-----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, Wd8lE3YRlXUCaU4rF3Af8abhcbAV465/iFVoruTkSv5hh1XE1DqVhMCxhp/OQpIK KLH7P00apFCgUlDldm2w2g== 0000950148-97-001798.txt : 19970715 0000950148-97-001798.hdr.sgml : 19970715 ACCESSION NUMBER: 0000950148-97-001798 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970714 SROS: NONE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09710 FILM NUMBER: 97639991 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-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________ FORM 10-K ___________ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997. COMMISSION FILE NUMBER 0-15939 SHOWSCAN ENTERTAINMENT INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3940004 (State of incorporation) (I.R.S. Employer 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 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS ------------------- Common Stock, $.001 par value 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 filing requirements for the past 90 days. YES X NO ----- ----- The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 20, 1997 was approximately $13,234,405 (based on last NASDAQ-reported sale price of $2.625 per share of Common Stock on that date). There were 5,642,058 shares of registrant's common stock outstanding as of June 20, 1997. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the close of registrant's fiscal year, are incorporated herein by reference in Part III of this Report. 2 TABLE OF CONTENTS Item Page - ---- ---- Part I 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 18 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . 19 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . 27 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Part III 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . 28 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . 28 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . 28 Part IV 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2. 3 FORWARD-LOOKING STATEMENTS In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Results." Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management's analysis only as of the date hereof. Showscan Entertainment Inc. undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by the Company in calendar 1997 and 1998 and any Current Reports on Form 8-K filed by the Company. PART I ITEM 1. BUSINESS GENERAL Showscan Entertainment Inc. (the "Company") is a leading provider of movie-based motion simulation theatre attractions to the rapidly expanding out-of-home entertainment market. The Company's motion simulation theatre attractions ("Showscan Attractions") combine the exhibition of a short action film with multi-channel sound systems and synchronized theatre seat movement to produce an immersive entertainment experience in which the theatre patron has the perception of actually participating in the on-screen action. The entertainment creates a "thrill ride" or action entertainment experience (such as riding a run-away train or racing through outer space). The Company's attractions incorporate various proprietary technologies, including the award winning and patented 70mm filming and projection process known as Showscan(R). The Company believes that films made and exhibited in the Showscan process create a visual effect of depth, clarity and realism that is superior to any other film format. The Showscan process is also used for the exhibition of films in large screen special format movie theatres. The Company's films have been exhibited in such specialty theatres at world fairs, tourist destinations, trade conventions and other locations where the operator desires the impact of the large-screen, intense image that a Showscan film provides. As of June 20, 1997, the Company had 61 Showscan Attractions screens operating around the world. The Company had 8 additional Showscan Attractions screens in its delivery and installation backlog, and has contractual commitments for an additional 29 Showscan Attractions screens. The Company includes in its backlog all sales for which it has a signed agreement or letter of intent, in each case supported by a letter of credit, cash deposits or damage provisions. Until November 1993, all Showscan Attractions were owned and operated by unaffiliated third parties. Since then, ventures in which the Company has a 15% to 50% ownership interest have opened motion simulation theatres ("O&O Theatres") at Universal CityWalk, Universal City, California; in the Trocadero Arcade at Piccadilly Circus, in London, England; at General Cinema's 14-screen theatre multiplex in Framingham, Massachusetts; on the Riverwalk in San Antonio, Texas; at the Asian Trade Center in Osaka, Japan; in Austin, Texas beginning on July 1, 1997 and at Darling Harbour, Australia in July, 1997. As part of its business, the Company produces and licenses specialty films in the Showscan process which are then exhibited in conventional theatres equipped to show Showscan films. The Company also markets all of the cameras, projectors, motion bases and other equipment necessary to establish and operate Showscan Attractions and Showscan specialty theatres. The Company has 6 permanent specialty theatres operating as of June 20, 1997. 3. 4 Last year, the Company entered another expanding market when it began marketing a 15/70 format giant screen equipment and theatre package. The Company was incorporated in Delaware in August 1984 under the name Showscan Film Corporation. In August 1990, the Company's name was changed to Showscan Corporation, and in August 1994 the name was changed again to Showscan Entertainment Inc. The Company's principal executive office is located at 3939 Landmark Street, Culver City, California 90232. The Company's telephone number at its executive office is (310) 558-0150. Unless the context otherwise requires, the term "Company" as used in this Report refers to Showscan Entertainment Inc. and its wholly owned subsidiaries, Showscan Productions, Inc., Showscan CityWalk, Inc., Showscan Attractions, Inc., Showscan Framingham, Inc. and Showscan Entertainment B.V. BUSINESS STRATEGY The Company believes that there is a rapidly increasing worldwide consumer demand for a variety of out-of-home entertainment options. The Company plans to capitalize on its position as a leader in the entertainment motion simulation attraction business and on the growing demand for entertainment alternatives by making its movie-based products available to consumers worldwide at high-visibility and high-traffic locations, such as urban entertainment complexes, tourist destinations, family entertainment centers, amusement/theme parks, movie theatre complexes, gaming casinos, and shopping centers. The Company has focused its primary business strategy on the development of high-margin recurring revenues from the licensing and distribution of its motion simulation and specialty films. The Company is also committed to enhancing the recognition of the Showscan(R) brand name worldwide. The Company's current strategies to achieve this objective are as follows: Increase Film Licensing Revenues. The Company seeks to increase the recurring revenues derived from licensing its films by increasing the number of motion simulation attractions and specialty theatres. As this installed base grows, each film will be licensed to a greater number of exhibitors thereby increasing revenue, while also amortizing the fixed film production costs of Showscan owned films over a larger revenue base. To increase this recurring revenue, the Company is: (i) Marketing to a wide range of potential customers worldwide while maintaining reasonable profit margins; (ii) Distributing Showscan films to simulation attractions previously installed by competitors of Showscan; (iii) Enhancing and expanding its film library by producing internally or with third parties new films while also obtaining distribution rights to motion simulation films produced by others; (iv) Enhancing its proprietary projection and motion base technology; (v) Entering into additional strategic sales arrangements to supplement existing strategic agreements which cover Japan, USA, Australia, Taiwan, Hong Kong and selected portions of China; and (vi) Emphasizing sales having multi-location possibilities. (To date, the Company has sold 18 Showscan Attractions to Imagine Japan, 10 Showscan Attractions in Taiwan to Kings Entertainment Co., Ltd., four Showscan Attractions in China to Jenor International, 24 Showscan Attractions to United Artists Theatre Circuit, Inc. ("UA"), five Showscan 4. 5 Attractions to Auscinemagic/Reality Cinema in Australia, two Showscan Attractions to Lotte World in Korea and two Showscan Attractions to Parc du Futuroscope in France.) INVESTMENTS IN SHOWSCAN ATTRACTION THEATRES. The Company has historically participated directly in the recurring revenues from ticket sales and film distribution and licensing by having an ownership interest in certain Showscan Attractions ranging from 25% to 50%. Although the start-up and the pre-opening marketing and advertising costs of O&O Theatres are sometimes high (which costs the Company has defrayed in part through strategic alliances), the variable costs of ticket sales are low. In the fourth quarter of the fiscal year ended March 31, 1997, the Company revised its O&O Theatre strategy so that it will now generally limit its ownership interest to between 10% and 15%; although there may be specific locations where the Company would invest up to 50%. The Company intends to selectively continue its investment in Showscan Attractions on this basis. The Company has entered into several alliances that provide the Company with the capability of participating in the ownership of Showscan Attractions with other investors. See "Item 1. Business -- Motion Simulation Attractions -- Owned and Operated Theatres," below. The first O&O Theatre opened at Universal CityWalk in Universal City, California in late November 1993; the second O&O Theatre (which contains two separate screens) opened in late September 1994 at the Trocadero Arcade at Piccadilly Circus, London, England; the third O&O Theatre (which contains two separate screens) opened in late May 1995 at a General Cinema 14-screen theatre multiplex in a suburb of Boston, Massachusetts; the fourth O&O Theatre (a joint venture with Imagine Japan) opened in August, 1995 at the Asian Trade Center in Osaka, Japan; and the fifth O&O Theatre opened in March, 1996 on the Riverwalk in San Antonio, Texas. UA has agreed to offer to the UA Venture (as defined below) up to 24 sites at anytime prior to August 19, 1999 as locations for O&O Theaters. On behalf of the UA Venture, the Company has the right to accept or reject any such potential site. The Company also has entered into an agreement with UA that gives the Company (on behalf of the UA Venture) the right of first negotiation with respect to any additional Showscan Attraction to be installed in any UA theatre complexes. See "Item 1. Business -- Motion Simulation Attractions -- Owned and Operated Theatres -- The United Artists Venture," below. As of March 31, 1997, UA has offered eight sites of which the UA Venture declined seven sites as they did not meet the criteria of the UA Venture. Effective July 1, 1997, the UA Venture accepted the offer by UA of the Showscan Attraction site in Austin, Texas. Additionally, the Company has acquired (effective July 1997) a 15% investment in a Showscan Attraction in Darling Harbour, Sydney, Australia. Pursue Other Business Opportunities. In addition to increasing its recurring film revenue, another objective of the Company is to explore and exploit other commercial and entertainment opportunities and revenue sources. During the fiscal year ended March 31, 1996, the Company introduced a new product line, a 15 perf/70 film format giant screen theatre package that includes state-of-the-art rolling loop projectors, surround-sound systems, synchronization, show control and theatre design. The 15/70 film format differs from other film formats such as 8 perf/70 and 5 perf/70 by providing a larger frame size which in turn allows projection onto a larger screen. This film format system is also big enough to use in a dome application, whereas with other formats this is not recommended. The 15/70 format film library is also the largest giant screen film library existing today. On May 2, 1997, the Company settled all litigation that it had with Imax Corporation regarding this product line. See "Item 3 -- Legal Proceedings," for a more detailed explanation of this litigation. In addition, the Company believes that its current and future library of motion simulation and specialty films will become increasingly more valuable. Accordingly, the Company plans to significantly increase the number of films it offers by producing and/or acquiring for distribution three to five new films annually. During the past fiscal year, the Company released three motion simulation films, has another film in post-production and has ten additional simulation films under active development. For the fiscal year ending March 31, 1998, the Company has acquired two films that were not filmed using the Showscan process but are being converted to the Company's format. In addition, the Company also is actively pursuing various financing alternatives, including limited partnerships and other similar arrangements to finance the production of additional Showscan motion simulation films. 5. 6 The Company believes that the Showscan process can also be used to enhance the effectiveness, appeal and commercial potential of other filmed products, including feature-length motion pictures, specialty films, commercial and corporate presentations, educational films, documentaries and other forms of entertainment, such as interactive and virtual reality attractions. In addition, the Company is exploring potential additional entertainment applications of the Showscan process, including the development of video games based on its existing and future film products. The Company plans to enter into additional strategic alliances, joint ventures and other similar arrangements (i) to facilitate the production of its motion-simulation software, (ii) to expand the out-of-home entertainment venues in which its products can be exhibited, (iii) to reduce financial risks, and (iv) to expand the Company's access to distribution networks, urban entertainment locations and destination centers, and technological innovations. The Company is currently considering alliances with motion picture exhibitors, retail shopping center developers and operators, and others for the establishment of additional Showscan Attractions and specialty theatres in motion picture multiplexes, shopping malls, casinos and other gaming venues, and other high-traffic locations and destinations. Furthermore, the Company may consider the acquisition of motion simulation film libraries and/or other companies in its line of business or in other businesses. THE MOTION SIMULATION AND SPECIALTY FILM LIBRARY The Company derives revenues in the following ways from its film library: (i) a royalty fee for use of the patented Showscan filming and projection process, (ii) a distribution fee based on the revenues derived from all films that are not solely owned by the Company; and (iii) receipt of all or a percentage of the licensing revenues remaining after the payment of any distribution fees or expenses. The amount the Company receives from co-owned films varies, and is based on the participation agreements negotiated with the other owners of the films. The Company's film library consists of a motion simulation film library and a specialty film library. The motion simulation film library is one of the world's largest entertainment motion simulation film libraries and currently contains 28 action/thrill-ride films. The specialty film library contains 16 Showscan specialty films available for exhibition in specialty theatres. The Company is the sole owner of 16 of the motion simulation films, a joint owner of seven motion simulation films and the distributor of five motion simulation films owned by unaffiliated companies. Of the 16 Showscan specialty films, seven are owned by the Company. The Company initiated distribution of the live-action motion simulation film Street Luge (a new high-speed downhill ride just inches from the asphalt) and the computer-animated/special effects Storm Rider (the rider becomes a raindrop that falls to Earth) during the past fiscal year. The film library also consists of such films as Cosmic Pinball (depicting a race through a giant, futuristic pinball park), and the highly-acclaimed Devil's Mine Ride (a ride through an abandoned mine on a runaway rail car). The Company has obtained certain distribution rights through May 1, 2002 to two films (Funhouse Express and Asteroid Adventure) which were produced by Imax Corporation. These two films may be distributed to Showscan's existing installed base and contractual backlog of Showscan Attractions as of April 30, 1997 (an aggregate of approximately 100 sites). The films that the Company produces are either fully financed by third parties or co-produced and financed by the Company and third parties. When the Company produces films, it typically hires a production company or team of specialists on a project-by-project basis, similar to the major movie studios. This allows the Company to retain creative and quality control without the burden of significant ongoing production overhead expenses. As the film's producer, the Company typically has control over the creative and technical aspects of the production and is designated as the film's exclusive distributor. The Company has obtained the exclusive, perpetual worldwide right to distribute in the Showscan format certain of the Showscan motion simulation films and specialty films that are not owned by the Company, except that in certain circumstances the Company does not own the right to distribute such films in the country in which the owner of the distributed film is located. On some films, the Company only has the right to distribute the film to its network of simulation attractions. 