D imagery, which is more consistent with the question that you asked. But that is not ready for primetime yet.

Okay and then lastly going to the Toronto study, cannibalization versus unique customers, do you have plans a) to release more details of this study on your Website, etc.; b) replicate the study, broaden the study so we get more of a feel of the IMAX product on customers?

Yes, I know. I think we will replicate the study because I think data is -- obviously we have been doing a lot of research in the last year, and I think we want to continue to do a lot of research because I think we want to be really as transparent as possible, especially in dealing with these studios and the exhibition chain.

I think what Rich described and what we really did is we created a control group. We looked at how blockbusters perform, a whole group of them in given cinemas and as a percentage of revenue in the BMA, as a percentage of revenue nationally, and from there created a band of what one would predict would be the revenue from 35mm from Matrix Revolutions. And then we actually looked at what the revenues from 35mm were in the markets for the IMAX theater where it was released, and actually you did not see any real cannibalization or any lowering of the 35mm revenue. What you did see was significant additive IMAX revenue, and that was done in a very very detailed fashion with reams and reams of data.

And the nature of the boring down is when we talk to a Regal or an AMC or a Lowe's or Warner's or Fox or whatever, we can spend hours and hours on them understanding every aspect of the presentation and the data, the results in it. And really I think those studies have been sort of a bellwether in I think changing the nature and tenor of our presentation and the reception we feel we are getting both from Hollywood and the exhibitors.

I think at our investor day we will spend a low spend a little more time explaining the background of the data, and anybody who is going to be there, certainly we would be happy to go into more detail on it.

Eric Wold.

Just a couple of follow-up questions. Of the four to six installs you are guiding to for Q2, how many have been installed so far this quarter?

I don't have that number.

I don't know right now, but we feel pretty good about it. We monitor the situation pretty carefully.

Do you know of any that have been installed?

While we are talking, Frank, if you have a list of the ones on the schedule, I will look at them and I will (multiple speakers).

We will do that.

Secondly, last question, you mentioned at the beginning, you were in talks with eight of the top 10 North American dealer operators, either one) if you feel comfortable disclosed the two that you are not in talks with, and if not, maybe detail if that was your decision not to be talking to them because their theaters don't meet your criteria. If that it is their decision, and if it was their decision, maybe what the reason for it was?

The (inaudible) ones were not our small market operators, where it is not obvious where IMAX theaters would fit into their plan. It would not be fair to say their names.

That is fine. I just wanted to make sure it was your decision, and if it was theirs, what the reasoning for that was. Perfect.

Ken Silver, CRT Capital.

Sorry, Ken. Before you go, Eric, one or two are already installed, and the rest are in progress at different stages. Go ahead, Ken. Sorry.

No problem. You mentioned this briefly a few minutes ago. Are there costs associated with these lease terminations that are embedded in your P&L?

Not cash costs but there are -- often there are balance sheet carrying costs.

Not cash costs but in cost of goods sold, there is something -- they are in there?

Correct.

Someone asked about a margin. Can you give us any sense of the margin related to this?

I do not think we can do that off the top of our heads.

All right. And then --

The margin is -- you know I think the margins are high.

Are they similar to the margins on your installs?

Yes, they should be.

Yes, because if you think about it, again it is conceptually not that different than an install. Where you shift the equipment, you are keeping the money, but you may or may not be getting the system back, and the system has a carrying cost on your books.

Okay. And then I know you don't want to talk about or give guidance for a good reason, (inaudible) whatever more in termination revenues you are going to have. Can you talk about how many lease terminations you are going to have this year?

No because you don't know who is (multiple speakers) installing or who is going to negotiate with you.

Just to give you a little color. We have a pool that we look at where different events could create a termination. So we do not know exactly who it is going to be, we don't know exactly what quarter, we don't know exactly the amount, but we can make what we feel are pretty reasonable estimates of what we think the aggregate is, but we are not comfortable sharing that.

One analogy that may make it easier for people to think about is a much larger capital goods company that ours, but someone like Boeing where people pay money for aircraft engines and then whatever reason for aircrafts, their needs change. They don't think they need as many planes. They cannot finance them, and they will have paid money and have a contract,and then they will terminate that agreement.

One of the things that IMAX sells in addition to equipment is kind of a territory. When you book an IMAX theater, you get some kind of territorial exclusivity. So someone may say, gee, I want to go in Singapore on this quarter, and then they do not put it together, and much like the aircraft example, they will have paid us for their "slot," and then they could not finalize it, and then we recognized the revenue. And then, of course, we can resell that slot in much the same way Boeing can resell the aircraft.

Okay. All right.

John Hudson (ph), Brickalora Capital (ph).

Just in the first quarter, you said you installed two systems. About how much revenue did that generate?

