Imax Corp (IMAX) 2006 Q3 法說會逐字稿

Thank you for standing by everyone. Welcome to the IMAX Corporation's third quarter earnings conference call. Just a quick reminder, this conference is being recorded. Now at this time, I'd like to turn the conference over to Richard Gelfond for opening remarks and introductions. Please go ahead, sir.

Good morning and thanks for joining us today for our third quarter 2006 conference call. Joining me is my partner, Co-chairman and co-CEO. Brad Wechsler. Also with us is our interim CFO, Ed McNeil. Our objective on today's call is to discuss with you in greater detail the strategic initiatives IMAX is undertaking to grow its business profitably for the long-term. Specifically, we will focus on how we expect our transition to digital to work and our accelerated efforts in joint ventures. We will therefore keep our comments brief on our operating numbers for the quarter ended September 30th, 2006. These results are discussed in both the press release we issued yesterday, as well as the 10-Q we will be filing for the period.

Before we begin, let me remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking in that they pertain to future results or occurrences. Actual future results or occurrences may differ materially from these forward-looking statements. Please refer to our SEC filings for more a detailed discussion of some of the factors that could affect our future results and occurrences, including the 10-Q we're filing today.

During today's call, references will be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. Discussion of management's use of these measures and reconciliations to GAAP measures are contained in the Company's third-quarter earnings release and our 10-Q. The full text of the earnings release, along with supporting financial tables, is available on our website, www.IMAX.com.

Please note that later on in the call, we will be referencing slides that are being simultaneously web cast on www.IMAX.com. To access the presentation, please click on company info, then click investor relations.

Let me begin by updating you on the SEC's and [OSC's] informal inquiries, including questions relating to the Company's timing of revenue recognition and where we stand in our exploration of strategic alternatives process.

First, with respect to the SEC and OSC, we are continuing to cooperate. If there are material developments, will keep you informed. We continue to believe that the Company's accounting is and has historically been in accordance with GAAP and PricewaterhouseCoopers LLP continues to support our position in this regard.

With respect to our exploration of strategic alternatives for the Corporation, on our last earnings call, we stated that the special committee of the Board authorized our bankers to explore conversations with parties that had expressed interest in acquiring IMAX at a lower valuation than initially sought by our Board of Directors. The same remains true today. Beyond this, there is nothing further on which to comment today, but to say if and when any material development occurs in this area, we will disclose it.

In terms of the third quarter that was completed on September 30, it was disappointing, primarily reflecting that the installations scheduled for Q3 slipped and will be reflected in subsequent reporting periods, beginning with Q4. Slippage is unfortunately not an uncommon occurrence. System installations can slip for many reasons, including delays in site selection, theater construction or the failure or delay of the client in getting the requisite building or regulatory approvals. Unfortunately, the timing of installations remains very difficult to predict because it is largely outside of our control.

The third quarter was also impacted by the lower-than-industry-anticipated box office performance of Ant Bully and increased SG&A, particularly in legal and expenses related to the strategic alternatives process, as well as non-cash charges and deferred taxes and litigation reserves. SG&A costs were approximately $1.2 million higher than budgeted and again reflect, among other things, the unusual developments of the SEC informal inquiry and the extension of the strategic alternatives process.

Nevertheless, consistent with IMAX's longer-term business potential, we did we did sign five theater deals in the quarter, bringing total signings for the first nine months of 2006 to 25. Our backlog at the end of September consisted of 73 systems with a value of $116.3 million. Despite a performance of Ant Bully, we should note that Ant Bully still did 14% of the domestic box office, our biggest percentage ever, and Superman grossed a very respectable $31 million, or more than 11% of the domestic box office on less than 1% of the screens. With respect to our other films, Open Season, which premiered on September 29th, has grossed $7.8 million to date.

Turning to the balance sheet, we ended the third quarter with $26.2 million in cash, cash equivalents and short-term investments versus of $32.5 million at the beginning of the year. Our borrowing capacity under our senior credit facility totals $26.1 million, subject to certain operating and borrowing base covenants.

Moving to the fourth quarter, we believe IMAX will realize between five and eight installations. The still reflects a significant amount of slippage, particularly backlog installation slippage. Specifically, there are six systems currently in backlog, which we expected would be Q4 '06 installs, and that will now end up being installed in subsequent periods. We note that, so far during the fourth quarter, a number of our clients are being impacted by slower-than-expected theater construction or permit approval process delays. We currently have 24 systems in backlog scheduled for installation in 2007 and an additional eight systems that could be installed as early as December of that year. While the slippage has remained a recurring and unpredictable part of our business, we do note that as these installations fall into subsequent periods, they should prove beneficial to our numbers.

During the fourth quarter, IMAX will be experiencing fewer sign-in installs than we would like, which has a great deal to do with the disappointing performance of a number of films shown at IMAX Theaters this year. Films are typically significant drivers of signings, particularly sign-in installs, which are installations that take place in the same calendar year as the signing, typically in anticipation of a high-profile film opening.