6. 7 The Company has or is transferring 23 of the Showscan motion simulation films to high-definition video for exhibition in HD Simulation Attractions. The Company's specialty film library consists of such films as Niagara Wonders, a 23-minute Showscan film produced for exhibition in a permanently erected 300-seat theatre in Niagara Falls, New York; France, a 40-minute Showscan film that was produced by Source Perrier for the 1989 bicentennial celebration of the French revolution and exhibited in a first-run theatre in Paris, France; and Discovery, a 16-minute Showscan film produced by the government of British Columbia and exhibited in a temporary specialty theatre at the Expo '86 World's Fair in Vancouver, Canada. Two Showscan specialty films, Nature Rediscovered and Concerto for the Earth, were in exhibition at temporary Showscan specialty theatres at the Expo '92 World's Fair in Seville, Spain. Both films explore biodiversity, ecological awareness and the fragile balance of nature. Concerto for the Earth is the first Showscan film in 3-D; however, the film can be exhibited in the standard 2-D format. MOTION SIMULATION ATTRACTIONS A Showscan Attraction is a theatre (typically 18 to 84 seats) in which the on-screen action of a short action film is synchronized with the motion of the theatre seats to simulate various realistic or action experiences. The Showscan Attraction "rides" are short, approximately four-to-five-minute entertainment experiences. Each Showscan Attraction is equipped with a high-quality, multi-channel sound system and a seat motion system (motion base). Motion bases are available in various theatre configurations to suit the needs of the various locations, and are manufactured by Intamin, A.G., McFadden Systems, Inc., Shostar Ltd., and others. The potential market for motion simulation theatre attractions includes any location with high pedestrian traffic, including tourist attractions, amusement parks, theme parks, resorts, large regional shopping centers, motion-picture multiplexes, urban entertainment centers, and hotel casinos. Showscan Attractions are either the standard film-based theatres in which the Company's 70mm motion simulation films are exhibited using the Company's patented projector, or are HD Simulation Attractions in which the motion simulation films are projected using standard, commercially available high-definition video projection equipment. To date, most Showscan Attractions have exhibited Showscan motion simulation films using 70mm film and the Company's projectors. However, the Company has seen increasing demand for its HD Simulation Attractions in which the Showscan films are transferred to a high-definition video format on laser discs and projected using high definition video projectors. See "Item 1. Business -- Equipment," below. Because the Showscan film is transferred directly from frame-to-field to high-definition video, the Company believes that the image projected is the sharpest image available in that format. The HD Simulation Attractions, when combined with any of the available motion bases, utilize less space than the standard film-based Showscan Attractions. Due to the lesser space requirements of HD Simulation Attractions, such Showscan Attractions can be installed in locations previously not feasible. The Company licenses its films and, in standard film-based motion simulation theatre attractions, sells its Showscan projection equipment to third party owners and operators of Showscan Attractions. The Company is the sole source of both the film projectors used to exhibit Showscan motion simulation films and the show control system. In addition, the Company generally sells the motion bases, control panels, video equipment and other equipment used in the Showscan Attractions and assists in installing the attraction. Licensees of the Company's motion simulation films are not obligated to purchase the motion bases or the other equipment and services offered by the Company. Other than the patented Showscan film projectors and the Company's show control system, all motion simulation equipment, including the various motion bases, the sound system and the video projection equipment, can be purchased by the third party owner/operator from other sources. The initial term of the Company's licensing agreements generally range from two to five years (normally with fixed or minimum annual royalty payments and film rental obligations). 7. 8 Historically, Showscan Attraction installations outside North America have represented a significant portion of the Company's revenues (constituting 62%, 61% and 69% of the Company's revenues for the fiscal years ending March 31, 1997, 1996 and 1995, respectively). As of March 31, 1997, Showscan Attractions have been sold or licensed in the United Kingdom, Australia, Saudi Arabia, Spain, Hong Kong, People's Republic of China, United States, Canada, Japan, South Korea, Taiwan, Indonesia, Singapore, France, Belgium, Italy, South Africa, United Arab Emirates, New Zealand and Germany. The Showscan Attractions sold in Japan have been purchased or distributed by Imagine Japan, Inc. ("Imagine"), which has exclusive distribution rights to Showscan Attractions in Japan through December 31, 1999. See "Item 1. Business -- Sales and Marketing," below. OWNED AND OPERATED THEATRES. In 1993, the Company began developing and operating Showscan Attractions in which the Company has an ownership interest. These O&O Theatres have, to date, been established through the various strategic alliances described below. For certain financial information regarding these strategic alliances, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." The United Artists Venture. Under the terms of a Joint Venture Agreement dated as of August 19, 1994 (the "Joint Venture Agreement"), the Company and UA have agreed to be equal partners in a venture called Showscan/United Artists Theatres Joint Venture (the "UA Venture"). The dates for the capital contributions are to be agreed upon by the venture partners, which dates will depend on the actual build- out schedule of each project. UA and the Company are required to equally contribute additional capital as necessary for all projects undertaken by the UA Venture. The Company is managing partner of the UA Venture while UA is the administrative partner. The Company, as managing partner, will implement all decisions of the UA Venture and, together with UA, develop the business plan and long-term strategic plans for the UA Venture. UA, as administrative partner, will be responsible for all financial aspects of the UA Venture, including overseeing record keeping and other financial matters. Pursuant to a Theater Rights Agreement dated as of August 19, 1994, as amended (the "Theater Rights Agreement"), UA has agreed to offer to the UA Venture for ownership and operation by the UA Venture, up to 24 theatre sites at any time prior to August 19, 1999 for the installation of Showscan Attractions in existing or to-be-built UA theatre complexes. If the UA Venture declines to acquire a particular location, then UA must install a Showscan motion simulation attraction theatre at the first 24 sites that the UA Venture declines to acquire. Whenever UA or the UA Venture builds a Showscan Attraction theatre, such entity will have the exclusive rights to exhibit Showscan motion simulation attraction films within a pre-agreed area surrounding such location. Also, pursuant to a Master Management and Development Agreement, dated as of August 19, 1994, by and among the Company, UA and the UA Venture (the "Master Management Agreement"), UA will develop and coordinate the construction of new and/or the conversion of existing theatres to Showscan Attractions and will manage each theatre pursuant to pre-negotiated terms. The Master Management Agreement expires on August 19, 1999, unless the Theater Rights Agreement is extended, in which case the Master Management Agreement will be extended for the same period. The UA Venture, in turn, has agreed to accept prior to August 19, 1999 at least one of the theatre sites offered to it by UA. The Company has agreed to pre-negotiated terms for the sale of Showscan equipment, installation, servicing and the licensing of Showscan motion simulator films. The Company will also make available to both the UA Venture and UA its library of specialty films which utilize the patented Showscan process, to the extent that either the UA Venture or UA builds or converts existing theatres into specialty theatres for the exhibition of specialty films. The Theater Rights Agreement contains certain provisions that require UA to make payments to the Company if UA is unable to meet its obligations and that require the Company to make payments to UA if the UA Venture is unable to meet certain of its obligations. To date, UA has offered to the UA Venture eight sites at new or existing UA movie theatre multiplexes. The UA Venture has declined seven of these sites because they did not meet the criteria of the UA Venture and 8. 9 therefore, UA has completed construction for its own account Showscan Attractions at those seven sites. On July 1, 1997, the UA Venture exercised its rights under the Theater Rights Agreement to accept the offer by UA of the Showscan Attraction site in Austin, Texas. This site was completed by UA and was already open prior to acceptance by the UA Venture. The Austin site is the first site under the UA Venture. Moss/DiBenedetto Ventures. The Company and affiliates of certain of its directors entered into (i) the Showscan CityWalk Venture (the "CityWalk Venture"), a venture formed solely to own and operate an O&O Theatre in Universal City, California and (ii) the Showscan Attractions Venture, a venture formed for the purpose of, directly or through other jointly-owned entities, developing, owning and operating additional O&O Theatres throughout the world (the "Attractions Venture", and together with the CityWalk Venture, the "Moss/DiBenedetto Ventures"). The CityWalk Venture. The first O&O Theatre opened in November 1993 at Universal CityWalk, adjacent to Universal Studios in Universal City, California. This O&O Theatre is owned by the CityWalk Venture, a venture 50% owned by Showscan CityWalk, Inc. (a wholly owned subsidiary of the Company), 25% owned by Moss Family LA Corp., a California corporation, and 25% owned by DiBenedetto CityWalk Limited Partnership, a Delaware limited partnership (collectively, the "Investors"). Moss Family LA Corp. and DiBenedetto CityWalk Limited Partnership are controlled by Mr. Charles B. Moss, Jr. and Mr. Thomas R. DiBenedetto, respectively. Mr. Moss and Mr. DiBenedetto are directors and stockholders of the Company. See "Item 10. Directors and Executive Officers of the Registrant," below. The term of the CityWalk Venture expires on December 31, 2050. Universal CityWalk is a diversified-use entertainment/shopping facility that is controlled by Universal Studios Recreation Group ("Universal"). The facilities are leased from Universal pursuant to a profit sharing lease (the "Lease") entered into with MCA Inc., the predecessor of Universal, under which Universal paid approximately one-half of the total tenant costs of the theatre (as defined), which costs included the projection equipment and the motion bases. The Lease expires in November 2002, subject to options to extend the Lease for three five-year periods. In general, the CityWalk Venture is obligated to pay a base rent plus 50% of the cash flow (as defined) from the operations of the theatre. Accordingly, the CityWalk Venture will retain 50% of the cash flow from the theatre's operations. The base rent will be adjusted annually based on the percentage increase in the consumer price index up to a maximum of 5% per year. Of the 50% of cash flow retained by CityWalk Venture, 50% will be retained by the Company and 50% will be paid to the Investors. Thus, the Company's share of the total cash flow from the theatre's operations will be 25% plus the annual film rentals, royalties and management fees that the CityWalk Venture is separately required to pay the Company, each of which is subject to annual increases based on the consumer price index up to a maximum of 5% per year. The Attractions Venture. The parties to the Attractions Venture are (i) Showscan Attractions, Inc., a wholly owned California subsidiary of the Company and the managing partner of the Attractions Venture, (ii) Moss Family O&O Corp., a California corporation controlled by Mr. Moss (the "Moss Partner"), and (iii) DiBenedetto O&O Limited Partnership, a Delaware limited partnership controlled by Mr. DiBenedetto (the "DiBenedetto Partner"). The Attractions Venture agreement states that the parties intend to develop, own and operate O&O Theatres through the Attractions Venture or through other corporations, joint ventures, partnerships or other entities to be owned by the parties to the Attractions Venture. The agreement further provides that if any O&O Theatre is owned by any such other corporation, venture, partnership or other entity, the partners to the Attractions Venture shall own and operate such other entity on the same terms and conditions as the agreement of the Attractions Venture. Pursuant to a Proprietary Property Acquisition and Management Agreement, dated as of September 27, 1993, between the Company and the Attractions Venture, the Company granted to the Attractions Venture rights to utilize proprietary property and rights of the Company in connection with the development and operation of additional O&O Theatres. Under the terms of this agreement, the Company will manage any and all Showscan Attractions developed and operated by the Attractions Venture. The Attractions Venture is required to purchase 9. 10 simulation equipment and license Showscan motion simulation films from the Company on terms and conditions that are substantially the same as those offered to unaffiliated third parties, except that the Attractions Venture receives a discount on certain equipment prices and film rental and royalty fees. Moss Entertainment Corp., a corporation controlled by Moss, and DiBenedetto Corp., an affiliate of DiBenedetto, were retained by the Attractions Venture to provide certain services in connection with the acquisition of properties for the additional O&O Theatres and the disposition of those theatres. For such services, Moss Entertainment Corp. and DiBenedetto Corp. are to receive fees upon the sale or other disposition of certain of the O&O Theatres developed by the Attractions Venture. The term of the Attractions Venture expires on December 31, 2050. The Attractions Venture agreement further provides that neither the Company, the Moss Partner, nor the DiBenedetto Partner may develop, own or operate any additional Showscan Attractions without first offering all of the other parties to the Attractions Venture the opportunity to invest in such additional Showscan Attractions in proportion to each party's Percentage Interest (as defined below). No party is, however, obligated to invest in any such additional Showscan Attractions. If the parties to the Attractions Venture do not collectively contribute all funds necessary to establish and operate any such additional Showscan Attraction, the parties may admit additional unaffiliated investors as part owners of the additional Showscan Attraction. Showscan Attractions, Inc. currently owns a 50% interest in the Attractions Venture, and each of the Moss Partner and the DiBenedetto Partner owns a 25% interest in the Attractions Venture (the "Percentage Interests"). In the event that the Company and the Moss Partner and/or the DiBenedetto Partner elect to jointly invest in any additional Showscan Attraction, the parties will share all profits, loss and distributions of cash, if any, derived from the operation and ultimate disposition of each additional Showscan Attraction in proportion to the capital contributions made by the partners (and any unaffiliated investor) into the account established for the additional Showscan Attraction. The first O&O Theatre owned by the parties to the Attractions Venture is the twin O&O Theatre that opened in late September 1994 in the Trocadero Arcade at Piccadilly Circus, London, England. As permitted by the Attractions Venture agreement, the London O&O Theatre is owned by the partners of the Attractions Venture through a corporation formed under the laws of England rather than directly through the Attractions Venture. Cinemania (U.K.) Limited, the corporation formed to own the London O&O theatre, is owned by Showscan Attractions, Inc., the Moss Partner and the DiBenedetto Partner in proportion to their Percentage Interests. In connection with the UA Venture, the Attractions Venture agreement was amended to exclude from the territories in which the Attractions Venture can operate certain specific areas that are made available to UA under the Theater Rights Agreement. In exchange for such amendment, the Company agreed to pay each of Messrs. Moss and DiBenedetto a specified amount upon the opening of each new O&O Theatre that is owned by the UA Venture in the specific excluded areas and to pay Messrs. Moss and DiBenedetto a percentage of certain profits (as defined) from the Company's share of profits from each such Showscan Attraction owned by the UA Venture. The Framingham Venture. In April 1995, Showscan Framingham, Inc., a wholly owned Delaware subsidiary of the Company, and General Cinema of Framingham Inc. ("GCF"), a wholly owned Massachusetts subsidiary of General Cinema Corp. of Massachusetts ("GCC"), entered into a venture (the "Framingham Venture") to own and operate twin Showscan Attractions at a newly opened, 14-screen movie theatre multiplex owned and operated by GCC in Framingham, Massachusetts, a suburb of Boston. Showscan Framingham, Inc. and GCF agreed to be equal partners in the Framingham Venture and to manage the venture by a four-person management committee composed of two representatives from each party. Day-to-day management of the twin theatres owned by the Framingham Venture is handled by GCF as operating partner, for which it receives a management fee. The Company receives film rentals and royalties from the Framingham Venture based on a formula tied to the gross box office receipts from the twin Showscan Attractions against a minimum. 