-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SNIFTVeAxOUzO2bTBkmBAb1kjlSB1RNRcCDFMAyhSklFgM2DXxu/T6rG8PB3/THS 7akBGGo+3O/y/bDzvR6YjQ== 0000944209-99-000158.txt : 19990217 0000944209-99-000158.hdr.sgml : 19990217 ACCESSION NUMBER: 0000944209-99-000158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOWSCAN ENTERTAINMENT INC CENTRAL INDEX KEY: 0000812882 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 953940004 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09710 FILM NUMBER: 99538805 BUSINESS ADDRESS: STREET 1: 3939 LANDMARK ST CITY: CULVER CITY STATE: CA ZIP: 90232 BUSINESS PHONE: 3105580150 MAIL ADDRESS: STREET 1: 3939 LANDMARK STREET CITY: CULVER CITY STATE: CA ZIP: 902322315 FORMER COMPANY: FORMER CONFORMED NAME: SHOWSCAN CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SHOWSCAN FILM CORP DATE OF NAME CHANGE: 19901116 10-Q 1 FORM 10-Q FOR PERIOD ENDED 12/31/1998 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q ---------------- (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1998 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from_________ to __________ Commission file number 0-15939 SHOWSCAN ENTERTAINMENT INC. (Exact name of registrant as specified in its charter) Delaware 95-3940004 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3939 Landmark Street Culver City, California 90232 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 558-0150 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] As of February 12, 1999, the Registrant had 5,642,058 shares of Common Stock, $.001 par value, issued and outstanding. ================================================================================ This report contains 24 consecutively numbered pages. SHOWSCAN ENTERTAINMENT INC. INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- Condensed Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998 3 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended December 31, 1998 and 1997 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1998 and 1997 6 Notes to the Condensed Consolidated Financial Statements 8 Item 2. - Management's Discussion and Analysis of - ------------------------------------------------- Financial Condition and Results of Operations 11 --------------------------------------------- PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 22 - ---------------------------------------- Signatures 23 Exhibit Index 24
2 PART I. - FINANCIAL INFORMATION Item 1. - Financial Statements - ------------------------------ SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Balance Sheets (Dollars in Thousands Except Share Information)
December 31, March 31, 1998 1998 ------------ --------- (Unaudited) (Note) ASSETS ------ Current assets: Cash and cash equivalents $ 1,035 $ 2,492 Accounts receivable (net of allowances) 2,130 2,161 Unbilled receivables on uncompleted film and equipment contracts 1,503 708 Due from affiliated entities, net of allowances (Note 6) 216 794 Equipment sales inventory 1,427 1,186 Prepaid expenses and other current assets 521 193 ------- ------- Total current assets 6,832 7,534 Film library (net of amortization) 3,104 3,765 Investment in and advances to O&O theatres (Note 2) 333 440 Patents and other intellectual properties (net of amortization) 575 900 Other assets, including equipment and leasehold improvements, net of accumulated depreciation and amortization 941 1,072 ------- ------- Total assets $11,785 $13,711 ======= =======
Note: The balance sheet at March 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to unaudited condensed consolidated financial statements. (Continued) 3 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Balance Sheets (continued) (Dollars in Thousands Except Share Information)
December 31, March 31, 1998 1998 ------------ --------- (Unaudited) (Note) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) - ------------------------------------ Current liabilities: Accounts payable $ 351 $ 752 Customer advances on uncompleted film and equipment contracts 3,408 2,317 Accrued expenses and other current liabilities 2,816 2,241 11% note payable (Note 3) 710 1,000 8% convertible notes, due September 1, 1999 (Note 4) 5,690 - -------- -------- Total current liabilities 12,975 6,310 -------- -------- 8% convertible notes (Note 4) - 5,690 Stockholders' equity (deficit): Series A Convertible Preferred Stock, $.001 par value; 150,000 shares authorized, no shares issued and outstanding - - Series C Convertible Preferred Stock, $.001 par value; 100,000 shares authorized; 49,000 shares issued and outstanding - - Common stock, $.001 par value; 20,000,000 shares authorized; 5,642,058 shares issued and outstanding 6 6 Additional paid-in capital 42,567 42,567 Accumulated deficit (43,763) (40,862) -------- -------- Total stockholders' equity (deficit) (1,190) 1,711 -------- -------- Total liabilities and stockholders' equity $ 11,785 $ 13,711 ======== ========
Note: The balance sheet at March 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to unaudited condensed consolidated financial statements. 4 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Operations (Dollars in Thousands Except Per Share Information)
Three Months Ended Nine Months Ended December 31, December 31, 1998 1997 1998 1997 --------------------- ---------------------- (Unaudited) (Unaudited) Revenues: Film licensing and production services $ 767 $ 791 $ 2,317 $ 2,922 Equipment sales and related services 569 2,634 3,450 4,214 ------- ------- ------- ------- 1,336 3,425 5,767 7,136 Costs of revenues 906 3,889 3,516 6,006 ------- ------- ------- ------- Gross profit 430 (464) 2,251 1,130 Costs and expenses: General and administrative expenses 1,425 2,339 4,009 5,505 Depreciation and amortization 166 190 432 579 ------- ------- ------- ------- 1,591 2,529 4,441 6,084 ------- ------- ------- ------- Operating loss (1,161) (2,993) (2,190) (4,954) Other income (expense): Equity in net operations of O&O Theatres (15) (104) (149) (468) Other income, including interest 5 23 62 64 Interest and other expenses (194) (190) (624) (517) ------- ------- ------- ------- (204) (271) (711) (921) ------- ------- ------- ------- Net loss $(1,365) $(3,264) $(2,901) $(5,875) ======= ======= ======= ======= Basic and diluted net loss per common share (Note 5) $ (.24) $ (.58) $ (.51) $ (1.04) ======= ======= ======= =======
See accompanying notes to unaudited condensed consolidated financial statements. 5 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Dollars in Thousands)
Nine Months Ended December 31, 1998 1997 ----------------------------------- (Unaudited) Cash flows from operating activities: Net loss $(2,901) $(5,875) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 432 579 Amortization of film library 763 683 Amortization of debt issue costs 193 2 Write down/provision for film library - 1,150 Equity in net operations of O&O theatres 149 468 Accrued interest on debt 342 358 Provision for doubtful accounts 90 590 Changes in operating assets and liabilities: Accounts receivable and due from affiliates 519 (779) Equipment sales inventory (240) (566) Unbilled receivables on uncompleted film and equipment contracts (795) (695) Prepaid expenses (328) 778 Investment in and advances to O&O theatres (203) 1,476 Accounts payable, accrued expenses and other current liabilities (167) (581) Customer advances on uncompleted equipment contracts 1,091 1,206 ------- ------- Net cash used in operating activities $(1,055) $(1,206) ------- ------- Cash flows from investing activities: Purchases of equipment and leasehold improvements (7) (16) Additions to film library (105) (1,022) Other assets - 870 ------- ------- Net cash used in investing activities $ (112) $ (168) ------- -------
(Continued) 6 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Continued) (Dollars in Thousands)
Nine Months Ended December 31, 1998 1997 ----------------------------------- (Unaudited) Balance forwarded $(1,167) $(1,374) ------- ------- Cash flows from financing activities: 11% note payable (290) 1,000 ------- ------- Net cash (used in) provided by financing activities (290) 1,000 ------- ------- Net decrease in cash and cash equivalents (1,457) (374) Cash and cash equivalents, beginning of period 2,492 2,562 ------- ------- Cash and cash equivalents, end of period $ 1,035 $ 2,188 ======= ======= Supplemental disclosures of cash flow information: Interest paid $ 338 $ 234 ======= ======= Income taxes paid $ - $ - ======= =======