Excitement over the film slate is a strong incentive for clients who install quickly after signing and we did not experience that on as large a scale in the second half of this year as in previous periods, partly as a function of our first-half film performance and we believe partly as a function of Happy Feet becoming a 2-D release instead of originally planned 3-D release. Similarly, clients waiting to hear more about other issues, like the Company's process of exploring strategic alternatives and its transition to digital, can also be factors in clients not entering into sign-and-install agreements. We're hopeful that if we end this year strongly in terms of film performance, with the consecutive releases of Happy Feet and Night at the Museum, and then move into '07 with two of the biggest films of the year already locked up, Spider-Man 3 and Harry Potter 5, exhibitors will have a strong motivation to sign additional theater systems and then install in the same period as they sign.

I would like to take a moment before moving to film to make sure people don't lose sight of the Company's broader strategic accomplishments amidst the recent negative short-term issues we have just been talking about. We feel it's important to remember that the combination of MPX and DMR has literally transformed this Company over the last four years and the transformation has been dramatic. In the 10 quarters before we signed our first MPX system, IMAX signed deals for 48 systems. In the 14 quarters since we introduced the MPX, we have signed deals for 125 systems. The MPX has totally revitalized our system [sales] business and moved us from mostly museums and science centers to mainstream entertainment.

During roughly the same period of time, we've gone from a company that in 2002 was pitching Hollywood to distribute previously-released films to our platform to where we now regularly secure the biggest, most event-status blockbusters for conversion to IMAX year after year. We had deals for the release of Spider-Man 3 and Harry Potter 5 in 2007 before the summer of 2006 was even over. During this time, our cash and credit line have remained stable, we've financed our debt and our technology group continues to innovate, converting the first-ever 2-D to 3-D live-action Hollywood release back in June, and we're now working on a brand-new groundbreaking IMAX Digital System. It's hard not to get caught up in all of the recent negative news, however, some of the points just outlined are important fundamental business points to remember.

Let's move on now and look at our film slate in a bit more detail. Next week, we will release Happy Feet with Warner Brothers. This is shaping up to be a great family film with a fantastic cast, including Nicole Kidman, Hugh Jackman and Robin Williams. The early read on the film is positive.

In December, we will be releasing Night at the Museum with 20th Century Fox. This is our second film with Fox and we're pleased to note that it will play at many of our institutions, as well as the exhibition chains. It's actually our second day and date film with Fox and our third film with Fox, including Star Wars. It stars Ben Stiller, Owen Wilson and Robin Williams and looks to be one of the most entertaining films of the holiday season. Night at the Museum is also testament to our ongoing efforts to broaden our relationships with the major studios, and we're very pleased to be working with Fox on this adventure comedy.

Looking towards '07, we're optimistic for sure about the releases of Spider-Man 3 in May with Sony and Harry Potter and the Order of the Phoenix in July with Warner Brothers. As you will recall, the last installment of the series, Harry Potter and the Goblet of Fire, broke numerous IMAX 2-D box office records and grossed more than $20 million in 110 IMAX Theaters worldwide. Our first Harry Potter movie, the Prisoner of Azkaban, grossed $14 million in 88 screens. This Harry Potter should play on approximately 130 screens.

That is where the growing network really helps. We believe that we couldn't be better positioned than to have two of the largest '07 franchise films to build around next year. Today, we remain in discussions with multiple studios about other movies and we look forward to keep you posted as we fill out our 2007 film slate.

At the end of the second quarter, we made clear that we were undertaking an extensive review of our operations to determine how to best build the profitable growth potential of IMAX, and in turn, its value to shareholders. Let us now focus on where we are and how we plan to grow IMAX.

There are several metrics, including signings, film performance and aggregate film performance per-theater that we expect to continue to drive returns in the future. In addition, we have determined that there are initiatives we will be undertaking to meaningfully accelerate the growth of our network and drive incremental returns, specifically, we viewed the transition to a Digital IMAX as potentially hugely beneficial as we squeezed the disproportionately high IMAX print cost out of the system and provide operators and studios more flexibility in their programming options. We also have identified that increasing the number of joint venture arrangements is an excellent and very viable way for us to deploy capital, grow the network and benefit from our participation in the incremental revenues and profitability that IMAX drives both for studios and exhibitors. While we have referenced these opportunities previously, we want to be more detailed with you based on our review. Brad will cover the Digital then turn it back to me to discuss the JVs. Afterwards, we'll be happy to answer your questions.

Thank you very much, Rich. And for those of you on the web cast, you will be able to see the slides on the screen. First, I'm going to turn through the forward-looking statement language and the opening slide that says transition to digital and start on the slide labeled items to be covered. My goal in the next 10 minutes or so will be [to cover often] answering the following questions -- why now is the right time for IMAX to launch a digital product, why digital is a good thing for IMAX, what technology we intend to use and why, what is our timeline, and finally, how much will it cost and how we intend to fund.

Going to the next slide, which is why now.

IMAX started investigating a transition to digital in the late 1990s into the concrete step in 1999 with our purchase of DPI, a digital projection company which was one of the three initial licensees of Texas Instruments' DLP technology. At that time, we stated we would migrate to digital as soon as we could produce a digital image that was consistent with our brand and the expectations of our customers, one that created that IMAX wow. We concluded then that the technology was not yet developed enough to build an IMAX-caliber system.

Today, we view that digital technology has evolved sufficiently for us to focus on having an IMAX Digital Projection System in theaters by the end of 2008, the same year we expect to see significant deployment of conventional digital cinema.