10. 11 The partners of the Framingham Venture have agreed to close the twin Showscan motion attraction simulation theatres and liquidate the assets of the Framingham Venture. The partners have further agreed to sell the simulation attraction equipment back to the Company at its current fair market value, which approximates the underlying net book value of the equipment, and the Company has contracted to sell the equipment to a non-affiliated third party. The remainder of the assets will be allocated, as defined in the Venture agreement, back to the partners. An additional capital contribution may be necessary by one of the partners upon settlement and liquidation of the Venture; however, the partners believe the contribution will be under $100,000. The Osaka Venture. In June, 1995, Showscan Entertainment B.V., a wholly owned subsidiary of the Company, organized under the laws of the Netherlands, and Imagine Japan, Inc., a company organized under the laws of Japan, entered into a venture (the "Osaka Venture") to own and operate a Showscan Attractions theatre at the Asia Trade Center in Osaka, Japan. Showscan Entertainment B.V. and Imagine Japan, Inc. agreed to be equal partners in the Osaka Venture. Day-to-day operations of the theatre are managed by Sega Enterprises, Ltd. As theatre manager, Sega receives a percentage of the gross box office receipts of the theatre as a combined rent/management fee, as well as reimbursement of its operating expenses. The Company separately receives film rental and royalty fees from the Osaka Venture. The term of the Osaka Venture is for five years from June, 1995 and can be extended for an additional five years at the option of Showscan Entertainment B.V. at the end of the initial term. Because of the structure of the Osaka Venture under Japanese law, ownership and title of all property is held by Imagine Japan. The Maloney Venture. In August, 1995, the Attractions Venture and Maloney Development Partnership Ltd. ("Maloney"), an unaffiliated Texas limited partnership, formed a Texas limited liability company called Showscan Maloney, LLC to own and operate a Showscan Attraction theatre in the San Antonio Riverwalk District, in San Antonio, Texas. The Attractions Venture and Maloney own equal interests in Showscan Maloney, LLC, thus the Company's share in the cash flow from the theatre is 25% plus the annual film rentals, royalties and management fees that Showscan Maloney, LLC is separately required to pay to the Company. Day-to-day management of the theatre is handled by the Company as the sole manager of Showscan Maloney, LLC. The partners of Showscan Maloney, LLC have agreed to close the theatre and liquidate its assets. The partners have further agreed to sell the theatre equipment to the Company, which is in the process of negotiating to sell the equipment to a non-affiliated third party. The Company expects to fully realize the carrying value of its investment in this venture at March 31, 1997 upon the completion of the liquidation and subsequent sale. Universal Agreement. Pursuant to the Lease entered into with Universal in connection with the CityWalk Venture, Universal has the right, exercisable at Universal's election, to participate in the Company's share of any future O&O Theatres located in California. If Universal makes any such election, Universal will be entitled to receive one-half of the Company's rights in such O&O Theatre and will assume one-half of the Company's obligations related to such O&O Theatre. To date, Universal has not exercised its option to participate in any additional O&O Theatres. SPECIALTY THEATRES The Company also receives revenues from the production, licensing and exhibition of specialty films. These films are typically 15 to 40 minutes in duration, are produced in the Showscan process and are exhibited at expositions, theme parks, major fairs and festivals and other larger tourist areas. Specialty theatres are either theatres permanently dedicated to the exhibition of Showscan specialty films or temporary theatres erected for such purposes. Often, specialty theatres exhibit Showscan specialty films that are produced specifically for the theatre or the exhibition. Examples of specialty theatres and specialty films include the two films produced for and exhibited at the Expo '92 World's Fair held in Seville, Spain. 11. 12 Typically, the Company finances its specialty film production through a third party who usually is the owner and operator of the specialty theatre venue. Showscan receives production fees for its services, revenues from the sale of Showscan projector equipment (and possibly the theatre installation, sound system and seats, etc.) and worldwide distribution rights to the specific films. As of June 20, 1997, nine permanent and twelve temporary specialty theatres had been sold by the Company. Of the nine permanent theatres, six are currently operating and the remaining three theatres are permanently closed. The Company has agreed to make available, for a fee, to both the UA Venture and UA its library of specialty films which utilize the patented Showscan process, to the extent that either the UA Venture or UA builds or converts existing theatres into specialty theatres for the exhibition of specialty films. THE SHOWSCAN PROCESS Standard films are currently projected at 24 frames per second (fps) on 35mm film with each frame being shown twice. In contrast to conventional filming and projection systems, a Showscan motion picture is photographed on 65mm film at a rate of 60 fps and is projected using 70mm film at a rate of 60 fps and at a higher illumination level (the 65mm film is projected using 70mm film in order to accommodate the sound track, which occupies approximately 5mm of the film strip). In addition, each frame in a Showscan film is shown only once. The Company believes that the bigger image and increased visual cues perceived by the viewer of a Showscan film result in greater picture clarity and an enhanced sense of depth and realism. Photography of 65mm film at a frame rate of 60 fps offers a number of improvements to the quality of a motion picture image and permits the screen size to be substantially enlarged without significant degradation of the image. The images are significantly brighter with more saturated and vibrant colors. Because of the frame rate of Showscan film, the motion of the cameras and the subject can be substantially increased without noticeable distortion, greatly heightening the impact of action scenes. The larger 70mm format and faster exposure time also greatly reduce blurring, thus recording images more accurately and in finer detail. To enhance the visual impact, and to take maximum advantage of the realism and detail of the Showscan process, Showscan film is usually projected onto a specially designed, curved screen. Showscan motion pictures can be transferred to conventional 35mm/24 fps format for use in conventional movie theatres to other large film formats and to all standard video formats. Showscan motion pictures can also be directly transferred (one frame to each field) to high- definition video for exhibition with standard high-definition video projectors. Although a Showscan film transferred to alternative formats, including to the high-definition laser projection system used by the Company, does not contain the clarity, depth and realism of the original Showscan film projected in 70mm film at 60 fps, the Company believes that the visual quality of Showscan film transferred to such alternative film formats (such as the 8/70 - 30 fps and 24 fps, 5/70 - 30 fps film formats) exceeds the quality that could be obtained in such formats using conventional films. SALES AND MARKETING The Company's sales and marketing activities are coordinated by the Company's Vice President of Worldwide Sales and Marketing, and effected through the Company's employees, its independent sales representatives worldwide and its strategic sales alliances. The Company participates in trade shows and regularly advertises in trade periodicals. The companies that provide Showscan with motion bases also market motion simulation theatre attractions worldwide that license the Company's motion simulation attraction films and equipment. Effective January 1997, the Company extended its agreement with Imagine Japan, Inc. ("Imagine") through December 31, 1999, which included an extension of Imagine's exclusive right to sell and acquire Showscan Attractions and specialty theatres in Japan. The price and other terms on which the Showscan Attractions are sold to Imagine are substantially the same as the price and terms offered by the Company to other Showscan Attraction customers. Imagine is permitted to resell in Japan any and all of the Attractions it purchases from the Company 12. 13 on terms established by Imagine. However, notwithstanding such resales, Imagine remains liable to the Company for all annual film licensing obligations related to all of the Showscan Attractions sold to Imagine. The Company has also granted Imagine a non-transferable license to exhibit Showscan films in the Company's motion simulation library for a rental fee that is based on the number of Showscan Attractions operating in Japan and on the films exhibited at the various attractions. This exclusive agreement with Imagine expires on December 31, 1999 although Imagine will continue to remain liable thereafter for all annual film rental and royalty obligations. Historically, the majority of the Company's revenues have been derived from export sales. The Company sells internationally through independent sales representatives and its own worldwide sales and marketing staff. The Company's international sales are subject to customary restrictions on foreign operations, including restrictions on imports and exports, longer collection periods for accounts receivable and risks associated with fluctuations in foreign exchange rates. The Company's contracts for the sale of equipment generally provide for payment in United States dollars and for letters of credit as the means of payment. The Company's policy is to require annual film rental and royalty payments to be made in United States dollars. EQUIPMENT The photography and exhibition of Showscan motion pictures require specially equipped or modified cameras and projectors. In addition, certain other products and equipment are needed to produce Showscan motion pictures and to convert Showscan film to the conventional 35mm/24 fps format. Cinema Products Corporation ("Cinema Products"), a manufacturer and supplier of professional motion picture cameras and equipment, has developed and built 65mm high speed cameras for the Company. The camera, known as the CP-65, is a high-speed, crystal-synchronized spinning mirror reflex studio camera. The camera is available with a full complement of film magazines, lenses and associated support equipment and is compatible with standard motion picture industry equipment. The camera can be operated at various speeds from 2 fps to 72 fps and is crystal-synchronized at 24, 30 and 60 fps. In 1993, the Academy of Motion Picture Arts and Sciences awarded the CP-65 camera the Scientific and Engineering Award. The CP-65 allows the synchronous recording of sound while filming at 60 fps and can be used in the same manner as standard 35mm/24 fps cameras. Cinema Products has manufactured and delivered to the Company five CP-65 camera systems, all of which have been used in filming and are available for use. Although the CP-65 camera was specially designed for filming Showscan motion pictures, a number of existing cameras manufactured by others can be modified to film in Showscan. The Company and Intamin, A.G., a Liechtenstein corporation and a leading manufacturer of amusement park rides, jointly developed the hydraulically-actuated seats that are used in the bench motion simulation attractions marketed by the Company. The Company and Intamin jointly own three United States patents on various elements of the motion simulation seats. A similar patent was approved under the European Patent Convention, which resulted in the issuance of patents in those European countries in which the Company elected to seek patent protection. See "Item 1. Business -- Patents and Other Intellectual Property," below. In addition to the Intamin bench motion bases, the Company markets the two-passenger and four-passenger pod, including a six-axis motion base manufactured by Intamin. The Company, in conjunction with McFadden Systems, Inc., jointly designed and developed a four-person, six-axis motion system (the "Quadra Motion System") as well as an 18-seat, six-axis dynamic platform. The Company currently markets the Quadra Motion System, the 18-person dynamic platform as well as six and 15-person platforms and a 12-seat self-contained capsule manufactured by McFadden Systems, Inc. The Company also markets an electromagnetically-driven (as opposed to hydraulically-driven) motion base called the "EM4." The "EM4" has several advantages over a hydraulically-driven motion base including lower electrical consumption, lower noise levels, lower operating costs and a decrease in construction costs due to elimination of hydraulic pump rooms, less air conditioning requirements and elimination of environmental concerns as no hydraulic fluids are used. 13. 