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Richard Gelfond and Bradley Wechsler of Imax Corp.: A really big show

"In a 35mm film you can see actors cry," says Bradley Wechsler, co­chief executive of Imax Corp. "But I had never seen tears well up in somebody's eyes before they cried." On Imax's 60-foot-high movie screens, no detail escapes notice, even in a movie as packed with gadgetry as Apollo 13.

Eyes moist and lips aquiver, actress Kathleen Quinlan looks like she's going to cry. "In a 35mm film you can see actors cry," says Bradley Wechsler, co­chief executive of Imax Corp. "But I had never seen tears well up in somebody's eyes before they cried." On Imax's 60-foot-high movie screens, no detail escapes notice, even in a movie as packed with gadgetry as Apollo 13.

Wechsler and his co-CEO, Richard Gelfond, could be excused for shedding a few tears of their own in 2001. As the commercial movie theater industry painfully contracted after reckless expansion, New York­ and Toronto-based Imax struggled to stay afloat. The large-format film company's revenues fell 40 percent, its losses mounted, and its stock price shriveled by more than 98 percent.

Today the story is a little more uplifting. In the first half of this year, Imax earned $5.3 million on revenues of $70.1 million, compared with a loss of $25.2 million in the same period of 2001. It reaped $8.3 million more from the repurchase of its debt at a discount. Its stock price, which peaked at $32.69 in 1999 and plummeted to $0.58 last fall, recently limped back to $5. And although the possibility of selling Imax was explored before the company's stock began to tumble in 2000, it is no longer being discussed, Wechsler says.

Imax is best known for documentary films like 1998's Everest, which play in both museums and commercial Imax theaters, most of them owned by leading movie chains. Invented in 1967 by a group of Canadian filmmakers, the patented 15/70 format (which refers to the number of sprocket holes on each frame of the 70mm film) is projected on screens eight stories high and 120 feet wide, making Imax movies ten times the size of 35mm films. There are now 225 Imax theaters, half of them commercial, in 30 countries, from the U.K. and Australia to China and India. Russia is next.

In March 1994 Wechsler, Gelfond and investment banking firm Wasserstein Perella & Co. purchased Imax for $80 million. Three months later they took the company public, giving it a capitalization of $196 million.

Gelfond, 48, and Wechsler, 51, both lawyers, grew up in the New York City area. They met in the late 1980s at junk bond bankers Drexel Burnham Lambert, where both were partners, Gelfond specializing in M&A and Wechsler in entertainment industry finance.

The pair saw an opportunity to expand Imax by showing mainstream films in Imax theaters and increasing the number of commercial theaters to complement its roster of museum screens. But merely projecting 35mm films onto Imax screens resulted in fuzzy, grainy film quality. The company invested millions to find a way to sharpen the resolution and suppress the film grain.

Last year Imax filed for patents on a digital remastering technology that can convert live-action films -- as well as animated and computer-generated movies -- into a digital stream of data, adjust distortions and reformat the images for the 15/70 system. The process, called DMR, was unveiled late last month when director Ron Howard's 1995 blockbuster, Apollo 13, starring Tom Hanks and Quinlan, was released in Imax format. November will bring Star Wars Episode II: Attack of the Clones. The company has also developed new three-dimensional technology; its documentary Space Station, shot in orbit, was released in April and had sold $27 million in tickets through Labor Day.

Recently, Gelfond and Wechsler spoke with Institutional Investor Assistant Managing Editor Subrata N. Chakravarty about Imax's prospects.

Institutional Investor: What brought you two together?

Wechsler: My background was in entertainment, Rich's in entrepreneurial and transactional businesses. We were almost the last two partners at Drexel Burnham in the late 1980s.

Gelfond: Brad and I discovered that we had complementary skill sets. I tend to be intuitive and idea-driven. Brad tends to be analytical and numbers-driven.

What drew you to Imax?

Wechsler: It's the Rolls-Royce of projection systems. We also identified a business opportunity to take the Imax experience and bring it to commercial theaters. This has been a longer and more difficult haul than we anticipated, particularly when you think about the huge pothole we hit in late 1999. The largest part of our customer base -- the commercial business -- ran into a wall. One third of our commercial customers were in bankruptcy, another third were restructuring out of bankruptcy, and the other third were saying, "Well, they're not paying you, so why should I?"

Gelfond: So we used our working capital to repurchase $90 million of the $100 million in debt due in 2003.

The technology was more difficult.

Gelfond: We had been working for more than five years to figure out the technology to convert 35mm movies into an Imax experience.

Wechsler: One thing that we're proud of is that we didn't cut back on R&D during that period. We continued to invest. I think we were quite fortunate that even during our time of troubles, Disney decided to enter our business in a fairly substantial way, releasing Fantasia and Beauty and the Beast in Imax. This Christmas they have two movies coming out in Imax: Treasure Planet and The Lion King.

Why chooseApollo 13as the first live-action film, instead of, say,Star Wars?

Gelfond: There are a number of reasons, some planned, some fortuitous. We were testing a number of films with our new technology, and Ron Howard saw the test and just fell in love with it. At the same time, we wanted to do a library film [one already released] rather than a day-and-date film [with an upcoming release date], because we wanted to demonstrate the technology and to take our time doing it. We wanted content to be right for the Imax network. Apollo 13 fit the agenda of museums and science centers as well as commercial theaters.

But the action is mostly in confined spaces rather than sweeping scenes.

Gelfond: We always expected the big vistas, the rocket launches, the reentry sequence to look spectacular. What surprised us were the shots inside the capsule, of Kathleen Quinlan crying -- the emotional content is really stepped up. In a way, it becomes a more powerful demonstration of the potential of Imax.

How much does this cost?

Wechsler: Two million dollars to $4 million for the physical cost of conversion. The total cost of a library film, with prints and marketing, is about $10 million. It takes three months to remaster.

How about geographic growth?

Wechsler: We are now adding about 20 theaters a year. That's not fast enough. There is lots of opportunity in North America and even more overseas.

Gelfond: We just opened our first theaters in China. The occupancy [per show] is more than 65 percent, which is phenomenal. We've also opened in India.

Why did the owners sell in 1994?

Gelfond: They were all over 65. They were ready to slow down. I think they saw that they had created something but that they didn't have the capital or the relationships to see its potential fulfilled.

The stock is still below $5. Why?

Gelfond: People who are familiar with our story are waiting for a few things. They're waiting to see more DMR announcements from Hollywood. They're waiting to see how the critics and the public receive Apollo 13. And they're waiting to see how our customer base responds. As those start to come together over the next six months, you'll start to see our stock respond accordingly.

Why buy back a lot of debt?

Wechsler: We bought in that $90 million at less than 25 cents on the dollar. The market was saying, "These guys have $100 million due in 18 months, and we're not sure how they're going to meet that obligation." That pushed the price of the bonds down dramatically.

Does Imax own any theaters?

Wechsler: Of the 225 Imax theaters, about a dozen are owned and operated. We don't want to be in the bricks-and-mortar business. We're a licenser of intellectual property and our theater systems. We manufacture the cameras, the projection systems and the sound systems, and we license those to theaters.

What is the interest from Hollywood?

Gelfond: Imax is the greatest canvas in the world, and some filmmakers would like the chance to paint on that canvas.

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