So what makes this possible now? The answer is that a number of items, ranging from higher-resolution chip sets coming to market, as well as technology that we developed, such as a patent pending image enhancement engine that enables us to supercharge contrast ratios and brightness or take advantage of our higher resolution DMR output. In addition, several years ago, we started working on finding technology that would let is align multiple digital images into one seamless image that takes advantage of the unique IMAX geometry. Today, we believe the combination of improving third-party technologies overlaid with IMAX IP makes this the correct time to build a system and implement an '08 product launch.

As many of you know, there are a number of risks embedded in our digital strategy -- the risk of exhibitors delaying system purchases during the transition period, the need to finance the investments necessary for implementing the strategy and our bet that the IMAX Digital experience will continue to provide a compelling experience for the customer. We nonetheless believe that we'll be able to manage these risks and achieve a successful transition to the digital environment. Doing so is essential both securing and optimizing IMAX's future.

Turning now to the next slide, which is -- why is going to digital a good thing for IMAX. Transitioning from a film-based platform to digitally-based platform is a very good thing for IMAX Corporation. The reason is simple -- lower print cost should lead to more films, and more films should lead to more theaters and more profits per theater. This in turn should mean more profitability for the studios releasing their films into a larger network and for IMAX, whether through conventional system sales or through joint ventures.

So why does digital mean more film? On the next slide, I will give a numerical example, but the concept is quite simple. The only real incremental cost a studio pays to release a film at IMAX is the print cost, which the studio pays to Kodak for film and Technicolor for processing. These costs range from around $22,000 per 2-D print to $45,000, plus or minus, for a 3-D print. By definition, these are variable costs, not fixed costs. Every time a studio releases a film in an IMAX Theater, it has to pay $22,000 to $45,000 per run. If a run were to average $160,000 in box office and the studio retained a little more than $88,000, print costs would eat up almost 40% of the per-profit run. Remove these costs and the studios should have even more incentive to release their film to IMAX theaters than they do today as profitability per run should jump up dramatically.

Additional studio profitability means more films delivered per year to the IMAX exhibitor, which means more aggregate box office. This obviously drives the profitability of the IMAX Theater, and this is highlighted in the next slide, which we should turn to right now, which is the studio example.

In this example, I've used a 2-D film that gets released in 100 theaters and does an average gross of $160,000 per theater, or $16 million in aggregate. By way of reference, the last Harry Potter film grossed roughly $20 million on 100 screens.

On a film that grosses $16 million, studio profitability today is roughly $4 million, or 46% of film rental. The studio retains roughly 54% of the box office, out of which they pay marketing of approximately $500,000, and IMAX participation, shown at 12.5% of gross in this example, and print costs; again, in this case $22,000 per print, or $2.2 million.

In the digital world, with the creation and distribution of digital disks that will cost approximately $1000 per run, profitability is roughly $6 million, or 68% of film rental. Said simply, gross margin per IMAX run increases by almost 50% solely by removing print costs.

With print costs almost zero and studios incented to deliver more films, the economics also change favorably for the exhibitor. For example, lower print costs and programming flexibility should allow theaters to move from programming six IMAX DMR films per year to 10 films per year in a digital environment, thereby naturally increasing box office.

So turn the page, and I'm now going to move to the technical attributes of the IMAX Digital system.

The IMAX Digital solution currently incorporates two Sony 4K projectors per IMAX system. In our technology center in Sheraton Park in Mississauga, Canada, we currently have two Sony production projectors and have been to Japan several times in the last year to better understand the capabilities if the underlying technology. In addition, the IMAX system will have a high-bandwidth server to reduce compression artifacts and will be capable of receiving and processing content at a bandwidth near three times the DCI requirement. This means visually lost list playback of IMAX delivery content.

IMAX's proprietary image enhancement engine will dramatically increase the light available, reduce pixel artifacts and enhance image contrast. This engine will utilize a custom design parallel processing system capable of driving the overall quality of the 4K by 2K image.

In addition, the projection system will process [up-res] content, higher-resolution content, whether generated initially through film or digital using our current and improved DMR technology. We continue to invest time and resources into further improving IMAX DMR so that the image we unveil through the IMAX Digital system is even more differentiated, so the -- excuse me. We continue to invest time and resources into further improving IMAX DMR so that the image we unveil through the IMAX Digital system is even more differentiated from anything else in the industry. In the future, we expect that it will enable us to do real-time DMR; that means, by way that example, the Super Bowl live at IMAX.

The net effect, as highlighted on the slide, will be our ability to light up an IMAX-sized screen with IMAX's unique geometry and deliver a movie experience that will deliver that IMAX wow.

So moving to the next slide, resolution parameters. High image resolution, among other items, enhances realism. On this slide, we take a conventional 35 millimeter auditorium and pull the screen forward to simulate the IMAX MPX geometry in a retrofitted theater. Using third-party research, this slide represents the average human's ability to see detail. The seats located on the left of each vertical red line represent where the realism of the presentation begins to become compromised for each projector type.

In the case of 35 millimeter film projectors, for almost two-thirds of an IMAX-configured auditorium, there would be a lack of detail which results in fuzziness. In the case of a single 2K digital projector, the individual pixels on the screen become apparent for more than half the audience. This is what technicians refer to as a screen door affect, meaning it's looking like -- it's like looking through a screen door. As you can hopefully see from the slide, the IMAX image is not compromised for virtually any of the audience. This is true today with our film-based MPX system and will be true of the IMAX Digital system as well. However, one important thought I want to leave you with is that it's not resolutions alone that gives IMAX gives that wow factor. Items such as sound, theater geometry, brightness and lens design all coalesce to make the great image possible.