14 Films made in Showscan can be projected with certain conventional 70mm projectors that are modified to project a motion picture at 60 fps. The modification does not entail significant expense or effort and does not have an adverse effect on the reliability of the projector. In order to facilitate the projection of Showscan motion simulation films, however, the Company has developed an automatic electronic projector that uses low-inertia motors to achieve the intermittent projection of frames of film rather than the conventional use of gears and geneva-drive sprockets. Film storage is contained within the projector which eliminates the need for complicated film loop cabinets. The projector permits computer-controlled automatic cuing, synchronization and rewinding necessary for the continuous showing of a variety of short films without requiring that the film be changed or a projectionist used. The Company owns a patent on certain circuitry included in this projector. The HD Simulation Attractions use standard, commercially available high definition video projectors and laser disc players. The video projectors and laser disc players are manufactured by a number of companies, including NEC, Sony Corp., Hughes JVC, and Barco Inc. RESEARCH AND DEVELOPMENT The Company, directly or in conjunction with other companies, has from time to time been engaged in a limited program of research and development. During the fiscal year ended March 31, 1997, the Company's research and development program did not, however, require a significant expenditure of funds. The Company's research and development efforts are currently directed at creating new simulation attractions for specific world markets, 2-D, 3-D and dome theatre systems to be used in the 15/70 giant-screen theatres. Also, the Company is actually developing theatre computer control system software programs to further enhance the ease by which simulation attractions can be operated and maintained by a minimum number of on-site personnel. COMPETITION The Company faces intense competition in all of its business activities. Some of the Company's competitors and potential competitors are well-established, have substantially greater financial and other resources than the Company, and have an established reputation for success in the development and marketing of filmed products. There can be no assurance that the Company will be able to compete successfully with such other companies. In addition to competing directly against other firms in the marketplace of the Company's products, the Company also generally competes for customers with other location-based entertainment alternatives. The entertainment business in general is undergoing significant changes in technology and in consumer demands for more stimulating entertainment both within the home and outside of the home. As the demand for increasingly sophisticated forms of technology increases, the Company competes for customers to some extent with theme parks, traditional motion pictures and other forms of filmed or computer-related entertainment. As a result of technological advances and the increased availability of alternative forms of leisure entertainment, including expanded pay and cable television service and advanced home audio and video systems, consumer demands and tastes may continue to change. Computer simulation, interactive and virtual reality products are improving rapidly and could become competitive with the Company's products. The Company is unable to predict what effect technological and other changes will have on the future success of the Company's products and services. Motion Simulation Theatre Attractions. Although the Company is aware of a number of other distributors of entertainment motion simulation equipment worldwide, including Iwerks Entertainment, Inc. ("Iwerks") and Imax Corporation ("Imax"), both of which compete directly with the Company in the motion simulation attraction market, the Company believes that it is one of the leading companies in the sale of motion simulation attractions. Both Iwerks and Imax have significantly greater financial resources than the Company and are both substantially larger than the Company. Because of the significant costs involved in the development and promotion of motion simulation attractions, companies with superior financial resources may have an advantage. 14. 15 However, the Company also believes that the Company's record of motion simulation attraction operations to date, the size of its film library and the quality and enhanced sense of depth and realism of its Showscan motion simulation films permits the Company to effectively compete in the motion simulation attractions market. The most widely-recognized motion simulation theatre attractions are Star Tours in Disneyland, and Back to the Future in a Universal Studios theme park. The Company is not aware of any plans by The Walt Disney Company or Universal Studios, which operate these parks, to make these motion simulation theatre attractions available outside of their respective theme parks. In fact, in May 1992, MCA entered into a participating lease with the Company in connection with the Company's first O&O Theatre located at MCA's CityWalk complex at Universal City near Hollywood, California. However, any decision by The Walt Disney Company or MCA, Inc. to market their own motion simulation theatre attractions outside their respective theme parks could have a material adverse effect on the Company's business. Specialty Theatres. With the introduction of the Company's 15/70 giant-screen equipment products in January, 1996, the Company now competes with companies that distribute other well-established large and giant-screen and special projection systems, including Imax, the developer of IMAX (for flat-screen projections) and IMAX Dome (for "domed" theatre projections), and Iwerks. Imax is well-established in the specialty film markets and has significantly more theatres currently exhibiting films produced in these formats. In addition, Imax has substantially greater financial and other resources and an established reputation for developing and marketing products competitive with the Company's specialty theatres. See "Item 3 -- Legal Proceedings." PATENTS AND OTHER INTELLECTUAL PROPERTY The Company owns two United States patents on the Showscan process. These patents cover the combined process of filming and projecting 35mm or larger negative film having high resolution images, at a constant frame rate of at least 50 fps, with the film being projected at a high illumination level. Both patents expire in October 2001. The patents are important to the Company because it believes that a frame rate of 50 fps or more is necessary to achieve the desired degree of depth and realism, and that enforcement of these patents could prevent others from achieving the same result. Although the Company believes that its existing patents are valid, there can be no assurance that the Company's patents, if challenged, will be upheld, nor can there be any assurance that competitors will not develop a different technology that offers comparable or better visual effects. Moreover, the Company may elect, for financial or commercial reasons, not to enforce its rights under its patents. The Company has obtained additional patents for the Showscan process in Australia, Canada and Japan. The Company's patent on the Showscan process has been approved under the European Patent Convention, which resulted in the issuance of patents in those European countries in which the Company elected to seek patent protection. To date, most of the Company's motion simulation attraction sales have been outside the United States and no assurance can be given that the Company's patents will adequately protect the Company's exclusive rights to the Showscan process outside the United States or that any additional foreign patents will be granted. The Company also has obtained U.S. patents on its electronic projector, the rapid start-up feature of the CP-65 camera, a system for projecting a 360-degree motion picture image, and a process for converting high frame-rate film to standard frame-rate film. In addition, the Company, in conjunction with Intamin, has obtained three U.S. patents on certain aspects of the Showscan motion simulation attractions and has a joint interest with another party in another motion simulation patent. The patents expire between the years 2004 and 2006. The Company and Intamin have also obtained a patent under the European Patent Convention covering certain aspects of the Showscan motion simulation attractions, which has resulted in the issuance of patents in those European countries in which the Company elected to seek patent protection. However, there can be no assurance that these patents, if challenged, will be upheld, nor can there be any assurance that competitors will not develop a different or more effective competing technology. 15. 16 Although the Company believes that its patented and non-patented products and processes have been independently developed and do not infringe the patents of others, third parties could claim that the Company's products and processes infringe the rights of others. If it were determined that the Company's products or processes did infringe the property rights of third parties, the Company may be required to modify its design or obtain a license. No assurance can be given that the Company will be able to do so in a timely manner or upon acceptable terms and conditions; and the failure to do either could have a material adverse effect upon the Company's business. There are no claims that the Company's products and processes infringe the rights of others. The mark "Showscan(R)" has been registered with the United States Patent and Trademark Office for use with the Showscan process and Showscan products. The Company has also registered "Showscan's The Edge", "Cinemania" and "Emaginator" for use as the name of motion simulation theatres. The Company has registered other marks in connection with certain of its products such as the "EM4" and the "Quadra 6." See "Item 3 - Legal Proceedings regarding the mark 'ShowMax'." ROYALTY ARRANGEMENTS The Company acquired all of the rights to the Showscan process from Paramount Pictures Corporation ("Paramount") and its subsidiary, FGC, Douglas Trumbull and WLS Partners ("WLS") in consideration for, among other things, agreements to pay royalties on future revenues from the exploitation of the Showscan process. The terms of such royalties are described below. WLS. Pursuant to a royalty agreement (the "Royalty Agreement") with WLS, the Company is required to pay WLS a royalty based, in general, on the gross receipts (as defined) of the Company from the worldwide exploitation of Showscan motion pictures and any other use of the Showscan process. The royalty is 3% of such gross receipts until August 31, 1999, or until WLS has been paid an aggregate of $3,500,000. The Company has paid a total of $2,364,000 in royalties under the Royalty Agreement through March 31, 1997. Future General Corporation/Paramount. Pursuant to the agreement with Paramount and FGC (the "FGC Agreement"), the Company is obligated to pay FGC a royalty, in perpetuity, equal to 2% of the Company's gross receipts (as defined) from the worldwide exploitation of the Showscan technology in excess of 180% of the sum of (i) $21,100,000, (ii) actual cash contributions for debt or equity of the Company during the period from June 27, 1985 to June 27, 1987, (iii) the Company's actual cost, if any, of converting and equipping theatres for exhibition of Showscan motion pictures, and (iii) any Showscan feature-length motion picture production costs incurred by the Company. For the purpose of determining FGC's royalty, "gross receipts" are defined as all monies received by the Company from the exploitation of the Showscan technology, provided that if the Company is the exhibitor of a Showscan feature-length motion picture, gross receipts will be deemed to be one-half of box office receipts less taxes paid. When gross receipts reach the $65 million level, FGC will begin to earn royalties. The current level of gross receipts (as defined) is $32 million at March 31, 1997, so no royalties have been earned under the FGC Agreement as of yet. The Company projects royalties to FGC will begin accruing in approximately five to seven years. If the Company produces feature-length motion pictures in Showscan and grants distribution rights to such a film to a third-party distributor, Paramount will have the right of first negotiation with respect to distribution of the first three of the Showscan motion pictures produced by the Company. However, the Company does not currently intend to produce any feature-length motion pictures itself. Douglas Trumbull. Pursuant to its agreement with Douglas Trumbull, the Company is required to pay royalties to Mr. Trumbull until the year 2015, subject to the maintenance of certain levels of working capital as established by the Board of Directors of the Company. In general, the payments equal 1% of revenues (as defined) received by the Company from the worldwide exploitation of the Showscan technology, except that if the Company operates a full-length motion picture theatre, Mr. Trumbull is entitled to 1% of the box office receipts of that theatre. The Company does not currently intend to operate any full-length motion picture theatres. 16. 17 EMPLOYEES As of June 20, 1997, the Company had 41 employees, six of whom were employed in management, four in sales and marketing, fourteen in engineering, assembly and installation, and five in production, film licensing and distribution. The remaining full-time employees are administrative and support staff. Although the Company has not experienced difficulties in obtaining qualified personnel and anticipates that it will be able to continue to recruit qualified personnel for its operations, there can be no assurance that such personnel will be available when required. The Company considers its relationship with its employees to be satisfactory. ITEM 2. PROPERTIES The Company leases a 37,000-square-foot building in Culver City, California, pursuant to a lease expiring on June 30, 2003. Under the lease, the current monthly rental is $33,568, subject to annual cost-of-living adjustments. The maximum annual rental increase is 7%. The Company is responsible for all costs and expenses of maintaining the building, including the payment of all property taxes and insurance premiums. The Company's corporate headquarters, Showscan demonstration theatre and film studio are located at this site. The Company considers its facilities adequate to meet its current needs. ITEM 3. LEGAL PROCEEDINGS In January 1996, the Company launched a new product line of 15/70 format projection systems which it called ShowMax. The Company filed for and registered the name "ShowMax" in the United States, Canada and several other countries. Soon after the launch of this product line, four lawsuits were brought against either the Company or its supplier of 15/70 format projectors. Three of the lawsuits involved the use of the name "ShowMax" in connection with the product line. Imax Corporation sued the Company on February 8, 1996 in both the United States District Court for the Southern District of New York and in the Federal Court of Canada alleging that the ShowMax trademark infringes upon its "IMAX" trademark and certain other trademarks owned by it. In the third lawsuit involving the name "ShowMax", a small California corporation named Showmax, Inc. sued the Company on June 12, 1996 in the United States District Court for the Central District of California alleging that the Company's ShowMax trademark infringes upon its alleged use of the name. All three of these lawsuits sought unspecified damages and asked that the Company be enjoined from any continued use of the ShowMax trademark. The Company disputed each of these claims. Imax Corporation also brought a fourth lawsuit on February 6, 1996 against World Odyssey Inc. and N.J. Engineering Inc. in the United States District Court for the Northern District of California. This suit alleged, among other things, trade secret misappropriation and that the relationship between World Odyssey Inc. and the Company violated certain provisions of a 1994 Settlement Agreement between Imax Corporation, World Odyssey Inc. and N.J. Engineering Inc. In this lawsuit, Imax Corporation sought unspecified damages and injunctive relief. The Company, World Odyssey Inc. and N.J. Engineering Inc. disputed each of these claims. Due to the foregoing actions by Imax Corporation, as well as other alleged acts of anticompetitive conduct, the Company and World Odyssey Inc. filed a lawsuit against Imax Corporation on March 4, 1996 in the United States District Court for the Central District of California alleging various antitrust and unfair competition claims including a claim that the lawsuits brought by Imax Corporation constitute sham litigation brought solely to obstruct the Company's entry into the market for 15/70 format products and services. The Company and World Odyssey sought treble damages, costs and injunctive relief. On May 2, 1997, the Company and Imax Corporation settled all claims and actions between the companies without the admission by either party of wrongdoing. The parties agreed to dismiss all lawsuits pending between 17. 18 them. As part of the settlement, the Company agreed, among other things, to abandon its registrations of the name "ShowMax" in each jurisdiction where it had been filed and to terminate its present relationship with World Odyssey Inc. In exchange the Company received a substantial cash payment from Imax Corporation, together with the right to distribute two Imax motion simulation films to the Company's installed base and contracted backlog of Showscan Attractions (approximately 100 screens) as of April 30, 1997. In turn the Company gave Imax the right to distribute two Showscan motion simulation films to Imax's installed base and contracted backlog (approximately 37 screens). The settlement does not limit the Company's ability to compete in the 15/70 format giant screen theatre market. In addition, on June 3, 1997 the Company and Showmax, Inc. settled all claims and actions between the companies without the admission by either party of wrongdoing. The parties also agreed to dismiss all lawsuits between them. This settlement also does not limit the Company's ability to compete in the 15/70 format giant-screen theatre market. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS During the fourth quarter of the fiscal year ended March 31, 1997, no matters were submitted to a vote of the Company's stockholders through the solicitation of proxies or otherwise. 18. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is traded on the Nasdaq National Market under the symbol "SHOW." The following table sets forth the high and low sales prices for the Common Stock for the periods indicated as reported by Nasdaq. The prices do not include retail mark-ups, mark-downs or fees.