See accompanying notes to unaudited condensed consolidated financial statements. 7 SHOWSCAN ENTERTAINMENT INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) Note 1--Introduction: - --------------------- The accompanying unaudited condensed consolidated financial statements of Showscan Entertainment Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period and the nine-month period ended December 31, 1998 are not necessarily indicative of the results that may be expected either for the last fiscal quarter in the fiscal year ending March 31, 1999 or for the entire fiscal year ending March 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 1998. Note 2--Owned and Operated Theatres ("O&O Theatres"): - ---------------------------------------------------- The Company has significantly revised its O&O Theatres policies and has during the past 21 months, closed five (5) of its theatres, including Framingham, Massachusetts (2), San Antonio, Texas (1), and London, England (2). Accordingly, the Company currently operates and/or has an ownership interest in two (2) Showscan Attractions located at Universal CityWalk in Universal City, California and Osaka, Japan. Generally, in each of these arrangements, the Company receives reimbursement for direct expenses, a percentage of each theatre's cash flow (equal to its ownership percentage), and receives separately annual film licensing revenues and management fees (if applicable). The Company accounts for its investment in the O&O Theatres under the equity method of accounting. Note 3--11% Promissory Note: - ---------------------------- On November 1, 1997, the Company completed a placement of a $1,000,000 promissory note through an unaffiliated third party. The note bears interest at a rate of 11 percent per annum. The note is secured by accounts receivable from the distribution of the Company's film library and the proceeds thereof. Principal and interest amounts were payable in full on November 15, 1998. In November 1998, the Company and the lender reached an agreement to modify the note so that the principal will be repaid in installments through March 31, 1999. As of December 31, 1998, aggregate payments of $400,000 have been made, including $110,000 of accrued interest as of November 15, 1998. The remaining scheduled payments per the modified agreement are as follows: December 31, 1998: $150,000 (paid in January 1999); January 31, 1999: $150,000 (paid in January 1999); February 28, 1999: $150,000; March 31, 1999: $260,000. Interest that accrues after the commencement of the modified agreement is due and payable on March 31, 1999. Note 4--8% Convertible Notes: - ----------------------------- On September 1, 1995, the Company completed a private placement of $7,000,000 in secured convertible notes ("8% Convertible Notes") with a European bank. The 8% Convertible Notes mature on September 1, 1999 and bear interest at 8% per annum which is payable semi-annually and are convertible at the option of the holder into shares of the Company's common stock ("Common Stock") at a conversion price of $5.75 per share. Through December 31, 1998, $1,310,000 of such notes had been converted into 8 227,819 shares of Common Stock leaving an outstanding balance of $5,690,000. The notes are secured by substantially all of the assets of the Company, although the security excludes the Company's film library and the capital stock of its subsidiaries, which includes its O&O Theatres. In connection with the placement, $619,000 of debt issue costs were incurred and are being amortized over the life of the notes. The Company is in discussions with its European bank regarding an extension of the maturity date of this debt and additional financing in excess of the amounts currently outstanding. There can be no assurance that the Company will be successful in the extension of the maturity date or such additional financing. Note 5--Loss per common share: - ------------------------------ The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128), effective with its March 31, 1998 fiscal year end. SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and supersedes APB Opinion No. 15, "Earnings Per Share" (APB No. 15). SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes the dilutive effects, if any, of common stock equivalents, and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15, with certain modifications. SFAS No. 128 also required dual presentation of basic EPS and diluted EPS on the face of the income statement for all periods presented. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements. Per share information has been determined by using 5,642,058 weighted average shares outstanding for the nine-months and the three-months ended December 31, 1998 and 1997. Note 6--Receivables from affiliated entities: - --------------------------------------------- At June 30, 1998, the Company was due $712,000 from United Artists Theatre Circuit, Inc. ("UA"). The payment terms for this receivable originally provided for (a) interest on the unpaid principal balance to be charged at 7.5% and (b) principal and interest to be paid in full on or before December 31, 1996 (Maturity Date); since the venture between UA and the Company (the "UA Venture") had not accepted one of the theatre sites it had been offered by UA prior to the Maturity Date, the Maturity Date was to be extended 30 days after the date that the UA Venture did accept, but in no event would that Maturity Date have been extended later than August 19, 1999. In July 1998, the Company and UA reached an agreement to settle the amount owed by means of a $318,000 payment by UA, the purchase by the Company of certain new simulation equipment and other assets owned by UA, the offset of certain amounts and the payment by UA of the remaining amounts over approximately one year. As part of this agreement, the Company also agreed to expand the ability of UA to "source" projection and other theatre equipment, in addition to simulation equipment, through the Company. Fifty percent (50%) of any such "sourced" equipment will count toward UA's achievement of the $13,950,000 aggregate equipment purchase requirement. Any such "sourcing" of projection and other theatre equipment must result in at least an aggregate benefit (as defined) to the Company of $3,000,000, which is contractually payable no later than August 19, 1999. If UA fails to achieve this requirement and/or fails to order and install 16 additional Simulation Attractions by August 1999, then UA will be contractually obligated to pay the Company liquidated damages in the amount of $5,100,000, which is also payable on August 19, 1999. It is the Company's belief that UA will not order or install any additional Simulation Attractions. The Company has removed the UATC systems from its contract backlog. At December 31, 1998, affiliates of certain directors owed the Company a combined balance of $336,000 related to advances made by the Company on their behalf to several O&O Theatres to satisfy 9 capital calls to cover operating expenses at such theatres and certain other administrative costs. On July 8, 1998, the affiliates of the certain directors indicated to the Company that they dispute their obligation to pay these sums. Accordingly, the Company fully reserved for such amounts in the March 31, 1998 consolidated balance sheet. On January 26, 1999, these directors and the Company agreed to a settlement and payment of the outstanding obligations. Each director agreed that Showscan could retain its respective estimated proceeds (aggregating approximately $130,000) from the sale of the San Antonio O&O Theatre (which was closed in September 1997) and to pay the remaining amounts due. As of February 11, 1999 one director has paid the agreed upon amount of $110,000. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - ------------- Overview: - --------- Showscan Entertainment Inc. (the "Company") is a leading provider of movie- based motion simulation theatre attractions ("Showscan Attractions") to the expanding out-of-home entertainment market. The Company's business includes: (i) licensing and distributing the films in its library to all operators of simulation attractions (including those installed by the Company and those previously installed by competitors of the Company); (ii) licensing the proprietary technologies necessary to produce and exhibit Showscan films; (iii) selling and installing Showscan Attractions and specialty theatres including the equipment necessary for each (including motion bases, projectors, screens, sound systems, synchronization and show control, and theatre design packages); (iv) producing films using the Showscan process; and (v) to a limited extent, establishing Showscan Attractions in which the Company has an economic interest ("O&O Theatres"). The Company is also committed to the continued recognition of the Showscan(R) brand name worldwide. The principal sources of the Company's revenues are the licensing of the Showscan film library and technologies, the sale and installation of projectors, screens, sound systems and other equipment used to exhibit Showscan films, and the sale of motion bases and other equipment used in most Showscan Attractions. The Company currently derives most of its revenues from export sales (60-85% for each of the three years ended March 31, 1998 and the nine-month period ended December 31, 1998). The Company does not believe that inflation has had a material impact on the Company's net revenues or on its results of operations for the three most recent fiscal years and the nine-month period ended December 31, 1998. Comparison of the nine months ended December 31, 1998 and 1997: - --------------------------------------------------------------- Revenues for the nine-month period ended December 31, 1998 (the "Nine Month Period") decreased by $1,369,000 or 19% to $5,767,000 from revenues for the nine-month period ended December 31, 1997. Film licensing and production service revenues in the Nine Month Period decreased by $605,000 or 21% to $2,317,000 from $2,922,000 in the nine-month period ended December 31, 1997. The decrease was primarily due to (i) the renegotiation of certain film licensing contracts in Asia due to adverse economic conditions in that region, and (ii) the reduction in film revenues collected from O&O Theatres due to the closure of five such theatres since the prior year period. Revenues from equipment sales and related services for the Nine Month Period decreased $764,000 or 18% to $3,450,000 from $4,214,000 in the nine-month period ended December 31, 1997. The decrease is due to the decrease in the number of Showscan Attractions shipped during the Nine Month Period as compared to the corresponding prior year nine-month period. Four Showscan Attractions were shipped in the Nine Month Period as compared to five units shipped in the nine-month period ended December 31, 1997. The Company recognizes equipment sales under the percentage-of-completion method of accounting, generally measured by the percentage that the labor