On the next slide, there is a grid which is the anticipated time line. I'm not going to spend a lot of time on the slide, but I would like to highlight that while the chart starts in the fourth quarter of '06, a number of items, including R&D on the projector, our enhancement engine, the screen management system and custom lens design, started at least 12 months ago. While many of the pre-launch targets could move, we believe the end of '08 as a launch date is quite achievable. In virtually all areas, we're out of the research mode and in active development on the core product with continuing R&D activity of the image enhancement engine feature upgrades.

A little more on R&D. Total R&D cost for IMAX Digital should be in the $17 million range, $5 million of which is already spent, or has been spent, in prior periods. The remaining $12 million, of which approximately $7 million will be front-loaded into '07, involves capital items, third-party consultants and in-house labor allocations. An important point -- at least 50% of the future costs are employee allocation costs and not incremental dollars.

Finally, as you can see on this slide, we would like to start field tests 15 months from now in the first quarter of '08 with a product launch in Q3 or Q4 of '08.

On the next slide, platform transition. IMAX realizes that a platform transition is potentially disruptive to the sales of our current film-based systems. In order to mitigate against this risk, IMAX expects to adopt a swap-out system similar in nature to the system now being used in conventional exhibition whereby a studio sets aside a portion of its print savings in a given year and makes those funds available to partially underwrite the cost of swapping out film-based systems for digital system through a funding mechanism known in the industry as virtual print fees, or VPFs.

IMAX is currently in conversations with two studios on virtual print fees and will expand those conversations to other studios over time. The approach is very similar to that implemented by Technicolor and Access Integrated in the conventional 35 millimeter space, whereby Technicolor or Access Integrated buys a projector from Christie, Barco or NEC, then contributes the system to an exhibitor in return for this studio agreeing to pay Technicolor or Access a portion of their print savings every time a digital disk is used instead of a film print, which would have cost the studio about $1000.

IMAX's intention is to try to negotiate similar terms to those in the 35 millimeter world. While the studios have not yet agreed, we believe that if they buy into the notion that an IMAX run generates at least $50,000 in incremental box office per theater, something that is quite clear from the empirical data, then virtual print fees are a net winner for the studios.

The key takeaway here is that the studios can help fund the buildout of the IMAX network by leveraging their print savings into a bigger ancillary market. This is a really important point that I want to dwell on a little. The primary business of the studio is to harvest a number of revenue streams from their films over multiple distribution platforms. All platforms that generate incremental revenues with low variable costs are the bull's eye of the studio business. Taking a portion of the print savings that a studio will realize in the digital world and using those savings to help underwrite the expansion of the global IMAX network should be extremely appealing to studios, particularly in a world where the IMAX brand and IMAX moviegoing experience helps to dramatically differentiate the moviegoing experience from in-home alternatives.

The last point I would like to make in this section is that, from an accounting standpoint, an obligation to upgrade future film-based systems as we sell them in the next couple of years could impact our ability to recognize some or all of the revenues on those film-based systems. Today, we are working on a structure that may enable us to defer only a portion of the recognition on the installation of a film-based system to the time of a digital upgrade.

As we move to the next slide, which is just a brief summary, in summary, IMAX intends to deploy a high high-end digital projector in the second half of '08. What will differentiate this projector from other, more conventional digital projectors is its ability to a light up a screen in the uniquely configured IMAX auditorium so that resolution doesn't break down and the audiences get that IMAX wow factor that they've come to expect. We plan to use two Sony 4K light engines, together with our own IP. The net effect of our business model going digital is reasonably simple. Our customers should make more money. The studios, because they will no longer have to pay for print costs that can easily eat up 40% of their profits, and the theaters, because the studios would deliver more films, driving aggregate box office higher. In turn, IMAX should share in their incremental profitability both directly through DMR fees and JV participations and indirectly through selling, leasing and JV-ing more systems.

Before I turn it over to Rich, just teeing up joint ventures. Hopefully, the review of our digital initiative has been valuable in helping you understand the opportunities that exist for IMAX on this front, and to provide greater detail on the other major component of our growth strategy. Let me now turn it over to Rich, who will take you through the joint venture initiative.

Thanks, Brad. In our previous earnings call, we announced that we intend to accelerate our rollout of joint ventures with commercial exhibitors. It is important to remember that this in no way is a replacement to our sales lease model, but a supplement. The primary reason to offer joint ventures to our clients is to add incremental momentum to our theater growth, to more quickly realize the benefits of network economics.

Over the past several years, our theater sightings have increased nicely based on our sales type lease model where exhibitors put up about $1.5 million in capital and they receive the benefit of virtually all the IMAX box office. We believe that by lowering the capital cost of the exhibitors by IMAX contributing the system with the exhibitor putting up approximately $250,000 to retrofit the auditorium, we can expand the network much more rapidly and receive a significant part of the IMAX box office from the theaters, as well as a piece of the IMAX film revenue from the studio. As Brad pointed out, and as I will discuss later, we believe the JV economics get even better for both IMAX and the exhibitor as we transition to digital.