Sales Prices ------------ High Low ---- --- Year Ended March 31, 1996 -------------------------- 1st Quarter $ 6 1/2 $ 5 2nd Quarter 8 1/8 5 1/4 3rd Quarter 7 3/4 5 3/4 4th Quarter 7 1/4 5 3/4 Year Ended March 31, 1997 ------------------------- 1st Quarter $ 8 1/8 $ 5 7/8 2nd Quarter 7 7/8 5 3rd Quarter 6 3/4 4 7/8 4th Quarter 5 3/8 2 1/4
The Company has never paid dividends on its Common Stock and does not currently anticipate that it will do so in the foreseeable future. The future payment of dividends, if any, on the Common Stock, is within the discretion of the Board of Directors and will depend on the Company's earnings, its capital requirements and financial condition, and other relevant factors. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The payment of any dividends on the Common Stock also obligates the Company to pay dividends on the outstanding shares of Series C Preferred Stock. Each share of Series C Preferred Stock is entitled, on an "as converted" basis, to 110% of any cash dividends declared on each share of Common Stock, subject to adjustments for stock splits, combinations or dividends. As of March 31, 1997, the Company had 129 holders of record of the Company's Common Stock. However, based solely upon its proxy solicitation procedures for last year's annual meeting of stockholders, the Company believes that it has more than 1,000 beneficial owners of its Common Stock. 19. 20 ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended March 31, ============================================================================= 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands, except share amounts) Statement of Operations Data: Revenues: Film licensing and production services . $ 6,236 $ 9,039 5,978 $ 2,970 $ 4,328 Equipment sales and related services .............................. 11,475 8,426 9,459 2,245 6,695 ----------- ----------- ----------- ----------- ----------- Total revenues ......................... 17,711 17,465 15,437 5,215 11,023 Cost of Revenues ......................... 10,854 8,399 8,584 3,967 6,941 ----------- ----------- ----------- ----------- ----------- Gross profit ............................. 6,857 9,066 6,853 1,248 4,082 Other costs and expenses: General and administrative ............. 6,904 7,576 5,560 5,566 6,286 Depreciation and amortization .......... 961 971 1,025 2,827 1,369 Provision for contract modifications ... -- -- -- 673 -- ----------- ----------- ----------- ----------- ----------- 7,865 8,547 6,585 9,066 7,655 ----------- ----------- ----------- ----------- ----------- Operating income (loss) ................ (1,008) 519 268 (7,818) (3,573) Other income (expense): Equity in operations of owned and operated theatres .................. (694) (217) (502) -- -- Effect of impairment loss on equity in operations of owned and operated theatres ............................ (1,771) -- -- -- -- Other income ......................... 250 358 444 171 164 Interest and other expense ............ (692) (555) (128) (98) (127) Provision for income taxes .............. (4) (4) (3) -- -- ----------- ----------- ----------- ----------- ----------- Net income (loss) ....................... $ (3,919) $ 101 $ 79 $ (7,745) $ (3,536) =========== =========== =========== =========== =========== Net income (loss) per common share ...... $ (.70) $ .02 $ .01 $ (1.68) $ (.76) =========== =========== =========== =========== =========== Weighted average number of common shares ............................. 5,594,245 6,317,167 5,788,230 4,679,519 4,679,519 =========== =========== =========== =========== =========== Balance Sheet Data (at end of period): Cash, cash equivalents and short-term investments ............................ $ 2,562 $ 8,141 $ 6,791 $ 2,371 $ 2,405 Accounts receivable, net ................. 3,600 3,101 2,943 2,569 4,202 Equipment sales inventory ................ 1,289 1,547 2,142 1,440 1,414 Other current assets ..................... 1,072 1,244 980 1,221 1,974 Film library (net) ....................... 5,520 3,481 1,394 1,003 1,488 Property and equipment (net) ............. 868 1,313 1,728 2,140 4,128 Owned and operated theatres .............. 2,123 4,424 2,598 644 478 Patents and other (net) .................. 2,894 2,764 2,654 2,994 4,211 ----------- ----------- ----------- ----------- ----------- Total assets ............................. $ 19,928 $ 26,015 $ 21,230 $ 14,382 $ 20,300 =========== =========== =========== =========== =========== Current liabilities ...................... $ 3,995 $ 6,097 $ 4,860 $ 4,632 $ 4,932 Convertible notes and other .............. 5,690 6,620(2) 3,121(1) 2,998 3,004 Series B Preferred Stock ................. -- -- -- 1,678 -- Stockholders' equity ..................... 10,243 13,298 13,249 5,074 12,364 ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity $ 19,928 $ 26,015 $ 21,230 $ 14,382 $ 20,300 =========== =========== =========== =========== ===========
- ---------------------- (1) Paid in full in April, 1995. (2) The Company completed a private placement of convertible notes in September, 1995. 20. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company is a leading provider of movie-based motion simulation theatre attractions to the rapidly expanding out-of-home entertainment market. The Company is presently in the business of: (i) licensing and distributing the films in its library and the proprietary technologies necessary to produce and exhibit Showscan films; (ii) selling and installing motion simulation attractions and specialty theatres including the equipment necessary for each (including projectors, screens, sound systems, synchronization and show control and theatre design packages); (iii) producing films using the Showscan process; and (iv) establishing motion simulation 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 derived, for the three years ended March 31, 1997, 60-70% of its revenues from export sales. See Note 9 to the Consolidated Financial Statements and "Item 1. Business -- Sales and Marketing." 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. Comparison of Year Ended March 31, 1997 and Year Ended March 31, 1996. Revenues for the fiscal year ended March 31, 1997 (hereafter "Fiscal 1997") increased $246,000 or 1% from revenues for the fiscal year ended March 31, 1996 (hereafter "Fiscal 1996"). Film licensing and production service revenues decreased $2.8 million or 31% in Fiscal 1997. The decrease was due primarily to (i) the renewal of an agreement with the Company's major Japanese customer (Imagine Japan), which renewal changed the timing of film licensing revenue recognition such that approximately $1.1 million was recognized in Fiscal 1996 that would have been recognized in Fiscal 1997; (ii) the inclusion in Fiscal 1996 of revenues from two specific one-time license agreements, which revenues constituted all of the revenues to be received with respect to such agreements, in the amounts of $550,000 and $300,000, respectively; and (iii) the early renewals in Fiscal 1996 of certain film licensing agreements, which renewals changed the timing of film licensing revenue recognition (reflected in the fourth quarter of Fiscal 1996 rather than in Fiscal 1997) of approximately $700,000. After adjusting for the aforementioned items, the recurring film licensing revenues were $6.2 million in Fiscal 1997 and $6.4 million in Fiscal 1996. Revenues from film licensing are based on new license agreements as well as renewals of existing agreements and results fluctuate from quarter to quarter, with such fluctuations being a result of the seasonality in the way that licensing agreements are entered into and how the license agreements are structured. Revenues from equipment sales and related services increased $3 million or 36% in Fiscal 1997. The increase is due to an increase in the number of Showscan Attractions shipped during Fiscal 1997 as compared to Fiscal 1996. The actual number of Showscan Attractions shipped in Fiscal 1997 increased to 16 units plus the completion of three relocation projects compared to ten such units in Fiscal 1996. Equipment sales in Fiscal 1996 also included $360,000 of one-time revenues recognized as a result of the expiration under a customer agreement of a required installation of two theatre sites. At June 20, 1997, the Company had 61 Showscan Attractions screens with 8 additional Showscan Attractions screens in its delivery and installation backlog and has contractual commitments for an additional 29 Showscan Attractions screens in its backlog, as compared to 55 Showscan Attractions screens with 11 additional Showscan Attractions screens in its delivery and installation backlog and 27 contractual commitments for Showscan Attractions screens in its backlog at June 20, 1996. The Company did not sell any permanent or temporary specialty theatres in Fiscal 1997. 21. 22 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. Cost of revenues was 61% in Fiscal 1997 as compared to 48% in Fiscal 1996. The increase was primarily the result of (i) two one-time agreements which were recognized ($550,000 and $660,000 respectively) in Fiscal 1996, each of which had significantly lower associated cost of revenues; and (ii) a lower gross profit percentage associated with sales to a major customer in Fiscal 1997. Cost of revenues also increased as a percentage of total revenues because film licensing revenues (which traditionally have a higher gross profit margin) represented less of a percentage of total revenues in Fiscal 1997 than in Fiscal 1996. Amortization expense of the film library for Fiscal 1997 was $613,000, up 27% from the amortization expense of $481,000 in Fiscal 1996. General and administrative expenses decreased $672,000 or 9% in Fiscal 1997. The decrease can be primarily attributed to an overall reduction in payroll and consultant expense due to the reduction in Company staff in the fourth quarter of Fiscal 1997 resulting from the decline in business activity. Depreciation and amortization expense remained relatively unchanged in Fiscal 1997 from Fiscal 1996. The Company accounts for its ownership position in O&O Theatres using the equity method of accounting. The equity loss of $694,000 on the operations of O&O Theatres for Fiscal 1997 was primarily the result of the following factors: (i) expenses incurred in connection with the acquisition and development of future O&O Theatre locations; (ii) operating losses at the Trocadero in London due to disruptions to theatre operations and attendance caused by the major renovation of the building and the theatre access impediments created thereby; (iii) operating losses, including start-up and marketing expenses at the Riverwalk in San Antonio, Texas; and (iv) operating losses at the Framingham theatres and at CityWalk. Although the O&O Theatre in Osaka had an operating profit, the profit was not sufficient to offset the losses of the other O&O Theatres. The Company earns film licensing revenues (from all O&O Theatres) and management fees (from some of the O&O Theatres) which are recorded separately in the accompanying consolidated statements of operations, thereby inherently increasing the operating expenses at the specific O&O Theatres. A formal claim that was filed with the owner of the Trocadero building to recover damages and lost revenues resulting from the renovation of the Trocadero building and the related access problems has resulted in a favorable settlement, in which the company holding that theatre will be reimbursed for a portion of the lost revenue incurred during the renovation period. The Company recognized a non-cash charge of $1,771,000 in Fiscal 1997 to record the impact of the adoption of SFAS No 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" by certain of its O&O Theatres joint ventures. The loss was calculated as the excess of the carrying value of joint venture fixed assets for each impaired O&O Theatre over the estimated discounted cash flows or fair value of each O&O Theatre impaired. Under the equity method of accounting, the Company has recognized its share of the joint venture charges. The Company incurred a net loss of $3,919,000 in Fiscal 1997 as compared to net income of $101,000 recorded in Fiscal 1996, primarily due to the decrease in film licensing and production service revenues, an increase in cost of revenues to total revenues, and the performance of the O&O Theatres, including the effect of the impairment loss on equity in the operations of certain O&O Theatres joint ventures. 22. 23 Comparison of Year Ended March 31, 1996 and Year Ended March 31, 1995. Revenues for the fiscal year ended March 31, 1996 (hereafter "Fiscal 1996") increased $2 million or 13% from revenues for the fiscal year ended March 31, 1995 (hereafter "Fiscal 1995"). Film rentals and royalties increased $3.1 million or 51% in Fiscal 1996. The increase was due primarily to the increase in the installed base of operating Showscan Attractions, renewals on certain licensing contracts (which affected the timing of revenue recognition) which accounted for $700,000 of the increase, the renewal of the Imagine Japan agreement which increased film revenues by approximately $1 million, and approximately $900,000 of revenues from two specific customer agreements, which revenues constitute all of the revenues to be received with respect to such agreements. On an annual basis, recurring film rentals and royalties should increase over time as the number of operating Showscan Attractions increases. Revenues from equipment sales and related services decreased $1 million or 11% in Fiscal 1996. Unit sales actually increased in Fiscal 1996, but revenues from these sales decreased as a result of the lower than average sales prices. At June 20, 1996, the Company has 55 Showscan Attractions screens with 11 additional Showscan Attractions screens in its delivery and installation backlog and has contractual commitments for an additional 27 Showscan Attractions screens in its backlog, as compared to 47 Showscan Attractions with 11 additional Showscan Attractions in its delivery and installation backlog and 22 contractual commitments for Showscan Attractions in its backlog at June 20, 1995. The Company has sold nine permanent and twelve temporary specialty theatres through June 20, 1996 and had sold eight permanent and twelve temporary specialty theatres through June 20, 1995. Fiscal 1996 equipment sales includes $360,000 of revenues recognized as a result of the expiration under a customer agreement of a required installation period for two theatre sites. 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 Showscan records revenues under this method rather than on the date that the sale agreement is signed. The actual signing of a Showscan Attraction sale precedes its delivery and installation by an average of six to seven months. Accordingly, the recognition of revenue for equipment sales during the current and future periods 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. Cost of revenues was 48% in Fiscal 1996 as compared to 56% in Fiscal 1995. Royalties and film costs as a percentage of film rentals and royalties dropped to 29% in Fiscal 1996 from 36% in Fiscal 1995 while equipment cost of sales as a percentage of equipment sales and related services remained constant at 68% for each of the past two fiscal years. The primary reason for the increase in film rental gross profit is due to the Company's purchase in Fiscal 1996 of the interests held by certain third-party producers in two films distributed by the Company, so that the Company now owns 100% of "Cosmic Pinball" and 57% of "Devil's Mine Ride." These purchases resulted in a reduction in payments to third-party producers (included in cost of revenues). The increase in film rental gross profit is also attributed to more Company- owned films being licensed by the venues in Fiscal 1996 than in the prior years. Amortization expense of the film library for Fiscal 1996 and Fiscal 1995 was $481,000 and $502,000 respectively. General and administrative expenses increased $2 million or 36% in Fiscal 1996. The increase was primarily the result of the Company's hiring of additional personnel in Fiscal 1996 to meet the anticipated levels of Showscan Attractions sales. Company management also made a decision to enhance the quality of existing product lines and to develop new product lines, both of which involved the continuing employment and hiring of key personnel in the Company's engineering and technology departments. The Company believes that there is a cost savings by performing such projects in-house, rather than contracting projects out to outside vendors. In addition, the Company increased its bad debt provision by $440,000 in Fiscal 1996, due to three Showscan Attraction accounts that became delinquent and eventually were written off as uncollectible. The closures of two 23. 