Somewhere in the range of between 5 -- just a little bit over 5 million.

Okay. And then I was reading through the K and I noticed on the inventory on the balance sheet there is 18 million at least at the end of December of finished goods inventory, and I am not really sure why you have any finished goods inventory. Is that just the systems that are waiting to be installed?

That is correct. And also if we take back -- when we take back the system in those instances where the terminated doesn't go back into that line on the balance sheet?

It would go there. We would take a look at it and see what the fair value is in terms of bringing it back. So there is no general rule, but that is exactly where it would go.

Yes. Remember we have a backlog, so when we build against our backlog (multiple speakers), that is in inventory. Remember again, though, frequently we have received a lot of the cash, which is in deferred revenue.

Right. I guess what I was trying to figure out is when you actually build the system, do you wait for the guy to say, okay, I have got my theater ready. Send it over.

No. Typically you build them in advance. But we have not been building a lot of systems over the last several years because when North American exhibitors experienced their problem years ago and did not take delivery, we had a fair amount of inventory. So we have not been investing a lot of cash in our inventory.

Okay. And then lastly, Rich, I think you mentioned that you have an MPX demo theater outside of Toronto now. Is that something that we can go visit?

Not yet, but we hope to have something up in Harry Potter time that you can go visit in about a month.

So this is more a system and a warehouse type thing for customers?

It is system and a prototype in a theater but for customers. (multiple speakers)

It is in a multiplex for customers.

Doug Demuse (ph), Whitney & Company (ph).

Can you tell me how much revenue or deferred revenue was picked up through the six signings?

Do you know that, Frank?

I don't have that. We will get back to you.

Someone will get back to you on that.

Okay. Thanks.

Richard Ingrassia.

It was asked and answered. Thanks.

At this time, we have no further questions. I will turn the call back over to Mr. Wechsler.

I will just say a couple of brief closing remarks, and then Rich can add if he wants. Just because of the nature and the tenor of some of the dialog and some of the questions, you know why are we all doing this? We are in the business of making money, making money for our shareholders. In particular, Rich and I are the two largest shareholders in the business.

A couple of years ago I guess we identified what we considered to be a very significant opportunity in terms of transitioning our business model to a more commercial one, which is based on Hollywood films on the one hand and a lower cost of entry for our exhibition customers on the other. So as we have discussed, it is a business model in transition. We think it is a business model with tremendous potential.

I think what a lot of people are reacting to is, on the one hand, while I think Rich and I are pretty sanguine and pretty comfortable about the fact that we are hitting our strategic mark, I think we have been hitting them slower than we would have expected. We may be six, nine, maybe even 12 months behind in terms of where we thought we would be in rolling out.

But when we look forward over the next six months, when you see films like Harry Potter, a huge film, followed by Cat Woman, followed by Polar Express, and we look at the '05 slate and the traction that we are getting with the exhibitors, we become extremely sanguine on an operating basis that we are doing everything right in terms of bringing about this transition, which we think has rather dramatic strategic and financial upside. I think part of that is the nature of the tension that you are hearing in some of this dialog.

As Rich has said many times in the past, capital markets and operations do not always correlate perfectly, and I think we are feeling we are in one of those zones where the people on the inside and what we are seeing in terms of operating the business on a day-to-day basis is not being reflected in the capital markets because the stock has gone down a specific percentage over the last several months.

But you get these periods where things in our view -- were things disconnect. You can see it the other way at different times in other companies where stocks flying high, and you have got worms eating away at the inside of the Company. We think we've got just the opposite going on at IMAX right now.

I was actually going to say the same thing as Brad but in a different way, which is that one of my favorite times, Brad knows this, is when we know something or we have a feeling about our business that the world does not share because it puts me in a very good mood to know that there are good things coming down the pipe. And while you cannot guarantee that, my perspective on the situation is that about a year ago when we announced the Matrix films and they were coming, I think the capital markets and to some extent the company said this is like a lightswitch, and this goal of building the network is going to happen very very quickly.

And what happened instead, somewhat to our disappointment and certainly the capital markets' disappointment, is a lot of the exhibitors said, we want to see the data; we want to see more founds. Well, we just put the data together in the last few months. We put up the MPX projector for people to see, and we got a very very strong film slate for this year in place right now. And I think what we are seeing on the inside is it coming together very nicely. And again, whereas I think the capital markets were a little ahead of themselves, saying it is going to happen tomorrow, I think the capital markets are now saying, uh-oh, is it ever going to happen? (multiple speakers).

Can we pay the interest? And I think from our prospective on the inside, we all might have been a little overly positive a little bit early, and I think we are being a little bit over negative right now because from my bed, and everybody will place their own, I think it is going to happen.

With that said, thank you very much.

We thank you for your participation in today's conference call. The conference call has now concluded. You may disconnect at this time.