Back in May of 2005, we announced our first significant joint venture with AMC, the second-largest North American exhibitor, to retrofit five domestic multiplexes with IMAX MPX theater systems. Under the agreement, we contributed the system and our installation costs, our partner contributed the retrofit costs and we both recouped our investments first and then shared the box office. We believe that the structure of that agreement remains very compelling for exhibitors because it shifts some risk capital to IMAX and is compelling for us because it essentially shifts IMAX theater economics more towards a recurring revenue model. We intend to structure our joint ventures similar to the AMC model going forward, although each transaction will likely vary based on the particular partner's needs. In this model you see on this slide, we would contribute and install the system at a cost of about $700,000. The exhibitor would contribute the retrofit cost of about $250,000. We will then negotiate for a recruitment corridor, let's say 75/25 in our favor, until we both recoup, and then split the profits 50-50 going forward.

We must continue to make exhibitors comfortable that the IMAX business is additive and not cannibalistic of the 35 millimeter business as they replace the 35 millimeter box with an IMAX box. In other words, the exhibitors are not interested in replacing a 35 millimeter patron with an IMAX customer, but in growing their overall traffic. Therefore, our deals are generally structured for us to participate in the incremental theater revenues. To date, the evidence has shown in both our joint venture at leased theaters that the IMAX business is almost completely additive. Despite this for purposes of the joint venture model, we deal with this by assuming that we negotiate some fixed portion of the theater's performance as cannibalistic in the range of 15% and not share in that part of the box office.

This slide presents what we are pretty close to the real world economics of a number of our existing joint ventures. As you can see, the returns are in the 30% range to the venture, even with some cannibalization. Depending on the deal structure and the film performance, IMAX can make a higher or lower return. It is important to note, that these actual results were made with only four DMR films in '05 and lower than average per-film revenues in '06. It is also important to note that while this slide is based of actual deals, not every deal will be structured the same way.

This next slide, we attempted to create a JV pro forma using the actual theater data collected to date, including average ticket price, box office, film license fees, concessions and film performance on all day and date DMR films we have ever released. In this pro forma, we continue to use the basic deal structure outlined above, even as we continue to run both deal structure and film performance sensitivities internally. Since we started collecting our engagement data in 2004 with Harry Potter 3, the average 2-D DMR films has grossed $132,000 over our network and the average 3-D DMR film has grossed $270,000. In the smaller MPX theaters, the average 2-D film has grossed $92,000 and the average 3-D film $150,000.

The accompanying slide shows the pro forma returns using both sets of numbers. Assuming we release three 2-D films and three 3-D films per year of theater's annual box office using the historical per-film number for all DMR films released across the network would be over $1 million a year. Using the number from the MPX theaters numbers only would generate $726,000 of box office, again, assuming six DMR films, three 2-D and three 3-D. If you inset these numbers for DMR film performance into the joint venture structure outlined above, you see venture returns of 58% and 33%, respectively, depending on whether you use film performance for MPX theaters only or film performance for all different theater types in our network. You could see how these economics would be very attractive to all concerned.

Perhaps the most important point to remember here is that these attractive returns to IMAX from the JV point of view do not include the revenue we received from the studios as part of our cut of DMR films. As you know, IMAX receives part of the IMAX gross box office, typically between 10% and 15% when a Hollywood film is released to our network in exchange to our agreement to convert the film into the IMAX format. Every IMAX JV that opens is in a new theater where we will receive 10% to 15% of the DMR film revenues, as well as our percentage of the joint venture. Using the historical numbers presented above, each new IMAX theater should allow us to receive about $90,000 pro forma each in film revenue in addition to our JV returns. This is based off the MPX numbers. Assuming an increase of 100 theaters due to JVs and our actual per-screen grosses above, this would provide IMAX with approximately $9 million of additional DMR film revenue per year. Hopefully, you can see how this network effect provides us with compelling economics as we accelerate the network growth by seating these JVs.

We expect to account for these JVs as we presently do for our operating leases. Income will be recorded for the JV, when earned, and the cost of our equipment will be depreciated over its useful life, currently 10 years. The depreciation issue on our film-based joint ventures will have to be reexamined with the release of our digital projection system. Film income will be recorded the same way as our current film revenue is presently recorded.

There are many important operational issues that we must assess as we roll out the JVs. These joint ventures are investments, not sales, that the Company will scrutinize closely. They are intended to supplement, not replace, our current sales and sales-type lease structure. We will only enter into JVs in North America and other politically-stable economies, such as Western Europe and Japan. We will only going into the right location, which should be easy to ascertain because we're going into existing multiplexes with documented attendance. We will only enter deals with credible financially-secure partners where the theater results are readily ascertainable.

Based on our initial discussions with financial advisers and exhibitors, we hope to sign between 20 and 30 JVs per year in 2007 and 2008, and then increase that rate as we transition to a digital projection system to around 40 to 50 per year. The digital system should lower the cost of our contribution by at least $100,000, and as Brad discussed, allow us to show more film and give our exhibitor partner much more operating flexibility. Because of the film flexibility, the digital system should materially increase the revenues per theater.

We have been pursuing various means to finance these JVs. At the first level, the Company expects to end this year with cash balances of approximately $25 million and expects that additional capacity of $26 million under our senior credit facility, although continued availability of the facility is dependent upon improved financial performance. We've had preliminary discussions with several lenders who have shown a preliminary interest in a facility to fund the JV rollout where IMAX puts up a percentage of the cost of each JV and the facility provides the rest. The JV should have a relatively fast return on cash with cash outflows from open JVs helping to fund future joint ventures. It is our belief that we do not require significant external funding at this time because as the JVs gain an operating track record, the pool of available capital should expand. In other words, if the first group of JVs performs as modeled, many lenders should be interested in funding an expanded rollout. Thus, our capital on hand, as well as potential sources, need only get us to a more established track record where it will be cost-effective to raise additional capital.