24 (which are higher than the Company's historical experience) of these Showscan Attractions were unforeseen by the Company at the beginning of Fiscal 1996. Depreciation and amortization remained relatively unchanged during Fiscal 1996 from Fiscal 1995. The Company develops, through various financing arrangements, Showscan Attractions in which the Company has an ownership interest and accounts for its net ownership position using the equity method of accounting. The Company's loss of $217,000 on the operations of owned and operated theatres in Fiscal 1996 decreased $285,000 or 57% from the $502,000 loss posted in Fiscal 1995. This loss is primarily the result of the following factors: (i) expenses incurred in connection with the acquisition and development of future owned and operated theatre locations, (ii) operating losses, including initial start-up and marketing expenses at the Framingham theatres (opened in late May 1995) of which the Company has a 50% interest and The Edge theatre in San Antonio, Texas (opened in March 1996), of which the Company has a 25% interest, and (iii) the combined operating profits of the owned and operated Showscan Attractions at CityWalk, the Trocadero in London, and Osaka. The results of operations showed an improvement for the CityWalk and London theatre locations in Fiscal 1996 from Fiscal 1995. The Company earns film rentals, royalties and management fees (from some of the owned and operated theatres), which are recorded separately in the accompanying condensed consolidated statements of operations, thereby inherently increasing the operating expenses at these specific theatres. Interest and other expense increased $427,000 or 334% in Fiscal 1996. The Company completed a $7 million ($6.4 million net of expenses) private placement of convertible notes through a European financial institution on September 1, 1995. The notes bear interest at 8% per annum with a semi-annual interest payment schedule commencing March 1, 1996. Interest expense recorded in Fiscal 1996 related to these notes was $319,024. Operating income increased 94% in Fiscal 1996 to an operating profit of $519,000 from an operating profit of $268,000 in Fiscal 1995. The increase in operating profit is primarily attributed to the increase in film rentals and royalties for the Company offset by the increase in general and administrative expenses. The Company's net income increased 28% to $101,000 or $0.02 per share in Fiscal 1996 as compared to a $79,000 net profit and $0.01 per share in Fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, the Company's working capital decreased to $4,528,000 from $7,936,000 at March 31, 1996. Cash, cash equivalents and short-term investments decreased to $2,562,000 from $8,141,000 at March 31, 1996. The decrease in working capital is primarily due to the expenditures related to the production of three new motion simulation films and the operating loss for Fiscal 1997. Cash and cash equivalents at March 31, 1997 decreased by $2,493,000 from March 31, 1996. The decrease in cash was primarily due to (i) the financing of the production of three new films in the amount of $2,420,000, (ii) the decrease of 34% in accounts payable, customer advances on uncompleted equipment contracts and accrued expenses and other current liabilities, (iii) significant expenditures in connection with the litigation with Imax Corporation discussed under "Item 3 - Legal Proceedings" which has been settled by the parties, and (iv) offset by a $3,086,000 redemption of short-term investments. The changes to receivables, payables, advances and accrued expenses are primarily attributable to variations in the timing of Showscan Attraction 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. The specific contract terms of each sale also dictate when invoicing occurs. The decrease in cash and accrued expenses is also attributable to the payment of $1,620,000 in May, 1996 for the purchase of additional interests in two films currently in the Showscan film library. 24. 25 Net cash flow used in operations was $2,687,000 in Fiscal 1997 as a result of changes in several categories. Accounts payable and accrued expenses and other current liabilities decreased by 25%, while accounts receivable (net of the $425,000 allowance) increased by 44% at March 31, 1997. Net cash provided by the Company's investing activities was $194,000 in Fiscal 1997. This was the result of $3,086,000 of redemptions in short-term investments, offset by $2,652,000 of additions to the Company's film library, $164,000 of investments in O&O theatres and $76,000 in purchases of equipment. The Company's business strategy includes a significant increase in the installed base of Showscan Attractions, new film productions, or the securing of distribution rights to motion simulation films produced by other companies, new product development and new product lines, enhancement of existing product lines, possible investments in O&O Theatres and the reduction of overhead by 30% (which was implemented during the fourth quarter of Fiscal 1997). The Company intends to finance the foregoing business strategy by utilizing its current working capital resources, the proceeds to be received from its existing backlog and anticipated future product sales and film licensing agreements, together with proceeds derived from one or more of the following financing alternatives: the sale of securities, the obtaining of a line of credit from a banking institution, 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. If the Company is unable to generate sufficient funds from operations or is unable to raise additional capital through any of the aforementioned alternatives, the Company will need to curtail its business strategy, specifically with regard to new film productions and investments in O&O Theatres. The Company believes that, given its various business alternatives, its working capital will be sufficient to fund the cost of its operations for the next twelve months. At March 31, 1997, the Company has reserved 4,573,572 shares of Common Stock for issuance on the exercise of stock options, warrants, preferred stock and convertible notes. FACTORS THAT MAY AFFECT FUTURE RESULTS Portions of 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, highlight some of the more important risks identified by management of the Company but should not be assumed to be the only things that could affect future performance. Period to Period Fluctuations The Company's operating results may fluctuate from period to period for a number of reasons, including (a) the timing of sales of the Company's motion simulation attractions, (b) 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, (c) the size, type and configuration of the attractions sold, (d) 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 (e) the timing of sales and marketing efforts and related expenditures. 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. This dependence has been lessening as the percentage of the Company's revenues derived from recurring film licensing revenues has increased though there can be no assurance that this trend will necessarily continue. 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. 25. 26 Business Strategy Management of the Company has adopted a business strategy that includes substantial investments in its sales and marketing organizations, the creation of new research and development programs and increased funding of existing programs. This strategy carries with it a number of risks, including a level of operating expenses that may not be adequately covered by increased sales or additional financing may not be available on favorable terms. This strategy will have to be curtailed if adequate funds are not available. 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 the Company's main competitors, Iwerks Entertainment, Inc. and Imax Corporation, 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 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 revenue is from sales and film licensing outside the United States. The Company's results could be negatively affected by such factors as changes in foreign currency exchange rates, trade protection measures, policies with respect to currency and fiscal controls, longer accounts receivable collection patterns, changes in regional or worldwide economic or political conditions, or natural disasters. Though the Company faces less direct exchange rate risks since nearly all of its contracts are denominated in United States Dollars, fluctuations in exchange rates can significantly affect the affordability of the Company's products and services overseas. Intellectual Property The Company has several United States patents on various processes and elements related to film projection and motion simulation. The most important of these patents expire in October 2001. Though the Company's patents have never been challenged and the Company believes that they are valid, third parties could still challenge the patents and a court could determine that one or more of them are invalid. Declarations of invalidity, particularly of the Company's key patents, could adversely affect the marketability of the Company's products and services. In addition, the Company always faces the risk that new technologies could be discovered that are superior to the Company's patents. Competition The Company faces intense competition in all of its product lines. In the motion simulation business, the Company's main competitor is Iwerks though there are an increasing number of smaller competitors. Iwerks has substantially greater financial resources than the Company and as such may be able to both price its existing products and services lower than the Company as well as produce new products. Imax is a growing competitor of the Company in this segment and has dedicated substantial resources to entering this market. In the large screen, special format motion picture business, the Company's main competitor is Imax though Iwerks is also very significant. The 15/70 format appears to be emerging as the most popular large format due primarily to the large number of films available in that format. Imax is by far the dominant company in this market. The Company is only a recent entrant into this market and has not yet made any sales. The Company will have to 26. 27 continue to invest funds in order to broaden its position in the 15/70 market and thus short term results could be adversely affected until sales can be made. 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. Dependence on Major Customers The Company's motion simulation business has two significant concentrations. The first concentration involves ongoing film licenses and is located in Japan where Imagine Japan presently operates or is otherwise responsible for fifteen simulation attractions. The second concentration relates to the Company's sales backlog where UA and King's Entertainment Co., Ltd. individually and collectively represent a substantial portion of the outstanding equipment orders to be delivered in the next few years. In Fiscal 1997, the Company earned revenues from Imagine Japan and UA in the amount of $8,522,000. The Company's short and long term performance could be adversely impacted if disruptions were to occur in any of these areas of concentration such as order cancellations, license terminations or payment problems. 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. 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. Iwerks and Imax have each indicated that they are devoting substantial portions of their assets to the production of new motion simulation films. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are listed under Item 14 in this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 27. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company intends to file with the Securities and Exchange Commission a definitive proxy statement (the "Proxy Statement") pursuant to Regulation 14A pertaining to the Annual Meeting of Stockholders, which will involve the election of directors, within 120 days of the end of the fiscal year covered by this Report on Form 10-K. Information regarding directors and executive officers of the Company will appear under the caption "Election of Directors" in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation will appear under the caption "Compensation of Directors and Executive Officers" in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management will appear under the caption "Security Ownership of Directors, Nominees and Principal Security Holders" in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions will appear under the caption "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated herein by reference. 28. 29 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a.(1)(2) FINANCIAL STATEMENTS AND SCHEDULES. See the Index to Consolidated Financial Statements and Financial Statement Schedule on Page F-1 hereafter, which is incorporated herein by reference. a.(3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 Restated Certificate of Incorporation.(j) 3.2 Certificate of Amendment to Restated Certificate of Incorporation, dated August 3, 1990.(j) 3.3 Second Certificate of Amendment of Restated Certificate of Incorporation of Showscan Corporation, dated August 18, 1994.(j) 3.6 Certificate of Designations with respect to Series C Convertible Preferred Stock of Showscan Corporation, as filed with the Secretary of State of Delaware on August 22, 1994.(h) 3.7 Certificate of Designations with respect to Series D Participating Preferred Stock of Showscan Entertainment Inc., as filed with the Secretary of State of Delaware on November 9, 1994.(j) 3.8 Bylaws of the Company, as amended. 4.1 Specimen certificate of the Common Stock, $.001 par value, of the Company.(a) 4.4 Stock Purchase Warrant, dated March 9, 1989, issued by the Company to Columbia Pictures Industries, Inc.(a) 4.7 Warrant Agreement, dated as of September 27, 1993, among Showscan Corporation and Charles B. Moss, Jr. and DiBenedetto Showscan Limited Partnership.(b) 4.8 Form of Warrant Agreement entered into with William D. Eberle.(g) 4.9 Registration Rights Agreement, dated as of September 27, 1993, among Showscan Corporation, Charles B. Moss, Jr., Thomas R. DiBenedetto and DiBenedetto Showscan Limited Partnership.(b) 4.10 Specimen Certificate of Series C Convertible Preferred Stock, $.001 par value, of the Company.(j) 4.11 Warrant Agreement, dated as of August 19, 1994, by and between Showscan Corporation and United Artists Theatre Circuit, Inc.(h)
29. 30
EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.12 Registration Rights Agreement, dated as of August 19, 1994, by and between Showscan Corporation and United Artists Theatre Circuit, Inc.(h) 4.13 Rights Agreement, dated as of November 11, 1994, by and between Showscan Entertainment Inc. and Continental Stock Transfer & Trust Company.(i) 4.14 Registration Rights Agreement, dated as of September 22, 1994, by and among Showscan Entertainment Inc., Charles B. Moss, Jr. and DiBenedetto Showscan Limited Partnership.(j) 4.15 Note Purchase, Paying and Conversion Agency Agreement, dated as of August 14, 1995, by and between Showscan Entertainment Inc. and Banca del Gottardo.(k) 4.16 Global Note, dated September 1, 1995, made by Showscan Entertainment Inc. in favor of Banca del Gottardo.(k) 4.17 Agency Agreement, dated as of August 14, 1995, by and between Showscan Entertainment Inc. and Banca del Gottardo.(k) 4.18 Pledge/Security Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Banca del Gottardo.(k) 4.19 Amendment to Pledge/Security Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Banca del Gottardo.(k) 4.20 Warrant Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack M. Ferraro.(l) 4.21 Registration Rights Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack M. Ferraro.(l) 4.22 Warrant Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack Erlanger.(l) 4.23 Registration Rights Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack Erlanger.(l) 4.24 Warrant Agreement, dated as of October 3, 1995, by and between Showscan Entertainment Inc. and Intralink Film Graphic Design.(l) 9.1 Voting Agreement, dated as of August 19, 1994, by and among Showscan Corporation, United Artists Theatre Circuit, Inc., Charles B. Moss, Jr., and Thomas R. DiBenedetto.(h) 10.1 Lease dated June 15, 1989 between the Company and Landmark Investments Ltd. ("Lease").(d) 10.2 Amendment No. 1 to Lease, dated February 20, 1991.(a) 10.3 Amendment No. 2 to Lease, dated January 21, 1992.(e)
30. 31
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.4 Amendment No. 3 to Lease, dated February 18, 1993.(f) 10.5 Amended and Restated Showscan Corporation 1987 Stock Option Plan.(c) 10.6 Showscan Entertainment Inc. 1992 Stock Option Plan, as amended.(j) 10.7 Modification, Consent and Assignment Agreement dated April 26, 1985 between the Company, Douglas Trumbull and Brock/Trumbull Entertainment Corporation.(c) 10.8 Agreement, dated June 27, 1985, between the Company and Future General Corporation.(c) 10.9 Agreement, dated February 23, 1987, between the Company and Cinema Products Corporation (the "Camera Agreement").(c) 10.10 Amendment to Camera Agreement, dated July 20, 1988.(a) 10.11 Amendment to Camera Agreement, dated February 1, 1989.(a) 10.12 Showscan 1985 Agreement, dated April 16, 1985, and Agreement, dated August 31, 1983, between Showscan Investors and Brock-Trumbull Entertainment Corporation.(c) 10.13 Amendment to Royalty Agreement, dated July 6, 1990, between the Company and WLS Partners.(a) 10.14 Amendment to payment terms of the Royalty Agreement, dated November 13, 1990, between the Company and WLS Partners.(a) 10.15 Universal CityWalk Lease, dated November 24, 1992, by and among the Company and MCA Development Company.(f) 10.16 Purchase Agreement dated as of September 27, 1993, among Showscan Corporation, Charles B. Moss, Jr., Thomas R. DiBenedetto and DiBenedetto Showscan Limited Partnership.(b) 10.17 Joint Venture Agreement, dated as of September 27, 1993, among Showscan Attractions, Inc., Moss Family O&O Corp., and DiBenedetto O&O Limited Partnership, with respect to the organization of Showscan Attractions Venture.(b) 10.18 Joint Venture Agreement, dated as of September 27, 1993, among Showscan CityWalk, Inc., Moss Family LA Corp., and DiBenedetto CityWalk Limited Partnership, with respect to the organization of Showscan CityWalk Venture.(b) 10.19 Proprietary Property Acquisition and Management Agreement, dated as of September 27, 1993, between Showscan Corporation and Showscan Attractions Venture.(b) 10.20 Development and Disposition Services Agreement, dated as of September 27, 1993, among Showscan Attractions Venture, DiBenedetto Showscan, Inc. and Moss Entertainment Corp.(b)
31. 32
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.22 Employment Agreement, dated May 3, 1994, between the Company and Dennis Pope, as amended.(j) 10.23 Purchase Agreement, dated as of August 19, 1994, by and between Showscan Corporation and United Artists Theatre Circuit, Inc.(h) 10.24 Joint Venture Agreement, dated as of August 19, 1994, by and between Showscan Corporation and United Artists Theatre Circuit, Inc.(h) 10.25 Theater Rights Agreement, dated as of August 19, 1994, among Showscan Corporation, United Artists Theatre Circuit, Inc. and Showscan/United Artists Theatres Joint Venture.(h) 10.26 First Amendment to Theater Rights Agreement, dated as of March 30, 1995, by and among Showscan Entertainment Inc., United Artists Theatre Circuit, Inc. and Showscan/United Artists Theatres Joint Venture.(j) 10.27 Master Management and Development Agreement, dated as of August 19, 1994, among Showscan Corporation, United Artists Theatre Circuit, Inc. and Showscan/United Artists Theatres Joint Venture.(h) 10.28 Amendment No. 1 to the Showscan Attractions Joint Venture Agreement, dated as of September 22, 1994, by and among DiBenedetto O&O Limited Partnership, Showscan Attractions, Inc., and Moss Family O&O Corp.(j) 10.29 Standstill Agreement, dated as of August 22, 1994, by and among Showscan Corporation, United Artists Theatre Circuit, Inc., Charles B. Moss, Jr., Thomas DiBenedetto and DiBenedetto Showscan Limited Partnership.(h) 10.30 Stock Exchange Agreement, dated as of September 22, 1994, by and among Showscan Entertainment Inc., Charles B. Moss, Jr., Thomas R. DiBenedetto, and DiBenedetto Showscan Limited Partnership.(j) 10.31 Royalty Agreement, dated as of September 22, 1994, by and among Showscan Entertainment Inc., Moss Family O&O Corp. and DiBenedetto O&O Limited Partnership.(j) 10.32 Memorandum of Agreement, dated as of April 24, 1995, by and between Showscan Framingham, Inc. and General Cinema of Framingham Inc.(j) 10.33 Operating Agreement, dated as of August 25, 1995, by and between Showscan Attractions Venture and Maloney Development Partnership Ltd.(l) 10.34 Second Amendment to Theater Rights Agreement, dated as of December 31, 1995, by and among Showscan Entertainment Inc., United Artists Theatre Circuit, Inc. and Showscan/United Artists Theatres Joint Venture.(l) 10.35 Agreement, dated August 7, 1996, between the Company and Dennis Pope.(m) 10.36 Agreement, dated August 7, 1996, between the Company and W. Tucker Lemon.(m) 21.1 List of Subsidiaries of the Company.(l) 23.1 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule.
32. 33 ________________ (a) Previously filed as an exhibit to the Company's Registration Statement on Form S-1, Registration No. 33-40531, as amended, and incorporated herein by reference. (b) Previously filed as an exhibit to the Schedule 13D filed with the Securities and Exchange Commission by Charles B. Moss, Jr., Thomas R. DiBenedetto and DiBenedetto Showscan Limited Partnership, dated September 27, 1993, and incorporated herein by reference. (c) Previously filed as an exhibit to the Company's Registration Statement on Form S-1, Registration No. 33-13582, as amended, and incorporated herein by reference. (d) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal year ended March 31, 1990, and incorporated herein by reference. (e) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1992, and incorporated herein by reference. (f) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal year ended March 31, 1993, and incorporated herein by reference. (g) Previously filed as an exhibit to the Company's Registration Statement on Form S-1, Registration No. 33-78236, as amended, and incorporated herein by reference. (h) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated August 19, 1994, as amended by the Form 8- K/A dated November 7, 1994, and incorporated herein by reference. (i) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated November 11, 1994, and incorporated herein by reference. (j) Previously filed as an exhibit to the Company's Annual Report on Form 10-K, as amended by the Form 10-K/A dated September 25, 1995, for the fiscal year ended March 31, 1995, and incorporated herein by reference. (k) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated September 1, 1995, and incorporated herein by reference. (l) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996, and incorporated herein by reference. (m) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996, and incorporated herein by reference. 33. 34 B. THE FOLLOWING REPORTS ON FORM 8-K WERE FILED DURING THE FOURTH QUARTER OF THE FISCAL YEAR ENDED MARCH 31, 1997. Current Report dated February 12, 1997, Item 5 and Item 7. No financial statements were filed with the foregoing Report. 34. 35 INDEX TO FINANCIAL STATEMENTS SHOWSCAN ENTERTAINMENT INC. Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets at March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the years ended March 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . F-5 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1997, 1996, and 1995 . . . . . . . . . F-6 Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . F-7 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9 Consolidated Financial Statement Schedule: Schedule II. Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-30 Supplementary Audited Financial Statements: Financial Statements for Showscan CityWalk Venture for the years ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-31 Financial Statements for Cinemania (U.K.) Limited for the years ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-40 Financial Statements for Showscan/General Cinema Ventures for the year ended October 31, 1996 and for the period from April 24, 1995 (date of formation) to October 31, 1995 . . . . . . . . . . . . F-49
All other schedules have been omitted either as inapplicable or not required under the instructions contained in Regulation S-X or because the information is included in the Consolidated Financial Statements or the Notes thereto listed above. F-1 36 Report of Independent Auditors Board of Directors and Stockholders Showscan Entertainment Inc. We have audited the accompanying consolidated balance sheets of Showscan Entertainment Inc. as of March 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Showscan Entertainment Inc. at March 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Los Angeles, California June 27, 1997 F-2 37 Showscan Entertainment Inc. Consolidated Balance Sheets (Dollars in Thousands, Except Share Amounts)
MARCH 31 1997 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 2,562 $ 5,055 Short-term investments (Note 1) - 3,086 Accounts receivable, net of allowances of $425 (1997) and $215 (1996) 2,716 1,885 Unbilled receivables on uncompleted equipment contracts (Note 1) - 1,122 Due from affiliated entities (Note 7) 884 1,216 Equipment sales inventory 1,289 1,547 Prepaid expenses and other current assets (Note 1) 1,072 122 ---------- ---------- Total current assets 8,523 14,033 Film library, net (Note 1) 5,520 3,481 Equipment and leasehold improvements, less depreciation and amortization (Note 2) 868 1,313 Investment in and advances to O&O theatres (Notes 1 and 6) 2,123 4,424 Patents and other intellectual properties, net of amortization (Note 1) 1,336 1,770 Other assets 1,558 994 ---------- ---------- Total assets $ 19,928 $ 26,015 ========== ==========
See accompanying notes. F-3 38
MARCH 31 1997 1996 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 654 $ 603 Customer advances on uncompleted film and equipment contracts (Note 1) 1,033 2,143 Accrued expenses and other current liabilities (Note 1) 2,308 3,351 ---------- ---------- Total current liabilities 3,995 6,097 8% convertible notes (Note 3) 5,690 6,620 ---------- ---------- Total liabilities 9,685 12,717 ---------- ---------- Commitments and contingencies (Note 10) Stockholders' equity (Note 5): Series A Convertible Preferred Stock, $.001 par value; 150,000 shares authorized, no shares issued and outstanding in 1997 and 1996 (Note 4) - - Series C Convertible Preferred Stock, $.001 par value; 100,000 shares authorized; 49,000 shares issued and outstanding in 1997 and 1996, $100 per share liquidation preference (Note 4) - - Common stock, $.001 par value; 20,000,000 shares authorized; shares issued and outstanding of 5,642,058 in 1997 and 5,480,324 in 1996 6 5 Additional paid-in capital 42,567 41,704 Accumulated deficit (32,330) (28,411) ---------- ---------- Total stockholders' equity 10,243 13,298 ---------- ---------- Total liabilities and stockholders' equity $ 19,928 $ 26,015 ========== ==========
See accompanying notes. F-4 39 Showscan Entertainment Inc. Consolidated Statements of Operations (Dollars in Thousands, Except Share Amounts)
YEAR ENDED MARCH 31 1997 1996 1995 ---------- ---------- ---------- Revenues (Note 9): Film licensing and production services $ 6,236 $ 9,039 $ 5,978 Equipment sales and related services 11,475 8,426 9,459 ---------- ---------- ---------- 17,711 17,465 15,437 Costs of revenues 10,854 8,399 8,584 ---------- ---------- ---------- Gross profit 6,857 9,066 6,853 Other costs and expenses: General and administrative expenses 6,904 7,576 5,560 Depreciation and amortization 961 971 1,025 ---------- ---------- ---------- 7,865 8,547 6,585 ---------- ---------- ---------- Operating income (loss) (1,008) 519 268 Other income (expense): Equity in net operations of O&O theatres (694) (217) (502) (Note 6) Effect of impairment loss on equity in net operations of O&O theatres (Note 6) (1,771) - - Other income, including interest of $241 (1997), $250 (1996) and $237 (1995) 250 358 444 Other expense, including interest of $672 (1997), $410 (1996) and $128 (1995) (692) (555) (128) ---------- ---------- ---------- (2,907) (414) (186) ---------- ---------- ---------- Income (loss) before taxes (3,915) 105 82 Provision for income taxes 4 4 3 ---------- ---------- ---------- Net income (loss) $ (3,919) $ 101 $ 79 ========== ========== ========== Net income (loss) per common share (Note 1) $ (0.70) $ 0.02 $ 0.01 ========== ========== ==========
See accompanying notes. F-5 40 Showscan Entertainment Inc. Consolidated Statements of Stockholders' Equity (In thousands, except share amounts)
Series A Convertible Series C Convertible Preferred Stock Preferred Stock Common Stock ----------------------------------------------------------------- Number Number of Number of Shares Amount Shares Amount of Shares Amount ---------- ------ --------- ------ --------- -------- Balance at March 31, 1994 150,000 $ - - $ - 4,679,519 $ 5 Proceeds from common stock offering - - - - 560,340 - Accretion on Series B Preferred Stock - - - - - - Proceeds from issuance of Series C Convertible Preferred Stock and warrants to purchase common stock - - 25,000 - - - Conversion of Series B Preferred Stock to Series C Convertible - - 24,000 - - - Preferred Stock Exercise of stock options - - - - 3,000 - Stock issuance costs - - - - - - Net income - - - - - - -------- ----- --------- ----- --------- ----- Balance at March 31, 1995 150,000 - 49,000 - 5,242,859 5 Conversion of Series A Convertible Preferred Stock to common stock (150,000) - - - 165,380 - Exercise of stock options 6,000 Conversion of convertible notes payable to common stock - - - - 66,085 - Other - - - - - - Net income - - - - - - -------- ----- --------- ----- --------- ----- Balance at March 31, 1996 - - 49,000 - 5,480,324 5 Exercise of stock options - - - - - - Conversion of convertible notes to common stock and other - - - - 161,734 1 Net income - - - - - - -------- ----- --------- ----- --------- ----- Balance at March 31, 1997 - $ - 49,000 $ - 5,642,058 $ 6 ======== ===== ========= ===== ========= =====
