Imax Corp. may be staring at a bigger mountain of problems than the climbers in Everest, the hit documentary shown in its gargantuan-screen theaters.
Troubles for the company started this year with the disclosure of an informal inquiry by the Securities and Exchange Commission into whether revenue was improperly booked.
That news caused Imax's stock to tumble sharply. Nine lawsuits have been filed by shareholders. And the company has had trouble finding a buyer at a time when it needs to expand and upgrade to digital technology.
Long term, there is a bigger problem for the Canadian company that pioneered the showing of films on screens as tall as eight stories accompanied by 14,000-watt blasts of sound. As multiplexes convert from film to digital projection, the crystal-clear images and 3-D technology that once made Imax special are no longer unusual.
"Imax has distinguished itself, especially in a world that is filled with entertainment options, including home theaters," said Paul Dergarabedian, head of Media by Numbers, a box-office tracking firm. "However, emerging technologies will make the normal movie screen more compelling."
Imax in recent years has worked with Hollywood to wow moviegoers at the local multiplex with huge-screen versions of popular releases, among them Superman Returns and the Harry Potter series, both from Warner Bros.
Still, it is hard for theaters to justify the $1.5 million needed for an Imax projector, sound system and specially designed auditorium.
Because of the high costs, there are just 137 Imax screens in the United States. Only 65 are in multiplex theaters, with the rest in educational institutions and museums, including the Maryland Science Center in Baltimore's Inner Harbor, zoos and even two furniture stores. Most of the company's growth is happening abroad, with 145 Imax locations in 40 countries.
"The problem is there are not enough movies, not enough screens or apparent economic benefit for theater owners," said analyst Jeffrey B. Logsdon of BMO Capital Markets.
For Imax, reels of its film are one of the biggest costs, especially burdensome in an era of digital technology. Imax's 70 mm prints -- which run wave-like through projectors at 24 frames a second to produce razor-sharp images -- cost about $22,000 each and nearly twice that, $43,000, when they are in 3-D. Standard 35 mm prints cost just $1,200.
"To grow the company, they need to convert to a digital format," said Dan Fellman, head of distribution for Warner Bros.
Imax understands it needs to change technologically as well as expand more aggressively, said Richard L. Gelfond, the company's co-chief executive.
In the United States, theater chains such as AMC, Regal Entertainment and National Amusements have Imax screens, and Imax has identified 300 more potential sites nationwide. In addition, the company is aggressively pursuing more exhibitor partnerships to share in the cost of building more Imax screens.
Working in partnership with Sony Corp., Imax has pledged to develop its own digital technology by late 2008.
"Digital holds great promise for us," Gelfond said. But he says standard cinemas will never measure up to Imax: "Digital technology is a substitute, not a step up from 35 millimeter. Imax is a much more immersive experience."
But all those plans cost money. In March, the company put itself up for sale.
Imax has declined to disclose its asking price, but the stock plunge drove its market capitalization down to just a shade north of $150 million. Investment banking firms Allen & Co. and UBS AG were authorized to identify prospective buyers.
The SEC investigation has not helped the Ontario company. Imax shares dropped nearly 50 percent in August, from $9.80 to $5.73, after the company disclosed it.
The stock has since tumbled lower, closing at $4.20 Thursday.
Regulators are looking into potential accounting irregularities from Imax's fourth-quarter 2005 earnings in which it recognized revenue from 10 theaters that had not opened. The majority of those theaters -- which have not been identified -- did not have completed screens until 2006, according to Imax.
"Imax's financial statements were untruthful and utterly misleading," alleged attorney Jay Strosberg, who filed a shareholder lawsuit in Canada. Imax maintains that booking the revenue was proper, and the company had been paid in installments ahead of time.
Imax technology was unveiled to great fanfare in 1967 at the world Expo in Montreal. At the time, its high visual quality and large-screen format were seen as the wave of the future. Its 1985 space documentary, The Dream Is Alive, proved popular for years, bringing in $150 million worldwide. Imax went public in 1994, a time when its theaters were mainly built for educational purposes at institutions and museums.
In 1998, the company exhibited its first high-profile blockbuster with the release of the mountain climbing documentary, Everest, which was independently produced and has grossed $130 million worldwide.
Its huge screen, clear picture and powerful sound system brought to life the danger and thrill of such adventures as the Everest expedition or deep-sea diving.
In Hollywood, Imax's breakthrough year was 2002, when it released its first Hollywood movie, Universal Pictures' Apollo 13, remastered into Imax's special format to accommodate the big screen.
In addition, that year it released its first big production, Space Station 3-D, which was narrated by Tom Cruise and gave a hipper feel to educational documentaries. That film has grossed more than $93 million worldwide.
Warner Bros. has been Imax's biggest studio supporter, releasing Imax versions of such hits as 2004's The Polar Express. The studio also partnered with the company on such documentaries as NASCAR 3-D: The Imax Experience, and Deep Sea 3D.
But most studios have not been as keen on the format. Distributors, who declined to comment on the record, say the costs are higher than the benefits.
Not only are the prints exorbitant, but studios are expected to pay several thousand dollars in additional marketing costs for institutional and educational magazines to publicize an Imax release.
In addition, the relatively small number of screens limits a movie's playability.
But Greg Foster, chairman and president of Imax's filmed entertainment unit, said that scarcity was part of the appeal. "We are not interested in having an Imax theater on every street corner, although we want more than we currently have," Foster said.
Lorenza Munoz writes for the Los Angeles Times.