The broadening of the JV strategy makes sense to us to supplement our existing sales lease strategy, leading to accelerated network growth and drive our recurring revenue. We believe this direction is a relatively low-risk strategy with a potentially significant payoff using assumptions consistent with current performance.

Hopefully, this overview has enabled you to gain a better understanding of where the company is headed and our reasons for implementing both our joint venture strategy and our transition to digital. We strongly believe that very significant opportunities exist for us as we complement these initiatives. We're absolutely convinced that this strategy will prove both effective and financially sound as we work on growing the Company and generating value for our shareholders. We look forward to keeping your apprised of our progress. Thanks very much for listening, and we're now happy to take your questions.

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

I apologize if I've missed this, but have any of the five to eight installs slated for the December quarter been installed to date?

Have any of the five (MULTIPLE SPEAKERS). Yes -- have any of the fourth quarter '06 been installed to date?

Yes.

Yes -- and do you know how many, Ed?

It's one or two, at this point.

One or two at this point, Rich.

Okay. And Brad and Rich, how much of your time personally has been spent in the current quarter pitching the JV proposal versus the obvious demands on your time from the shareholder lawsuits, the accounting investigation?

Very little, but it has nothing to do with the shareholder losses or the SEC investigation. The JV business is a different business for us, Rich, meaning that our old business was selling locations and systems, rather than having an ongoing stake in the box office. And we made a strategic determination that, until we had the plan buttoned down, we weren't going to actively market it. That means the criteria I went through, such as the right location, the operating history, the right partner, how you're going to audit it, how you're going to police it. So we have not actively marketed it in a material way so we haven't spent a lot of time on that. With that said, we have marketed it to some extent at we've spent some time on it, and following this call, we expect to spend more time on it.

Finally, two years is a long time to wait for a digital cinema launch here. Do you expect it to increase demand for signings here in the next 12 months, or is the intention really more to give the current lessees the digital swap option and give them a reason to re-up when their leases come up?

Let me answer it two ways. First, it has nothing to do with signings per se. We think it's really good for our business, that our business becomes more profitable for everybody as we go digital, and therefore, we should be implemented a digital solution as soon as we can, and that means with the current technology, we've been doing it -- we've been working on it for at least a year, but sort of continuing to jump on it, accelerate it and get into the field 1.5 years, two years from now.

In terms of what it means for the customers, I think our belief is people can continue to make a bunch of money over the next couple of years. People can license film-based projector systems, and then know that when a digital system becomes available, that they could be swapped into a digital system. So, I think we don't view this as either -- certainly doesn't -- accelerating film-based signings or really detracting from film-based signings, as long as we know or our customers know that there will be a digital swap-out when the digital becomes available.

Ken Silver, CRT Capital.

I just wanted to follow up on what you just said, as far as digital swap-outs. The contracts you're currently negotiating, do they have digital swap-out language in them?

It's customer-specific. Generally speaking, no, but it has been raised by some of our customers and it's something that we are willing to negotiate about. One of the things we would like to do is we would like to be further along in our negotiations on the virtual print fees, because that obviously kind of coalesces with -- product coincides with the swap-out obligation.

I didn't catch entirely what you said with the last person asking questions, but is this expecting the backlog in this sense that, are people reluctant to install film-based systems without knowing or having some comfort from you that they're going to able to swap out into a digital system in the future on terms that are reasonably good for them?

To the contrary, I think by announcing this initiative and being willing to provide the swap-out, that we eliminate that risk to the client.

And have you had discussions with people whose systems are in the backlog about this?

No, I'm sorry. Either I'm confused or you're not being clear. In terms of current signings, this should help them because people are no longer taking a risk. We're willing to take the risk. In terms of the backlog, those are contractually binding obligations and this doesn't affect the backlog. We could choose to swap them out, and in instances, we will choose to swap them out, but they have contractually-binding obligations that are completely unaffected by this.

Okay, but they have the ability to cancel their order, if they want to? You can keep the money, I understand that, but have you (MULTIPLE SPEAKERS).

They don't have any ability to cancel their order. They have a binding contract. We've sued under the contracts and we haven't lost under the contracts.

Fair enough. They have the ability to not install the system. I guess I was just trying to understand whether you've had discussions with your existing customers who you've already negotiated contracts with about the swap-outs -- that's all I am asking.

We haven't, because we're announcing it today or this call.

Okay, fair enough.

Michael Kelman, Susquehanna.

Thanks very much. I actually had just a quick question regarding the revenue recognition with the JV structure. You talked about the incremental revenues and the incremental cost. How will that look on your P&L going forward? So, for example, using that example you used in the presentation, if there were $380,000 of incremental revenues, would you actually book the actual incremental profit and your percentage of it, or would you actually book the gross amount from the actual theater system? Could you help us understand that a little bit better?

It would be the actual incremental amounts, so it would be our cut of the incremental box office.

Would it be net of incremental costs, or how would you recognize that? And would the only cost that you show would be just the depreciation on your initial investment?