hours incurred to date bears to the estimated total labor hours of each contract. This results in a disparity in the comparison of equipment sales revenues over different time periods, as the Company records revenues under this method rather than on the date that the sales agreement is signed. The actual signing of a Showscan Attraction sale precedes its delivery and installation by an average of five to six months. Accordingly, the recognition of revenue for equipment sales during the current and future quarters is affected by (i) the timing of such sales; (ii) the schedule of the build- 11 out of the Showscan Attractions; and (iii) the shipment, delivery and installation of the equipment and related services. Costs of revenues were 61% of revenues in the Nine Month Period as compared to 84% in the nine-month period ended December 31, 1997. Equipment cost of sales to total equipment sales decreased to 65% in the Nine Month Period from 81% in the nine-month period ended December 31, 1997, primarily as a result of modifications to two equipment sales contracts which adversely impacted costs of revenues for the nine months ended December 31, 1997. Film licensing cost of sales to total film licensing sales was 56% in the Nine Month Period as compared to 88% in the nine-month period ended December 31, 1997. The decrease in film licensing cost of sales in the Nine Month Period from the nine-month period ended December 31, 1997 is due to an adjustment to the carrying value of two films to their estimated realizable value of the $1,150,000 recorded in the nine-month period ended December 31, 1997. The film licensing cost of sales to total film licensing sales as adjusted for the $1,150,000 amount recorded to the carrying value of the two films was 49%, excluding the $1,150,000 provision in the nine-month period ended December 31, 1997. Amortization of the film library for the Nine Month Period and the nine- month period ended December 31, 1997 was $763,000 and $683,000, respectively. The increase in film amortization is due to the additional amortization of three films in the Nine Month Period that were added to the Company's film library in the past fiscal year (and are now in release) and were not amortized in the nine-month period ended December 31, 1997. The Company reviews film library estimated revenues on a quarterly basis (based on the then current market conditions) and, where applicable, unamortized film costs are written down to estimated net realizable value. General and Administrative expenses decreased $1,496,000 or 27% in the Nine Month Period from the nine-month period ended December 31, 1997. The decrease can be primarily attributed to (i) a significant reduction in the number of employees, (ii) a reduction in legal, marketing and merger-related expenses from the nine-month period ended December 31, 1997, and (iii) a $500,000 increase in the allowance for doubtful accounts that was recorded in the nine-month period ended December 31, 1997. The loss on investment in O&O Theatres decreased to $149,000 in the Nine Month Period from $468,000 in the nine-month period ended December 31, 1997, as a result of the Company's closing of five of its O&O Theatres. The loss for the Nine Month Period is primarily the result of the following factors: (i) operating losses at the Universal CityWalk theatre, and (ii) operating losses at the two (2) London/Trocadero theatres through their closing on July 2, 1998 and related costs of such closing. The Company earns film licensing revenues and management fees (if applicable) which are recorded separately in the accompanying consolidated statements of operations, thereby inherently increasing the operating expenses at the specific O&O Theatres. The Company's net loss decreased $2,974,000 or 51% in the Nine Month Period to $2,901,000 from $5,875,000 in the nine-month period ended December 31, 1997 primarily due to (i) the continued decrease in general and administrative expenses, and (ii) the decrease in the equity loss from the net operations of O&O Theatres. Comparison of the three months ended December 31, 1998 and 1997: - ---------------------------------------------------------------- Revenues for the three-month period ended December 31, 1998 (the "1999 Third Quarter") decreased by $2,089,000 or 61% from revenues for the three-month period ended December 31, 1997 (the "1998 Third Quarter") due to a decrease in revenues recognized from equipment sales and related services in the 1999 Third Quarter. 12 Film licensing and production service revenues in the 1999 Third Quarter decreased by $24,000 or 3% to $767,000 from $791,000 in the 1998 Third Quarter. Revenues from equipment sales and related services for the 1999 Third Quarter decreased 78% to $569,000 from $2,634,000 in the 1998 Third Quarter. The decrease is due to the reduction in number of Showscan Attractions shipped from three in the 1998 Third Quarter (two of which were relocations) as compared to one in the 1999 Third Quarter. The Company recognizes equipment sales under the percentage-of-completion method of accounting, generally measured by the percentage that the labor hours incurred to date bears to the estimated total labor hours of each contract. This results in a disparity in the comparison of equipment sales revenues over different time periods, as the Company records revenues under this method rather than on the date that the sales agreement is signed. The actual signing of a Showscan Attraction sale precedes its delivery and installation by an average of five to six months. Accordingly, the recognition of revenue for equipment sales during the current and future quarters is affected by (i) the timing of such sales; (ii) the schedule of the build-out of the Showscan Attractions; and (iii) the shipment, delivery and installation of the equipment and related services. Costs of revenues were 39% of revenues in the 1999 Third Quarter as compared to 114% in the 1998 Third Quarter. Equipment cost of sales to total equipment sales decreased to 64% in the 1999 Third Quarter from 87% in the 1998 Third Quarter primarily as a result of a higher gross profit margin on the shipment during the 1999 Third Quarter as compared to lower average gross profit margins for the three shipments in the 1998 Third Quarter. The higher gross profit margin earned on the shipments during the 1999 Third Quarter is related to custom equipment specifications and services. Film licensing cost of sales to total film licensing sales was 56% in the 1999 Third Quarter as compared to 202% in the 1998 Third Quarter. Amortization of the film library for the 1999 Third Quarter and the 1998 Third Quarter was $253,900 and $1,410,300, respectively. The decrease is due to a provision of $1,150,000 during the 1998 Third Quarter to adjust the carrying value of three films to their estimated realizable value. No provisions of this nature were necessary in the 1999 Third Quarter. The Company reviews film library estimated revenues on a quarterly basis (based on the then current market conditions) and, where applicable, unamortized film costs are written down to estimated net realizable value. General and Administrative expenses decreased $914,000 or 39% in the 1999 Third Quarter from the 1998 Third Quarter. The decrease can be primarily attributed to (i) a significant reduction in the number of employees, and (ii) a reduction in legal, consulting and marketing expenses from the 1998 Third Quarter. The loss on investment in O&O Theatres decreased to $15,000 in the 1999 Third Quarter from $104,000 in the 1998 Third Quarter, as a result of the Company's closing of five of its O&O Theatres. The loss for the 1999 Third Quarter is primarily the result of the operating loss at the Universal CityWalk theatre. The Company earns film licensing revenues and management fees (if applicable) which are recorded separately in the accompanying consolidated statements of operations, thereby inherently increasing the operating expenses at the specific O&O Theatres. The Company's net loss decreased 58% in the 1999 Third Quarter to $1,365,000 from $3,264,000 in the 1998 Third Quarter primarily due to (i) the decrease in equipment cost of sales, (ii) the continued decrease in general and administrative expenses, and (iii) the decrease in the equity loss from the net operations of O&O Theatres. 