Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from Michael Kelman, Susquehanna Financial Group. Please go ahead.
Michael Kelman - Susquehanna Financial Group
Thank, hi. Two quick questions for you. Rich, I think you just touched on the digital upgrade and including that in some of your contracts. And you talked about what the accounting issues to that may be. Can you talk a little more qualitatively how the upgrade to digital is impacting your theater system sales process? How you are including that in your contracts? And then also maybe touch on how existing theater system contracts that are currently in your backlog are looking towards the digital transition and how you address that?
And then the second question is with regards to the SEC and OSC investigations. Can you talk a little bit about where we are in the process of that? What other hurdles need to be met in order to move past that?
Rich Gelfond
Sure, Michael. In terms of the digital, starting in the fourth quarter of last year, we looked out into the future and we didn’t want our business to come to a halt as people waited for the digital system to come online. So we included a provision in the contracts that said, if they took delivery of a film-based projection system, we would upgrade them to digital at our cost.
Again, I would just like to run you through some numbers, Michael, so this makes some sense. The typical cost of an MPX system, including minimums, is around $1.5 million. The cost of goods sold of our film-based projector is around $600,000 to $650,000. And the digital upgrade costs around $350,000.
So in the worst-case scenario, if we had to pay the full cost of the digital upgrade, we would still make a pretty decent margin on that. However, as I said during my other comments, we have been in discussions with a number of studios. I actually said three in the script, but we have started to touch on it with a fourth. And we believe that the studios will pay for that upgrade at a virtual print fee. So at the end of the day, we don’t believe we're going to end up paying that, at least certainly not all of that cost.
The second part of the contract says that, if they are going to take delivery, let's say, in late 2008 and we are ready with a digital system, rather than putting in a film system and swapping out, we can put a digital system in, in lieu of the film system. Or we can have them delay by a few months so that we would put in the digital system, therefore eliminating the need for the upgrade.
| TRANSCRIPT SPONSOR |
- To read the full transcript on Seeking Alpha, click here »