The thinking is that, the formula, in terms of the number on which we split would first deduct the incremental costs of running the IMAX theater. And then from that point, we would split based on our recoupment corridors.

Let me just give you -- follow through on just from what we've presented on the slide, and Ed, correct me if I am wrong. I think we showed like $380,000 of incremental revenue, $75,000 of incremental costs in terms of running the system at the joint venture level, so that would be around $300,000 of incremental profits. If we were entitled to take half of that, we would book $150,000 into revenue.

Now on the cost side, let's say we contributed a theater system that cost $600,000 -- I'm making that up -- and it had a 10-year life through the venture. Then we would I guess depreciate that straight line over 10 years, or $60,000 a year, so you would have $150,000 of revenue and $60,000 of cost, not including our DMR participation of 12.5% of the gross of the box office, which would show up on our film line.

Perfect. That was very helpful. And I just had one other question for you; it's regarding SG&A expenses. Given that the exploration continues and the SEC investigation is ongoing, should we expect that SG&A expenses will continue to run at current levels?

I think it's hard for us to say what the run rate will be. I think it is easy for us to say that we're going to have incremental legal fees with respect to the SEC and the OSC investigation, but it's really hard for me to see say that the run rate right now, you can extrapolate that on a quarterly basis. I don't think we know the answer to that.

Okay, thank you.

Eric Wold, Merriman Curhan Ford.

Obviously, sign and installs have been lagging recently because of the box office; I think that's one of the factors. What do you think the biggest driver of getting sign and installs back up and running? Is that really just a function of box office, or do you think of it irrespective of that, theater operators understanding the JV model and being comfortable with that and being comfortable with the lack of capital equipment they need to get into that structure, that would help them kind of over the hump, even a weak box office? Or, do you think the box office is really the only driver there?

I think it's really both, Eric. I think from the exhibitor point of view, as we've said during our remarks, it's a risk/reward calculation. One of the things that has kept some of the exhibitors away, particularly the large North American exhibitors that are owned by LBO firms is the outlay of cash. And I think the risk/reward calculus will change if we are contributing the system. So I would expect, as we educate people on that, the installs will come at a relatively quick turn cycle. On the other hand, there's no question that box office has an impact and we would be hopeful that, next year with Spider-Man and Harry Potter coming, that those are the kinds of blockbuster hits that people will want to be up and running for. So I think it will be both.

If you're looking at the 24 systems that are in backlog now to be installed next year, do you have an idea of how many, or even a wide range of how many potentially could be signed in Q4 of a sales-type lease that could fall into '07? And then, the eight that are potentially on the cusp to be installed by the end of next year, what are the gating factors there? Are those looking like January and February of '08, and they could pull forward a couple of months, or is it really just up to the theater operators' discretion of when you want us to pull those in?

On your first question, Eric, in terms of the fourth quarter, historically, there are some [sign] that move into next year, but I really don't know how to answer that specifically right now because I'm not aware of the install dates on the deals that we're talking about and finalizing right now.

In terms of the eight that we said could come forward, we have -- under our contracts, it's indicated that they would install in '07, but I think, given the history of slippages and our experience with slippages, which were talked about on this call, we're hesitant to predict that they're really going to make it. And it's a question of how strongly we want to enforce our contractual rights. So it's just difficult to access, which is why we couched it the way we did, Eric.

And then, lastly, on the 10 JVs that you think could be installed in '07, are any of those likely to be installed in the first half, or is that more of sort of a back half?

Again, it's very hard to say, but based on where some of the discussions are, I would expect some would be installed in the first half.

Tony Gikas, Piper Jaffray.

Could you tell us wards, were there any theater installs that slipped out of the September quarter or the December quarter that were due to the consideration by these theater operators to move to digital systems specifically? First question. Second question -- how long will it take to migrate all of your existing systems from film-based to the digital platform? Is this a multi-year transition, or is this something that occurs over the course of two or three years?

With respect to your first question, we're not aware of any of the systems that slipped because of people being concerned about digital. It's more issues like zoning approvals and the land or something like that. And with respect to the overall transition, the transition is going to take many years. It's not something that happens right away. And I think as other people have indicated with their questions, they're probably different segments, meaning certainly, there are those people that we're going to be signing now going forward, new customers. That is one segment which will be very interested in a digital upgrade probably sooner rather than later. There are backlog customers that have the signed commitments to go film, but we will probably at some point want to also go digital. And then there are other customers, our previous customers, the current installed base, and some of those have had the use of film-based projectors for many, many years, they may be coming to the end of their lease, and they may want to -- actually, they will be a source of customers, a new customer for us for buying a digital system. And there will be others that may have had a system for three or four years and they may want to talk to us to or negotiate with us some sort of swap-out arrangement. So it's going to take a period of time.

So if it's going to be a multi-year transition then, how long will you be supporting the film systems and content as you move to digital? How long until you realize those absolute print cost savings, if you will? Last question -- can you provide us any visibility for cash flow projections for next year?

First, with respect to running duplicative systems, again, it's a little different than the model in the 35 millimeter world. We don't incur a ton of print costs. This is the studios that incur the print cost. So I think, I would say that the there's going to be I would say a transition from now, would probably be about five years. But as the digital network grows, obviously, it becomes more compelling for the studios. Also the way the virtual print fees work, they tend to be better and better for the studios as time goes on, meaning that they keep the greater share of the print savings. So it's really sort of crossing lines. I don't know if that's terribly clear, but assume five years from now, we're three years from the initiation of our digital products. The second question?