13 Liquidity and Capital Resources: - ------------------------------- At December 31, 1998, the Company's operating working capital decreased to a deficit of $6,143,000 from $1,224,000 at March 31, 1998. The decrease in operating working capital was primarily due to the reclassification of the $5,690,000 outstanding balance of the 8% Convertible Notes to a current liability and to the operating loss of the Company in the Nine Month Period. The Company's 8% Convertible Notes mature on September 1, 1999 and, accordingly, the related obligation of $5,690,000 has been reclassified as a current liability in the December 31, 1998 balance sheet. The Company is in discussions with its European bank regarding an extension of the maturity date of this debt and additional financing in excess of the amounts currently outstanding, as further discussed below. Cash and cash equivalents at December 31, 1998 decreased by $1,457,000 to $1,035,000 from the cash level at March 31, 1998. This reduction was the result of $1,055,000 used in operating activities, $112,000 used in investing activities, and $290,000 used in financing activities. Net cash used in operating activities was primarily due to (i) the net loss of $2,901,000 in the Nine Month Period, (ii) a 65% increase in prepaid expenses, unbilled receivables on uncompleted contracts and equipment sales inventory, and (iii) a 53% decrease in accounts payable. These changes are primarily attributable to variations in the timing of Showscan Attractions sales and the specific contract terms of such sales, which terms generally affect the timing of collections, shipments, deliveries to customers, installations and the related payments to vendors. Net cash used in investing activities was primarily due to the amortization of the film library. As the Company derives 60-85% of its business from export sales, its liquidity may be adversely affected by changes in worldwide economic or political conditions. Such factors as changes in foreign currency exchange rates (which can significantly affect the affordability of the Company's products and services), trade protection measures, and policies with respect to currency and fiscal controls may negatively affect liquidity. The current Asian economic situation has caused the re-negotiation of certain film licensing agreements and the delay of new Showscan Attractions and certain other projects. The Company's business strategy includes an increase in the installed base of Showscan Attractions, creation of the largest thrill-ride film library in the simulation industry (through new film productions and the securing of distribution rights to motion simulation films produced by other companies), the licensing and distribution of its motion simulation library (including films produced using the Showscan process and films acquired from other producers) to all operators of simulation attractions (including those installed by the Company and those previously installed by competitors of the Company), new product development and new product lines, enhancement of existing product lines, possible investments in O&O Theatres and the continued reduction of overhead. The Company intends to finance the foregoing business strategy by utilizing its existing capital resources, the proceeds to be received from its existing contractual/installation backlog, existing film licensing agreements and anticipated future equipment sales/film licensing agreements, together with proceeds derived from one or more of the following financing alternatives: the sale of securities, the sale of non-performing assets, additional financing from banking institutions, the renegotiation of existing indebtedness repayment schedules, and/or the formation of strategic alliances, joint ventures or off- balance sheet financing. There can be no assurance that the Company will be able to obtain any of the aforementioned financing alternatives. 14 During the past fiscal year and the Nine Month Period, the Company took a substantial number of actions to reduce its negative cash flow from operations. These actions included implementing significant cost reductions, such as the reduction in employee head-count to 29 currently from 61 at March 31, 1997, and the closure of five of the seven previously existing O&O Theatre screens. The Company's management is evaluating further cost reductions, including the out- sourcing of certain operating functions (thereby further reducing employee head- count) and the relocation of the Company's headquarters to smaller office space. There can be no assurance that these cost-cutting measures will be sufficient to eliminate the negative cash flow or that they will not further adversely impact the Company's operations. The Company has limited capital resources and has debt obligations from two different financial institutions. The Company reached an agreement with the holder of the $1,000,000 note to revise the payment schedule on the note, from being due in full in November 1998 to monthly payments which began November 15, 1998 and continue through March 31, 1999. As of December 31, 1998, the Company has made aggregate payments of $400,000, including $110,000 of accrued interest as of November 15, 1998. The Company is also in continuing discussions with its European bank regarding additional financing in excess of the $5,690,000 currently outstanding balance of the 8% Convertible Notes and an extension of the maturity date of repayment of this debt. Although the Company has held discussions with its European bank regarding additional financing and the bank has conducted certain due diligence procedures, there can be no assurance that the Company will be successful in obtaining any such financing. There can also be no assurance that this creditor will agree to extend its maturity date or other terms. The failure to fully repay either of these debts could result in the foreclosure against the collateral securing each, which together constitute substantially all of the assets of the Company. The Company believes that its existing funds, combined with generated cash from future operations, the sale of non-performing assets, the re-negotiation of existing indebtedness repayment schedules and other financing transactions, will finance its revised levels of activities and operations, although the Company anticipates that it will require additional financing or be required to further restructure its business and operations. Additionally, based on the Company's current cash flow projections, it is anticipated that cash generated from operations will not be sufficient to pay all of the $5,690,000 due on September 1, 1999. The Company is considering possible alternatives available to it in order to pay the debt due in September 1999, including the possible sale and/or licensing of assets to others, the re-negotiation of debt re-payment schedules, the raising of cash through debt and/or equity financings, the further curtailment of operating expenses and the receipt of payments by the Company from UA by August 1999 either (i) through the "sourcing" of projection and other theatre equipment, or (ii) through the liquidated damages provisions of the Theater Rights Agreement with UA (such contractual obligations are to range between $3,000,000 and $5,100,000), since the Company does not believe that UA will order any additional Showscan Attractions. See Note 6 of Notes to Condensed Consolidated Financial Statements. Impact of the Year 2000: - ------------------------ Some of the Company's older computer software systems were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This software could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed an assessment of its existing software systems and after reviewing various factors, one of which being the year 2000 issue, has determined which systems would need to be replaced or upgraded. The necessary upgrades will cost approximately $50,000. 15 The Company believes that the required changes to its existing computer systems will be completed and tested not later than June 30, 1999, which is prior to any anticipated impact on the operating systems. Although the Company believes that with the conversions to the software, the year 2000 issue will not pose significant operational problems for its computer systems, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or material additional costs caused by an undetected error or defect in the technology used in the Company's internal systems that were acquired from third parties. The costs of the project and the date on which the Company believes it will complete the conversion are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. The Company has assigned several key employees as a Year 2000 committee, whose sole purpose is to determine the compliance of all Company products, software systems and key vendors with the necessary conversion requirements. This committee (the "Year 2000 Committee") is responsible for identifying all potential issues which must be addressed. The Year 2000 Committee's recommendations will be followed by the Company. The Year 2000 Committee is in the process of reviewing all of the products of the Company in order to identify any Year 2000 sensitive software included in the products sold currently or in the past. The Company has identified some potential software problems and has not yet determined if a material cost will be incurred to test or correct products initially sold by the Company. The Year 2000 Committee is currently contacting each site to determine which components (hardware and/or software) require upgrade or replacement. The upgrades are scheduled for completion by June 30, 1999. The Year 2000 Committee has identified and contacted all key vendors to insure their compliance with Year 2000 transition requirements. The Committee is reviewing responses received for compliance. Vendors were asked to confirm that they have addressed internal issues related to their continued operations as well as compliance of their products or their ability to provide ongoing services to Showscan. Factors That May Affect Future Results Portions of this report on Form 10-Q (this "Report") may contain "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. The discussion below, together with portions of the discussion elsewhere in this Report and in the Company's other reports on file with the Securities and Exchange Commission, highlight some of the more important risks identified by the management of the Company but should not be assumed to be the only things that could affect future performance. History of Operating Losses - --------------------------- For the fiscal years ending March 31, the Company had net profits of $79,000 in fiscal 1995, net profits of $101,000 in fiscal 1996, a net loss of $3.9 million in fiscal 1997 and a net loss of $8.5 million in fiscal 1998. At March 31, 1998, the Company had an accumulated deficit of $40.9 million. For the fiscal 16 years ended March 31, 1995, 1996, 1997 and 1998, the Company's ratio of indebtedness to stockholders equity was 23.6%, 49.8%, 55.6% and 390%, respectively. This history of losses has had a negative impact on the Company's stock