IMAX makes a dramatic comeback

Indiana Jones, Batman and The Mummy may be the characters that come to mind when you think of movie icons angling to make a comeback at theaters this summer.

But the biggest marquee name promoting a sequel isn't fictional.

It's IMAX.

The company known for its giant movie screens and rib-rocking sound has begun a construction boom that will increase the number of IMAX imax venues in North America nearly 80% by the end of 2009 as it outfits new and old theaters alike with its proprietary digital projectors.

That's part of a larger plan to win back the confidence of investors, theater owners, Hollywood studios and consumers following a period marked by steep losses, a failed effort to sell itself, and questions about the integrity of its financial reports when a Securities and Exchange Commission inquiry led to restatements.

"Some people wrote us off as a dinosaur," says co-CEO Richard Gelfond. "They said, 'Until we see where IMAX is going, we don't want to do business with them.' "

The campaign by Gelfond and fellow co-CEO Bradley Wechsler will hit its stride in July when AMC Entertainment theaters in Baltimore and Washington, D.C., open IMAX venues that will be the first to deploy its new digital projectors.

If the digital theaters appeal to the popcorn crowd — people typically pay an additional $3 per ticket for an IMAX film — then Hollywood studios likely will make more big releases available to IMAX. They likely will find it especially appealing for the growing number of flicks being made in 3-D.

Potential blockbusters that will appear in IMAX this year include Speed Racer, Kung Fu Panda, The Dark Knight, and Harry Potter and the Half-Blood Prince (which will include some scenes in 3-D). Next year's slate includes a 3-D version of DreamWorks Animation's Monsters vs. Aliens.

IMAX also is talking to sports leagues — executives declined to say which ones — about beaming live broadcasts on the supersize screens.

"IMAX has developed a differentiated experience, which we like," says AMC chief executive Peter Brown. "We'd like to have it be that you could come in to one of our (multiplexes) and have a variety of experiences at all sorts of different price points."

Gelfond and Wechsler hope other theater owners will share that view: Their company can grow only if exhibitors cut deals to have them build new IMAX theaters or retrofit existing ones.

It will take time to convince some skeptics that IMAX can pull off its ambitious transition to digital.

IMAX paid $17.1 million last year in interest on $160 million in long-term debt, which must be refinanced at the end of 2010. Those payments contributed to the 61% growth in its 2007 net loss vs. 2006 to $26.9 million on revenue of $115.8 million, down 9.3%.

"Solvency questions are the thrust of the bear story on the stock," says Roth Capital Partners analyst Richard Ingrassia, who had soured on the company until last August. "They still have a couple of quarters of hangover from the period when exhibitors weren't ordering anything and IMAX didn't have a digital product to offer them."

IMAX may quell some of those concerns today when it unveils two deals providing access to as much as $36 million in additional funds, bringing its total spending power to about $55 million.

Its largest investor, Douglas Telecommunications founder Kevin Douglas, agreed to pay $18 million for 2.73 million new IMAX shares. When that closes, expected later this week, Douglas will own nearly 20% of IMAX. As part of the private placement, he has agreed not to increase his ownership stake or seek a change in control for at least five years.

In addition, IMAX's bank, Wachovia Capital Finance, increased its line of credit to as much as $30 million from $12 million currently and removed a covenant that required IMAX to generate an undisclosed amount of cash flow.

The company also said in its annual report that it's addressing eight auditing problems identified by its accountants, PricewaterhouseCoopers.

Some analysts say that IMAX has already won back their confidence.

"At this point, they're as clean as a whistle as they can be," says Research Associates analyst Marla Backer. She adds that IMAX's resources to outfit new theaters "is not a concern in 2008, 2009 and probably not in 2010."

During that period, she and others say, IMAX will generate sufficient cash to keep it from joining Cinerama and Cinemascope in the graveyard of widescreen movie formats.

Drama has been building for years

"They're getting great movies," says Merriman Curhan Ford analyst Eric Wold. "The new theater pace will be huge over the next two years. And I predict them turning profitable in the fourth quarter and staying profitable ever after."

That would be a suitably theatrical ending to a drama that started as early as 2000.

"We knew that there was a structural flaw in our business model — prints were disproportionately expensive in IMAX," Wechsler says. Studio payments for "prints in the conventional (film) business are about $1,000 apiece. In IMAX it's $22,000 for a 2-D print and $45,000 for a 3-D print."

What's more, celluloid was starting to become anachronistic. Hollywood studios and theaters are converting to digital with films delivered on relatively small hard drives.