Cash flow.

Cash flow. We really haven't outlined it specific enough to answer that question, Tony, although our preliminary look that we're giving suggests that this year so far, our cash flow is down around $8 million for the year -- not our cash flow, but our cash position is down from the beginning of the year to around $8 million. Now we starred around $32 million and we're at (MULTIPLE SPEAKERS) $25 million, $26 million now. The back of the envelope, and I really have to caution, it's very preliminary, suggests something like that, but it's too early to say.

Another $8 million decline for next year, is that what you're implying?

It's complicated, Tony, because there's a lot of pieces with JVs and we haven't modeled it all out. But I'm saying, back of the envelope, very early stages, that's kind of the neighborhood we're thinking of.

(indiscernible).

Thanks. Just talking about the bank agreement here, you have an EBITDA test. And I'm not sure if I'm calculating things, right, but it looks like you're getting close to the $20 million test right now. With the fourth quarter looking like it's probably going to be a negative comparison, can you just tell us what the availability is going to look like going forward?

On our model, as you say, there is an EBITDA test. The availability is subject to certain levels of performance. What we're projecting now obviously for the fourth quarter keeps us in compliance with the EBITDA test.

And a follow-up to that. The funding plan it looks like you're putting in place if you don't get somebody to buy the Company, it looks like it could be increasing the leverage as you do the transition into the JV plan. How much leverage are you willing to take on and what kind of leverage metrics are you comfortable with?

I think we specifically said that, in the short run, it was unlikely that we were going to take on significantly more leverage because we were likely to use our cash and use the revolver to the extent it's available. So it's more cash leverage, but it's consistent with the existing capital structure. And I think we would take on additional debt likely as the JVs prove out in the model and when it's prudent to do it. Again, the specific financing needs are somewhat in flux. If someone came to us tomorrow, a reputable client, and said they're willing to do a 40-theater JV, we might take a different point of view on it. But at the moment, we don't intend to take on significantly more leverage.

Other than using up your cash and using the bank line?

Correct.

Correct.

I think you have a great business plan, it's just a little risky in the short-term here for fixed-income investors. Thank you.

[Josh Clark], South Point Capital.

My question is on -- what do you guys think the end of the year cash is actually going to be? It seems like we burned close to $4 million in Q3, and that was without making the $7.5 million interest payment that we have due December 1. When I do that math, it seems like we're going to finish the year $20 million or less. Is that what you guys think?

No, I think we said during our comments that we expect it to finish the year at around $25 million, and that is what we expect. The fourth quarter is historically good quarter for cash collections for us. If you look back over the last several years and we have been a fairly detailed analysis, and that is our expectation at the present time.

When you guys work out your projections for the next couple of years, how long do you think this cash lasts if we burned $8 million or $9 million this year, whatever the number is, and we burn the same amount next year, do we have enough to make it to the end of next year?

From our point of view, based on the projections we've seen, there's no question we have enough to make it to the end of the next year. That is not an issue.

And how low can that cash actually go? There has to be some level where you get nervous or don't feel comfortable. Is there some number that you don't want to go below on that cash balance?

I don't think we should speculate that right now. I don't think that's in the foreseeable future.

(OPERATOR INSTRUCTIONS). Eric Wold.

Just a follow-up question, make sure I understand this. If I look at a '07, and specifically on the JV model, if you assume -- I know that each deal could be different from the others, but if you see the one that's in the slide, with the 75/25 recoupment fees to IMAX on a $700,000 investment, so I understand it's likely, unless that theater open sup the very, very first part of the year, that you would not recoup that $700,000 during '07 such that any JVs installed in '07 probably would not contribute to profitability in '07 but would be in '08?

That is correct, on a cash basis.

But on an earnings basis, on a GAAP earnings, it would contribute to the bottom line?

Sure, as soon as it opens, Eric.

Ken Silver.

I appreciate your sort of giving out some preliminary guidance for the cash balance at the end of next year. I think you said you thought maybe it would decline by $8 million. I guess the only question I wanted to clarify about that was, does that also anticipate some borrowings under the bank line at that point in time?

No, we're talking about total cash position. No, Ken.

Okay, thinks a lot.

(Operator Instructions). There appear to be no further questions at this point.

I think -- why don't Rich and I make some concluding remarks.

First, thank you very much for joining us. I think as we indicated in our last call in August, while we don't plan to give guidance, financial guidance going forward, we are trying to give greater transparency into our business, and particularly the operating levers of our business and the items that we look at, such as signings or signings of joint ventures or performance per film, aggregate performance per theater. And thank you for spending as much time as you did with us today, but the purpose is to give you insights into the operating levers in our business because at the end of the day, that's what translates into shareholder value over the long-term, and that's what we're trying to achieve.

Adding to what Brad said, I think one reason we decided to put the slides out on the Web was to enable you all to build a financial model based on the pieces that we put together on the slides. And I think, particularly on the financial slide, we're going to try and be accessible to help answer your questions to fill out that model. So you should please call Amanda Mullin, and Amanda will adjust the calls to Ed MacNeil, our CFO, or to Brad or myself, as appropriate. And, again, thank you for joining us.

That does conclude this call. Thank you all for joining us and have a wonderful day.