price and will adversely effect the Company's ability to carry out its business strategy, increase stockholder value, and to obtain financing in the future. The Company received notification from the Nasdaq Stock Market in the fiscal quarter ended June 30, 1998, that it was not in compliance with the continued listing requirements of the Nasdaq National Market(R). Nasdaq indicated that the Company had not maintained the required $1 minimum closing bid price per share nor the required $5,000,000 minimum market value of public float, nor the required $4,000,000 minimum net tangible assets. The Company was granted an oral hearing on September 10, 1998 to demonstrate its ability to meet all of the continued listing requirements. After the hearing, Nasdaq decided to delist the Company's Common Stock from trading on the Nasdaq National Market(R) at the opening of business on September 17, 1998. The Company's Common Stock now trades on the OTC Bulletin Board. Since the Company has moved to the Electronic Bulletin Board, the Company has lost some of its market makers with the result that it may now be more difficult to effect trades of the Company's shares and to obtain timely and accurate quotations and reports of trading. This delisting could also adversely affect the liquidity of the Company's shares and thus their market value. This delisting could also adversely affect the Company's ability to obtain debt and/or equity financing. Ability to Obtain Additional Financing - -------------------------------------- To date, the Company's primary source of capital has been from debt and equity financings. Unless the Company is able to obtain additional proceeds from such financing sources, the Company will have to further and maybe significantly restructure its business and operations. A number of factors will make it difficult for the Company to obtain equity financing in the future, including the significant losses the Company incurred, the de-listing of the Common Stock from the Nasdaq National Market(R), the on-going financial turmoil in Asia (historically the Company's largest market and principal source of revenues), the Company's historical stock performance, and a general decrease in investor interest in the Company's industry. The Company's lack of assets that are available for collateral and its cash flow fluctuations may make it difficult for the Company to attract additional debt financing. Any investor or lender may require a significant equity position in the Company that could result in dilution of the Company's present stockholders. In addition to restructuring its business and operations, the Company has debt obligations from two different financial institutions. In November 1998 the Company reached an agreement with one of its lenders to revise the payment schedule on the $1,000,000 obligation from being due on November 15, 1998 to monthly payments beginning November 15, 1998 and continuing through March 31, 1999. Through December 31, 1998, payments in the aggregate of $400,000 have been paid, including $110,000 of accrued interest as of November 15, 1998. The Company is in continuing discussions with its European Bank with regard to re- negotiation of its debt repayment schedule regarding potential additional financing. There can be no assurance that the European bank will agree to extend its maturity date or provide additional financing. The failure to fully repay either of these debts could result in the foreclosure against the collateral securing them which, between the two obligations, constitute substantially all of the assets of the Company. Based on current cash flow projections, the management of the Company anticipates that cash generated from operations will not be sufficient to pay all of the $5.7 million due on September 1, 1999. The Company has various alternatives available to it in order to pay this debt. There can be no assurance that any of these alternatives will be successful. 17 Ability to Produce Additional Films - ----------------------------------- One of the primary factors considered by potential purchasers of motion simulation attractions is the quality and extent of the films available to be shown at the attraction. In addition, existing sites considering licensing the Company's films will consider the type and number of films available to them. The Company believes that a large portion of its competitive advantage resides in its popular and extensive library of ride films. To maintain this competitive edge, the Company must produce or acquire the distribution rights to several new films each year. Film production is expensive and requires the investment of Company funds (to the extent that investors cannot be located) with no assurance that the films produced will be popular. To the extent that the Company does not have its own funds available to invest and financing cannot be found on acceptable terms, then the Company's ability to produce new films could be restricted. Other competitors have each indicated that they are devoting substantial portions of their financial resources to the production of new motion simulation films. The Company's recent operating losses and declining cash balances have caused it to decrease the level of its investments in film software, which may have an adverse effect on revenues in future periods. Both the short- and long-term financial performance of the Company will be adversely affected if the perceived quality and popularity of the Company's film library declines either alone or in comparison to the films of the Company's competitors. Period to Period Fluctuations - ----------------------------- The Company has experienced quarterly fluctuations in operating results and anticipates that these fluctuations will continue in future periods. Operating results and cash flow can fluctuate substantially from quarter to quarter and periodically as a result of the timing of theatre system deliveries, contract signings, the mix of theatre systems shipped, the completion of custom film contracts, the amount of revenues from film licensing agreements, the timing of sales of Showscan Attractions, the timing of delivery and installation of such sales (pursuant to percentage of completion accounting) and any delays therein caused by permitting or construction delays at the customer's site, the size, type and configuration of the attractions sold, the timing of film rental payments from existing attractions and the performance of those attractions that pay film rental based on a percentage of box office and the timing of sales and marketing efforts and related expenditures. In particular, fluctuations in theatre system sales and deliveries from quarter to quarter can materially affect quarterly and periodic operating results, and theatre system contract signings can materially affect quarterly or periodic cash flow. Accordingly, the Company's revenues and earnings in any particular period may not be indicative of the results for any future period. The seasonal fluctuations also cause gyrations in the Company's stock price. The Company's performance depends primarily upon the number of motion simulation attractions that it can sell and install. The Company's results have followed a seasonal pattern, with revenues tending to be stronger in the second and fourth fiscal quarters, reflecting the buying patterns of the Company's customers for new motion simulation attractions. New Product Development - ----------------------- The Company operates in a technology driven segment of the entertainment business. As such, the Company must continually improve its products to increase their entertainment value while also facing pressure to continually reduce the price of its products to respond to competitive pressures. Since several of the Company's competitors have significantly more capital than the Company, the Company has had to rely more on its suppliers and other third-parties to improve the Company's existing products and to develop new ones. The inability of the Company to develop new products and to respond to technological developments 18 of its competitors could have a materially adverse effect on the Company's business, operations and financial condition. International Operations - ------------------------ A significant portion of the Company's sales and film licensing are made to customers located outside of the United States, primarily in the Far East, Europe, Middle East and Australasia. During the fiscal years ended 1998, 1997, 1996 and 1995, 85%, 62%, 61% and 69% of the Company's revenues, respectively, were derived from sales outside the United States. International operations and sales of the Company may be subject to political and economic risks, including political instability, currency controls, exchange rate fluctuations (which, in the event of a decrease in value of foreign currency to the dollar, can significantly affect the affordability of the Company's products overseas), changes in import/export regulations, tariff and freight rates, longer accounts receivable collection patterns, changes in regional or worldwide economic or political conditions and natural disasters. The Company typically denominates the prices of its films and equipment in United States Dollars. As a result of the recent devaluation of a number of Asian countries' currencies relative to the U.S. Dollar, the price of the Company's products to prospective buyers in such countries has increased significantly. This effective price increase could adversely affect the Company's future sales in the region and its ability to continue to negotiate and receive its current levels of film rental from existing sites in the region. In addition, various forms of protectionist trade legislation have been