"When you have platters (for celluloid IMAX films) that weigh 250-to-500 pounds, you need forklifts and storage," Gelfond says, "It's rather Rube Goldberg-esque."

IMAX had to join the rest of the industry and convert to digital. But it couldn't just buy equipment designed for conventional theaters. The bulbs, tiny mirrors and other mechanisms used in most digital projectors didn't generate enough light to completely illuminate IMAX screens.

"We had to wait for the technology to catch up," Wechsler says. "There were significant hurdles with something as simple as the color black, which is very important."

Faced with that uncertainty, and with dwindling orders to build new IMAX venues, the co-CEOs in early 2006 hired Allen & Co. and UBS to look for a buyer.

"We felt that the changes (at IMAX) would have been painful in a public context, and we were right," Gelfond says.

The pain became acute that August. IMAX shares plummeted more than 40% the day after it reported that it still hadn't found a potential buyer — and that the SEC was investigating a possible accounting irregularity.

Regulators questioned IMAX's decision to record revenue from theaters it was hired to build before they opened.

"It put tremendous internal stress on the organization," Wechsler says. "The time and effort involved (to sort out the issues) were a significant cash drain. In terms of exterior perceptions, it was another cloud around IMAX."

Some shareholders filed class-action lawsuits; several are still pending.

Investors "had a huge short position (a bet that IMAX shares would fall) and we wanted to prove them wrong," Gelfond says. "The challenge was daunting, but there was only one way to go, which was up."

A breakthrough to go digital

They needed a light to get IMAX out of that dark period, and around mid-2006 technicians seemed to have a promising solution to the screen-illumination problem. They developed a process, and software, that fused and enhanced images from two projectors.

To preserve the trade secret, they called the technology a "flux capacitor" — a joking tribute to the device that made time travel possible in the 1985 hit Back to the Future.

The first big test for the $15 million development project took place in a Toronto warehouse. The company created a makeshift IMAX theater and hired a research firm that invited people to watch a series of clips and answer the question: Is this IMAX?

Satisfied with the initial response, the company in mid-2007 made a deal with AMC to turn one of its screens in Toronto into an IMAX venue and show the prototype to technicians from studios and theater chains.

As the positive reviews rolled in, IMAX had to grapple with one more problem — and a big one at that: Its business model had become obsolete.

IMAX required theater owners to pay the company about $1.6 million to build and equip a venue, and then let IMAX collect as much as 5% of its ticket sales. IMAX installs curved, wall-to-wall screens. Seats also are configured to ensure that virtually everyone can see the entire image — which is especially important for 3-D films.

But theater owners didn't want to take a risk on IMAX while it was in trouble, and following disappointing ticket sales for films including V for Vendetta, Poseidon, Ant Bully and Open Season. Many questioned whether Hollywood would continue to make hit films available to IMAX.

To overcome theater owners' jitters, IMAX offered to shoulder some of the construction costs and operate the screens as joint ventures. IMAX gets close to half of the box office revenue, plus a cut of concession sales.

Deals start rolling in for IMAX

AMC gave the digital and joint venture package a powerful endorsement with a deal that was unveiled in December. It agreed to deploy its new digital projectors at 100 screens in 33 markets including New York, Los Angeles, Chicago, Washington and Miami.

In March, Regal, the No. 1 theater owner, agreed to joint ventures for 31 digital systems in 20 markets.

IMAX says that theaters like these deals because there aren't enough popular films to fill seats at the multiplexes. With IMAX, "You're bringing new people into the theater," Gelfond says. "The studios wouldn't give us 12½% of the box office (and exhibitors) wouldn't give us 40-something% of the revenue if they didn't believe that."

The executives say that they're talking with virtually every studio to score promising films. The biggest titles currently scheduled come from Warner Bros. and DreamWorks.

There's one prominent holdout: "Disney has been challenging for us," Gelfond says. IMAX was talking with Pixar before it was acquired by Disney, he adds, "so we're hopeful that as Pixar's influence increases at Disney, they'll see the value of IMAX."

For now, though, Gelfond and Wechsler say that the company has shifted its focus from dealmaking to the nuts-and-bolts work needed to get the new digital venues running. Each one has a playbook with plans for everything from seat placement to ways IMAX movies should be marketed.

"One of my favorite sayings in life is, 'Good news is bad news, and bad news is good news — but you can't tell until later,' " Gelfond says. "No one believed that we could (successfully go digital). Well, now we've done it. And we and our shareholders will get the benefits."