proposed in the United States and certain other countries. Any resulting changes in current tariff structures or other trade and monetary policies could adversely affect the Company's international operations. Political and economic factors have been identified by the Company with respect to certain of the markets in which it competes. There can be no assurance that these factors will not result in customers of the Company defaulting on payments due to it, or in the reduction of potential purchases of the Company's products. The Company has not engaged in any currency hedging programs. Intellectual Property - --------------------- The Company has several United States patents on various processes and elements related to film projection and motion simulation. In addition, the Company always faces the risk that new technologies could be discovered that are superior to the Company's patents. Competition - ----------- Competition in each of the markets in which the Company competes is intense. The principal direct competition for customers comes from manufacturers of competing movie-based attractions, and in the case of amusement and theme parks, manufacturers of traditional amusement park attractions. In addition to direct competitors, there is also competition from systems integrators and some amusement and theme parks developing and constructing their own attractions. Many of the Company's competitors have better name recognition, and substantially greater financial and other resources than the Company. Additionally, the out-of-home entertainment industry in general is undergoing significant changes, primarily due to technological developments as well as changing consumer tastes. Numerous companies are developing and are expected to develop new entertainment products or concepts for the out-of-home entertainment industry in response to these developments that are or may be directly competitive with existing products. There is severe competition for financial, creative and technological resources in the industry and there can be no assurance that existing products will continue to compete effectively or that products under development will ever be competitive. Further, the commercial success of products is 19 ultimately dependent upon audience reaction. Audience reaction will to a large extent be influenced by the audience's perception of how the Company's products compare with other available entertainment options out of the home. There can be no assurance that new developments in out-of-home entertainment will not result in changes in consumer tastes that will make the Company's products less competitive. Volatility of Stock Price - ------------------------- The Company's stock price has been, and could continue to be, highly volatile. During the 12 months prior to December 31, 1998, the Company's closing market price has ranged from a low of $0.0469 per share to a high of $1.875 per share. Future announcements concerning the Company or its competitors, quarterly variations in operating results, introduction of new products or changes in product pricing policies by the Company or its competitors, the acquisition or loss of significant customers, or changes in earnings estimates by analysts, among other factors, may affect or be perceived to affect the Company's operations and could cause the market price of the Company's shares to fluctuate substantially. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's shares. Ability to Retain Key Personnel - ------------------------------- Over the past twenty-one months, the Company has reduced its number of employees from 61 to 29. The possible merger of the Company, the financial losses, the potential for additional staff reductions and a tight job market have resulted in some departures by some key personnel. While none of the departures have had a significant effect upon the Company's operations, there can be no assurance that there will not be additional departures. Environmental Matters and Other Governmental Regulations - -------------------------------------------------------- Under various Federal, state and local environmental laws and regulations, a current or previous owner or occupant of real property may become liable for the costs of removal or remediation of hazardous substances at such real property. Such laws and regulations often impose liability without regard to fault. The Company could be held liable for the costs of remedial actions with respect to hazardous substances at its corporate headquarters under the terms of the governing lease and/or governing law. Although the Company has not been notified of, nor is otherwise aware of, any current environmental liability, claim or non-compliance, there can be no assurance that the Company will not be required to incur remediation or other costs in the future in connection with these properties. The Company believes it is in compliance with all applicable Federal, state and local environmental laws and regulations. Business Disruption - ------------------- The Company's corporate headquarters, including its research and development operations, are located in Los Angeles, California, a region known for seismic activity. Operating results could be materially affected by a significant earthquake or other natural disaster. 20 Dependence on Major Customers - ----------------------------- The Company's film licensing business has a concentration located in Japan where Imagine Japan presently operates or is otherwise responsible for fifteen simulation attractions. In the fiscal year ended March 31, 1998, Showscan earned revenues from Imagine Japan in the amount of $1,318,000. The Company's short and long-term performance could be adversely impacted if disruptions were to occur in this area of concentration, such as license terminations or payment problems. Current Trends in the Global Economy - ------------------------------------ The Company's revenues and profitability are dependent on the strength of the national and international economies. In a recessionary or deflationary environment, sales of the Company's products and products of other entertainment companies may be adversely affected. Theme parks and other out-of-home entertainment venues may also experience a downturn in sales which could reduce the funds available for capital improvements and film licensing, resulting in price and other concessions and discounts by the Company in order to maintain sales activity. Recent turmoil in the economies of the countries in Asia have had a material adverse affect on the Company's revenues and results of operations. If recent economic problems experienced in Asia, Russia, and Eastern Europe were to spread to Europe, South America or the United States, it could have a material adverse affect upon the Company's revenues and results of operations. The Company is not able to predict to what extent, or for what period, these economic trends may adversely affect the sales of its products. 21 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- a) Exhibits -------- The exhibits listed below are filed as part of this Report.
Exhibit Number Description -------------- ----------- 10.38 First Amendment to Credit Agreement, dated as of November 10, 1998, by and between Showscan Entertainment Inc. and Eldee Foundation. 27.1 Financial Data Schedule
(b) Reports on Form 8-K ------------------- None 22 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Culver City, State of California on the 16th day of February, 1999. Showscan Entertainment Inc. --------------------------- (Registrant) By \s\DENNIS POPE -------------- Dennis Pope President - Chief Executive Officer (Authorized Officer and Principal Executive Officer) By \s\MARC SABELLA --------------- Marc Sabella Vice President - Corporate Controller (Authorized Officer and Principal Accounting Officer) 23 EXHIBIT INDEX
Exhibit No. Description Page Number ----------- ----------- ----------- 10.38 First Amendment to Credit 25 Agreement, dated as of November 10, 1998, by and between Showscan Entertainment Inc. and Eldee Foundation 27.1 Financial Data Schedule 35
24 EX-10.38 2 FIRST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.38 FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment to Credit Agreement, dated as of November 10, 1998, (this "First Amendment"), is entered into by and between Showscan Entertainment Inc., a Delaware corporation ("Showscan") and Eldee Foundation, a Canadian non- profit corporation ("Lender"). This First Amendment amends, as set forth herein, the Credit Agreement, dated as of November 1, 1997, by and between Showscan and Lender (the "Credit Agreement"). Capitalized terms used herein without definition shall have the meanings assigned thereto in the Credit Agreement. RECITALS 1. Borrower and Lender have heretofore entered into the Credit Agreement. 2. Borrower and Lender now desire to amend certain provisions of the Credit Agreement as specified herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment of Section 1.1(b). Section 1.1(b) of the Credit Agreement is --------------------------- hereby amended in its entirety to read as follows: "(b) Repayment. The outstanding principal amount of the Term --------- Loan shall be repaid at the following times in the indicated amounts: Payment Date Principal Amount Repaid ------------ -----------------------
November 15, 1998 $290,000 December 31, 1998 $150,000 January 31, 1999 $150,000 February 28, 1999 $150,000 March 31, 1999 $260,000
All accrued but unpaid interest on the Term Loan at November 15, 1998 ($110,000) shall be paid together with the principal payment on such date. Each subsequent payment shall be applied first to principal, with the result that all interest that accrues after November 15, 1998, shall be due in full with the final payment. The Term Loan, together with any accrued but unpaid interest thereon, shall be due and payable in full on March 31, 1999. Each payment not made within three (3) business days of its due date shall incur an immediately payable late penalty of $10,000 in addition to any other charges, penalties, interest or defaults established by this Agreement. The Term Loan shall be immediately due and payable in full upon the obtaining by Showscan of new financing(s) in excess of $1,000,000 either singularly or in the aggregate or upon any recapitalization of Showscan that results in net proceeds to Showscan of at least $1,000,000." 2. Amendment of Section 1.3. Section 1.3 of the Credit Agreement is ------------------------ hereby amended in its entirety to read as follows: "SECTION 1.3. COLLATERAL. In order to secure the payment and performance by Borrower of all of its obligations under this Agreement and the Note, Borrower hereby grants to Lender a first priority (other than guild liens) security interest in all of Borrower's right, title and interest in and to each of the motion pictures set forth on Exhibit B to this Agreement (collectively, the "Pictures"), and further including but not limited to related goods, accounts, contract rights, general intangibles, equipment, copyrights, trademarks, and any proceeds thereof or income therefrom (collectively, the "Collateral"), provided, however, that -------- ------- the Collateral shall not include any of the collateral pledged in favor of Banca del Gottardo as evidenced by that certain Financing Statement on Form UCC-1 filed with the Secretary of State of the State of California on September 7, 1995 (#9525160682). The Collateral shall include, to the extent they are owned by Borrower (it being understood that the grant contained in this Section 1.3 does not constitute a representation that each and all the various rights listed are owned by Borrower), without limitation, the scenarios, screenplays or scripts upon which the Pictures are based, all of the properties thereof, tangible and intangible, whether now in existence or hereafter to be made or produced and whether or not in possession of Borrower, and any rights therein and thereto, of every kind and character, including, without limiting the foregoing language, each and all of the following particular rights and properties: 1. all scenarios, screenplays and/or scripts at every stage of the development of the Pictures; 2. all common law and statutory copyright and other rights in all literary and other properties with respect to the Pictures (the "Literary Properties") that form the basis of the Pictures or which are or will be incorporated into the Pictures, all component parts of the Pictures consisting of the Literary Properties and other properties, all motion picture rights in and to the stories, all treatments of said stories and other literary material, together with all preliminary and final screenplays and all drafts prior thereto (the "Screenplays"), used and to be used in connection with the Pictures; 3. all motion picture rights in and to all music and musical compositions connected with the Pictures, including, without limitation, all rights to record, re-record, produce, reproduce, or synchronize all of said music and musical compositions in and in connection with motion pictures; 4. all exposed and/or delivered negative film, sound tracks, positive prints, cutouts and trims connected with the Pictures, whether or not in completed form or in some state of completion; 5. all collateral, allied, subsidiary and merchandising rights appurtenant or related to the Pictures now or hereafter owned or controlled by Borrower, including, without limitation, the following rights: the Literary Properties, or the text or any part of the Literary Properties; all rights throughout the world to broadcast, transmit and/or reproduce by means of television (including, without limitation, free, commercially sponsored, sustaining, subscription, cable and pay television) or by any process analogous thereto, now known or hereafter devised, the Pictures; all merchandising rights including, without limitation, all rights to use, exploit, and license others to use and exploit any commercial tie-ups of any kind arising out of or connected with the Literary Properties, the Pictures, the title or titles of the Pictures, the characters of the Pictures or the Literary Properties, or the names or characteristics of such characters and including further, without limitation, any commercial exploitation in connection with or related to the Pictures or the Literary Properties; 6. all statutory copyrights, domestic and foreign, obtained or to be obtained on the Pictures, together with any and all copyrights obtained or to be obtained in connection with the Pictures or any underlying or component elements of the Pictures, including, without limitation, all copyrights on the property described in subparagraphs (1) through (5) of this Section 1.3, together with the right to register for copyright, and all rights to renew or extend such registration and the right to sue in the name of Borrower or in Lender's name for past, present, or future infringements of copyrights; 7. all insurance policies connected with the Pictures and all proceeds which may be derived therefrom; 8. all rights to distribute, sell, rent, license the exhibition of, and otherwise exploit and turn to account the Pictures, the negatives, sound tracks, prints, and motion picture rights in and to the Literary Properties, other literary material upon which the Pictures are based or from which they are adapted, and such music and musical compositions used or to be used in the Pictures; 9. any and all sums, proceeds, money, products, profits, or increases, including Presale Deposits and Gross Revenues, and any other money profits or increases (as those terms are used in the Uniform Commercial Code in California (the "Code") or otherwise, or as defined below), other property obtained or to be obtained from the distribution, exhibition, sale, or other uses or dispositions of the Pictures or any part of the Pictures throughout the world, including, without limitation, all proceeds, profits, products, and increases, whether in money or otherwise, from the sale, rental, or licensing of the Pictures and/or any of the elements of the Pictures, whether pursuant to any distribution or license agreements or otherwise, in any and all Media (as such term is defined below), including collateral, allied, subsidiary, and merchandising rights, and amounts recovered as damages by reason of unfair competition, copyright infringement, breach of any contract or infringement of any rights, or derived therefrom in any manner whatsoever; 10. the dramatic, non-dramatic, stage, television, radio, and publishing rights, title and interests in and to the Pictures, to the extent owned by Borrower, and the rights to register for copyrights and renewals of same therein, and the right to sue in Borrower's name or in Lender's name for past, present, and future infringements of copyright; 11. the title of the Pictures and all rights of Borrower to the use thereof, including, without limitation, rights protected pursuant to any trademark, service mark, or unfair competition law, and/or the rules and principles of law related to any other applicable statute, common law decision, or other rule or principle of law; 12. all contract rights and general intangibles which grant to any person any right to acquire, produce, develop, reacquire, finance, release, sell, distribute, lease, sublease, market, license, sublicense, exhibit, broadcast, transmit, reproduce, publicize or otherwise exploit the Pictures or any rights in the Pictures; 13. with respect to the Pictures, all accounts and/or other rights to payment which Borrower presently owns or which may arise in favor of Borrower in the future, including, without limitation, any refund under a completion guaranty, all accounts and/or rights to payment due from exhibitors in connection with the distribution of the Pictures, and all accounts and/or rights to payment arising from exploitation of any and all of the collateral, allied, subsidiary, merchandising, and other rights in connection with the Pictures; 14. any and all "general intangibles" (as that term is defined in the Code) in connection with the Pictures not elsewhere included in this definition, including, without limitation, any and all general intangibles consisting of any right to payment which may arise in the distribution or exploitation of any of the rights set out herein, and any and all general intangible rights in favor of Borrower or Lender in connection with the Pictures for services or other performances by any third parties, including actors, writers, directors, individual producers, and/or any and all other performing or non-performing parties or artists in any way connected with the Pictures, any and all general intangible rights in favor of Borrower or Lender relating to licenses of sound or other equipment in connection with the Pictures, and licenses for photographic or other processes, and any and all general intangibles related to the exhibition, distribution or exploitation of the Pictures including general intangibles related to or which grow out of the exhibition of the Pictures and the exploitation of any and all other rights in the Pictures set out in this definition; 15. any and all goods owned by Borrower, including without limitation "inventory" and "equipment" (as those terms are defined in the Code) which may arise in connection with the creation, production, or delivery of the Pictures; 16. any and all rights which arise in connection with the creation, production, completion of production, delivery, distribution, or other exploitation of the Pictures, including, without limitation, any and all rights in favor of Borrower and/or Lender, the ownership or control of which are or may become necessary or desirable in the opinion of Lender, in order to complete production of the Pictures in the event that Lender exercises any rights it may have to take over and complete production of the Pictures; 17. any and all documents issued by any pledgeholder or bailee with respect to the Pictures or with respect to any negatives, sound tracks or prints (whether or not in completed form) connected therewith; 18. any and all rights of Borrower under contracts relating to the production of the Pictures; and 19. all of Borrower's right, title and interest in and to the distribution or license agreements relating to the Pictures, including, without limitation, the proceeds thereof. Definitions - ----------- For purposes of this Section 1.3, the following terms have the meanings expressed below: "Presale Deposits" shall mean any and all sums deposited by any licensee, sub-licensee, distributor or sub-distributor in connection with the exploitation of the Pictures. "Gross Revenue" shall mean all direct cash received by Borrower any of its affiliates (which receipts are not otherwise subject to defeasement or reimbursement or offset in any manner with respect to the Pictures) in respect of the exploitation of the Pictures throughout the world in all Media, whether now known or hereafter devised, subject to the terms of this Agreement, including but not limited to any advances, minimum guarantees, royalties, and license fees actually received by Borrower from any licensee, sub-licensee, distributor or sub-distributor throughout the world. "Media" shall be deemed to mean all media now known or hereafter created or invented with respect to (i) the theatrical, non-theatrical, or public (i.e. non-household viewing) video exhibition of the Pictures, (ii) all television, including without limitation standard broadcast television, pay cable, free cable, pay-per-view (including both residential and non residential) and any other form of demand view, satellite free and pay, or terrestrial free or pay, (iii) all video devices, including without limitation, tape or laser disc based systems, (iv) inter-active video game technology including without limitation, SEGA, Nintendo, 3DO, CD-I or CD-Rom or other home computer based system, or any other system designed to permit the exhibition of the Pictures in a residential or other non-theatrical setting, and (v) all ancillary rights, including without limitation, merchandising, publishing, music publishing and soundtrack rights." 3. Amendment of Exhibit A. Exhibit A of the Credit Agreement is hereby ---------------------- amended in its entirety to read as set forth on Exhibit A to this First Amendment. 4. Addition of Exhibit B. The Credit Agreement is hereby amended by --------------------- adding thereto an Exhibit B in the form of the Exhibit B attached to this First Amendment. 5. Amendment and Restated Promissory Note. The Note shall be exchanged by -------------------------------------- the Lender for an Amended and Restated Promissory Note in the form of Exhibit A to this First Amendment. 6. Fees and Expenses. In connection with this First Amendment, Showscan ----------------- shall pay to Lender a fee of $25,000 on November 15, 1998. In addition, Showscan shall reimburse Lender for its attorney's fees and expenses in drafting and recording such instruments or notices as pre-approved by Showscan and as may be reasonably necessary in order to perfect and preserve the security interest heretofore granted to Lender in the Collateral. 7. No Other Modifications. Except as expressly set forth in this First ---------------------- Amendment, the Credit Agreement shall remain unmodified and in full force and effect. 8. Miscellaneous. ------------- 8.1 Further Assurances. Each party agrees to perform all such acts, ------------------ including without limitation, the execution of documents, as may reasonably be requested by any party in order to more fully effectuate the purposes of this First Amendment. In particular, Borrower agrees to cooperate with Lender to accomplish the execution and filing of copyright mortgages with respect to all or some (as designated by Lender) of the Pictures by November 23, 1998. 8.2 Successors and Assigns. Except as otherwise expressly provided in ---------------------- this First Amendment, all covenants and agreements contained in this First Amendment by or on behalf of any of the parties will bind and inure to the benefit of the respective successors and assigns of the parties whether so expressed or not. 8.3 Severability. Whenever possible, each provision of this First ------------ Amendment will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this First Amendment is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this First Amendment. 8.4 Counterparts. This First Amendment may be executed in two or more ------------ counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 8.5 Choice of Law. This First Amendment shall be interpreted in ------------- accordance with the substantive law of the State of California without regard to its choice of law provisions. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. SHOWSCAN ENTERTAINMENT INC. By: ---------------------------------------- Dennis Pope Title: President and Chief Executive Officer ELDEE FOUNDATION By: ---------------------------------------- Title: ------------------------------------- EXHIBIT A AMENDED AND RESTATED PROMISSORY NOTE Culver City, California November 10, 1998 USD$1,000,000 FOR VALUE RECEIVED, Showscan Entertainment Inc., a Delaware corporation (the "Company"), promises to pay to the order of Eldee Foundation, or order (collectively, "Payee"), at the times and in the manner provided in Section 1.1(b) of the Credit Agreement (as hereinafter defined) but in no event later than March 31, 1999, the principal amount of USD$1,000,000. The Company promises to repay the principal amount and to pay interest on the unpaid principal amount hereof from the date hereof until paid in full at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement, dated as of November 1, 1997, by and between the Company and Payee (such agreement, as it may be amended, modified or supplemented from time to time, the "Credit Agreement"). Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement. This Note is the Company's "Term Note" and is issued pursuant to and entitled to the benefits of the Credit Agreement to which reference is hereby made for a more complete statement of the terms and conditions under which the advances evidenced hereby were made and are to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the office of Payee located at 1080 Beaver Hall Hill, Suite 1720, Montreal, Quebec, H2Z 1S8, or at such other place as shall be designated in writing for such purpose in accordance with the notice provisions of the Credit Agreement. Whenever any payment on this Note shall be stated to be due on a day which is not a business day, such payment shall be made on the next succeeding business day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to repayment and mandatory prepayment as, and to the extent, provided in the Credit Agreement and prepayment at the option of the Company as provided in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO CONFLICTS OF LAW PROVISIONS. Upon the occurrence and during the continuance of an Event of Default, the unpaid balance of the principal amount of this Note and all other obligations of the Company under the Credit Agreement, together with all accrued but unpaid interest thereon, may automatically become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The obligation of the Company to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed is absolute and unconditional. This Note amends and restates, and is issued in substitution for, that certain Note dated November 1, 1997 in the principal amount of $1,000,000 issued by the Company in favor of Payee, which Note shall automatically be of no force or effect upon the delivery of this Note. The Company expressly disclaims any intent to effect an extinguishment or discharge of any of the obligations under such old Note as a result of issuing this Note. The Company and endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. IN WITNESS WHEREOF, the Company has caused this Note to be executed and delivered by its duly authorized officer, as of the day and year and at the place first above written. SHOWSCAN ENTERTAINMENT INC. By: ----------------------- Title: -------------------- EXHIBIT B --------- SHOWSCAN FILM LIBRARY ----------------------- Aerial Dogfight Night Race Alien Encounter Ninja Alpha Jet** Ocean Flight** Alpine Express Olympic Bobsled Alpine Raceway Police Chase* Aquaride Rescue at Sea* Asteroid Adventure Revolution Astro Canyon Coaster*** RGB Adventure Beach Buggies* River Run Cosmic Pinball Rollercoaster Desert Duel Runaway Train Devil's Mine Ride Silicon Adventure Downhill Skier Space Race Dracula's Haunted Castle Stock Car Showdown Dynamite Train StormRider Fun House Express Street Luge Glacier Run Virtual Time Machine Grand Prix Volcano Mine Ride*** Hong Kong Havoc Whitewater Rafting Kid Coaster * Not available in HD Format ** Available only in Video Format *** Available only in HD and Video Formats EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1999 APR-01-1998 DEC-31-1998 1,035 0 3,502 1,372 1,426 6,832 3,578 3,230 11,785 12,975 5,690 0 0 6 (1,196) 11,785 569 1,336 404 906 1,606 0 194 (1,365) 0 (1,365) 0 0 0 (1,365) (.24) (.24)
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