Additional Paid-In Accumulated Capital Deficit Total ---------- ----------- ---------- Balance at March 31, 1994 $ 33,660 $ (28,591) $ 5,074 Proceeds from common stock offering 4,342 - 4,342 Accretion on Series B Preferred Stock (122) - (122) Proceeds from issuance of Series C Convertible Preferred Stock and warrants to purchase common stock 2,500 - 2,500 Conversion of Series B Preferred Stock to Series C Convertible 1,800 - 1,800 Preferred Stock Exercise of stock options 12 - 12 Stock issuance costs (436) - (436) Net income - 79 79 --------- ---------- ------- Balance at March 31, 1995 41,756 (28,512) 13,249 Conversion of Series A Convertible Preferred Stock to common stock - - - Exercise of stock options 30 30 Conversion of convertible notes payable to common stock 345 - 345 Other (427) - (427) Net income - 101 101 --------- ---------- ------- Balance at March 31, 1996 41,704 (28,411) 13,298 Exercise of stock options - - - Conversion of convertible notes to common stock and other 863 - 864 Net income - (3,919) (3,919) --------- ---------- ------- Balance at March 31, 1997 $ 42,567 $ (32,330) $10,243 ========= ========== =======
See accompanying notes. F-6 41 Showscan Entertainment Inc. Consolidated Statements of Cash Flows (Dollars in Thousands)
YEAR ENDED MARCH 31 1997 1996 1995 --------- --------- --------- OPERATING ACTIVITIES Net income (loss) $ (3,919) $ 101 $ 79 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 961 971 1,025 Amortization of film library 613 481 502 Amortization of debt issue costs 198 85 - Provision for doubtful accounts receivable 270 440 (30) Equity in net operations of O&O theatres, including impairment loss 2,465 217 502 Accrued interest on subordinated note - - 123 Changes in operating assets and liabilities: Accounts receivable (1,101) (279) 353 Due from affiliated entities 332 (319) (697) Equipment sales inventory 258 595 (702) Unbilled receivables on uncompleted equipment contracts 1,122 (252) 248 Prepaid expenses and other assets (1,784) (12) (7) Accounts payable, accrued expenses and (992) 2,023 (570) other Customer advances on uncompleted equipment contracts (1,110) (786) 798 --------- --------- --------- Net cash (used in) provided by operating (2,687) 3,265 1,624 activities INVESTING ACTIVITIES Purchases of short-term investments - (3,086) - Redemptions of short-term investments 3,086 - 1,243 Additions to film library (2,652) (2,568) (891) Investment in and advances to O&O theatres (164) (2,486) (2,456) Purchases of equipment and leasehold improvements and other, net (76) (151) (275) --------- --------- --------- Net cash provided by (used in) investing 194 (8,291) (2,379) activities
F-7 42 Showscan Entertainment Inc. Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
YEAR ENDED MARCH 31 1997 1996 1995 --------- --------- --------- FINANCING ACTIVITIES Proceeds from borrowings, net of debt issue costs $ - $ 6,381 $ - Repayment of subordinated note payable - (3,121) - Net proceeds from issuance of common stock - - 4,079 Net proceeds from issuance of preferred stock and common stock warrants - - 2,327 Proceeds from exercise of stock options - 30 12 --------- --------- --------- Net cash provided by financing activities - 3,290 6,418 --------- --------- --------- Net (decrease) increase in cash and cash (2,493) (1,736) 5,663 equivalents Cash and cash equivalents at beginning of year 5,055 6,791 1,128 --------- --------- --------- Cash and cash equivalents at end of year $ 2,562 $ 5,055 $ 6,791 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 479 $ 1,818 $ 4 ========= ========= ========= Income taxes paid $ 4 $ 4 $ 2 ========= ========= =========
See accompanying notes. F-8 43 Showscan Entertainment Inc. Notes to Consolidated Financial Statements March 31, 1997 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS OF THE COMPANY Showscan Entertainment Inc. (the Company) is a leader in the production and distribution of exciting movie-based entertainment attractions shown in large-screen, special-format theatres worldwide. The Company's business is in the rapidly expanding out-of-home entertainment marketplace. The Company's motion simulation and specialty theatres are open or under construction around the world, located in theme parks, motion picture mutiplexes, expos, world fairs, resorts, shopping centers, casinos, museums and other tourist destinations. The Company also owns and operates motion simulation theatres in partnership with leading entertainment companies around the world. The Company's simulation attractions combine the exhibition of a short action film with multi-channel sound systems and synchronized theatre seat movement to produce an immersive entertainment experience in which the theatre patron has the perception of actually participating in the on-screen action. The entertainment creates a "thrill ride" or action entertainment experience (such as riding a runaway train or racing through outer space). The Company's attractions incorporate various proprietary technologies, including the award winning and patented 70mm filming and projection process known as Showscan(R). The Company believes that films made and exhibited in the Showscan process create a visual effect of depth, clarity and realism that is superior to any other film format. The Showscan process is also used for the exhibition of films in large screen special format movie theatres. The Company's films have been exhibited in such specialty theatres at world fairs, tourist destinations, trade conventions and other locations where the operator desires the impact of the large-screen, intense image that a Showscan film provides. The Company is presently in the business of: (i) licensing and distributing the films in its library and the proprietary technologies necessary to produce and exhibit the Company's films; (ii) selling and installing motion simulation attractions and specialty theatres (including projectors, screens, sound systems, synchronization and show control, and theatre design packages); (iii) selling motion bases and other equipment used in motion simulation attractions; (iv) producing films using the Showscan process; and (v) operating motion simulation 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. F-9 44 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BUSINESS OF THE COMPANY (CONTINUED) The Company's primary business strategy is to develop high margin recurring revenues from the licensing and distribution of movie-based software to third-party owner/operators of its attractions and from ticket sales at, and the licensing of its movie-based software to, its O&O Theatres. The Company seeks to increase the demand for its film library by significantly increasing the installed base of both its motion simulation attractions and specialty theatres. CONSOLIDATION The financial statements consolidate the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts and transactions have been eliminated in consolidation. The Company accounts for its investment in O&O Theatres (see Note 6) using the equity method of accounting. RECLASSIFICATIONS The consolidated financial statements for the years ended March 31, 1996 and 1995 contain certain reclassifications to conform to the presentation for the year ended March 31, 1997. FILM LIBRARY The Company's film library primarily consists of short "thrill-ride" or action films that are exhibited in motion simulation attraction theatres worldwide. Films are stated at the lower of unamortized cost or estimated realizable values. The cost of a film includes the direct costs to produce or purchase the film and the costs of production overhead, if any. The components of the unamortized film library consist of the following: F-10 45 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARCH 31 1997 1996 --------- --------- Films in production $ 2,399 $ 476 Completed films in release 10,239 9,510 --------- --------- 12,638 9,986 Less accumulated amortization 7,118 6,505 --------- --------- $ 5,520 $ 3,481 ========= =========
Films are being amortized over their estimated future revenue stream (five to seven years) as revised quarterly, if applicable; however, many of the Company's films are expected to generate revenues for periods up to ten years or longer. The Company estimates that approximately 60% of unamortized film costs at March 31, 1997 will be amortized over the next four fiscal years. PATENTS AND OTHER INTELLECTUAL PROPERTIES Patents (expiring in fiscal year 2002) and other intellectual properties represent the excess of the total purchase cost over the values assigned to tangible assets at the date of acquisition of the Showscan process. Amortization is provided on the basis of the ratio of annual revenues to projected revenues over the lives of the patents, as revised quarterly, if applicable, from the Showscan process with minimum annual amortization of approximately $434,000 (equal to 1/15 of the original balance of $6,504,000). Accumulated amortization of the patents and other intellectual properties was $5,169,000 and $4,734,000 at March 31, 1997 and 1996, respectively. EQUIPMENT SALES ACCOUNTING Equipment sales inventory, consisting primarily of film exhibition and motion simulation system equipment packages and related components, is valued at the lower of average cost or market. Equipment sales contracts are accounted for using the percentage-of-completion method of accounting, generally measured by the percentage of labor hours incurred to date to the estimated total labor hours for each contract. When revenues and cost estimates for a contract indicate an ultimate loss, that loss is recognized immediately. F-11 46 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the respective assets, generally 7 to 12 years. Amortization of leasehold improvements is computed using the straight-line method over the lease term. Depreciation and amortization of equipment and leasehold improvements was $527,000, $537,000 and $590,000 for the years 1997, 1996 and 1995, respectively. FILM LICENSING REVENUES Revenues from film license agreements are recognized when the license period begins and the film is available pursuant to the terms of the license agreement and accepted by the customer. INCOME TAXES The Company accounts for taxes using Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less or investments in money market funds to be cash equivalents. Short-term investments are stated at amortized cost and consisted of amounts invested in debt securities (U.S. Treasury Bills) which were held to maturity. Such securities had maturities ranging from three to nine months from the time of acquisition. F-12 47 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The Company generally requires customers to furnish irrevocable letters of credit on equipment sales and to pay film licensing revenues at the beginning of the license period in order to minimize the Company's credit risk. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets include $600,000 at March 31, 1997 of costs advanced for the joint defense of certain litigation against the Company and a supplier. Such litigation was settled subsequent to year end, and the Company realized the amounts capitalized. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Included in accrued expenses and other current liabilities are the following:
1997 1996 ------------- ------------- Accrued participations and royalties $ 972,000 $ 988,000 Purchase of motion simulation films - 1,620,000 Accrued cost of film and equipment sales 679,000 175,000 Other items 657,000 568,000 ------------- ------------- $ 2,308,000 $ 3,351,000 ============= =============
F-13 48 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 established a fair value-based method of accounting for compensation cost related to stock options and other forms of stock-based compensation plans. However, SFAS 123 allows an entity to continue to measure compensation costs using the principles of APB 25 if certain pro forma disclosures are made. The Company has elected to account for its stock compensation arrangements under the provisions of APB 25, "Accounting for Stock Issued to Employees." The Company adopted the provisions for pro forma disclosures requirements of SFAS 123 in fiscal year 1997 (see Note 5). USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NET INCOME (LOSS) PER COMMON SHARE Per share information has been determined on the basis of 5,594,245, 6,317,167, and 5,788,230 weighted average shares outstanding for the years ended March 31, 1997, 1996 and 1995, respectively. For the year ended March 31, 1997, the effect of common stock equivalents is not included in the per share computation as such items are anti-dilutive. The weighted average shares for the years ended March 31, 1996 and 1995 give effect to the assumed conversion of the Company's Convertible Preferred Stock (the effect of all other common stock equivalents was anti-dilutive and thus not reflected in the per share computation). In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). 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 F-14 49 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME (LOSS) PER COMMON SHARE (CONTINUED) the period. SFAS No. 128 also requires dual presentation of basic EPS and diluted EPS on the face of the income statement for all periods presented. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15, with certain modifications. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Early adoption is not permitted and SFAS No. 128 requires restatement of all prior period EPS data presented after SFAS No. 128's effective date. The Company will adopt SFAS No. 128 effective with its March 31, 1998 fiscal year end. Pro forma earnings (loss) per share data calculated in accordance with SFAS No. 128 for the year ended March 31, 1997 and 1996 has not been presented as it would have been the same as the historical amounts reported. 2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements at March 31, 1997 and 1996 were as follows:
1997 1996 ------------- ------------- Showscan equipment $ 4,580,000 $ 4,559,000 Leasehold improvements 926,000 927,000 Office furniture and equipment 652,000 769,000 ------------- ------------- 6,158,000 6,255,000 Less accumulated depreciation and amortization 5,290,000 4,942,000 ------------- ------------- $ 868,000 $ 1,313,000 ============= =============
3. 8% CONVERTIBLE NOTES In September 1995, the Company completed a private placement of $7,000,000 in Convertible Notes which mature on September 1, 1999 and bear interest at 8% per annum payable semi-annually. 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 notes are convertible into F-15 50 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 3. 8% CONVERTIBLE NOTES (CONTINUED) common stock at the option of the holder at a conversion price (subject to certain anti-dilution adjustments) of $5.75 per share (the closing price on the Nasdaq National Market on the transaction closing date). Through March 31, 1997, $1,310,000 of notes were converted into 227,819 shares of common stock, leaving an outstanding balance of $5,690,000. The fair value of convertible notes was determined using valuation techniques that considered cash flows discounted at current market rates and management's best estimate for instruments without quoted market prices. At March 31, 1997 and 1996, the carrying value of convertible notes exceeded the fair value by approximately $1,300,000 and $0, respectively. 4. PREFERRED STOCK The Company is authorized to issue preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications, limitations, restrictions and the number of shares constituting any such series. The Company is authorized to issue a total of 10,000,000 shares of preferred stock of which 49,000 shares are issued as of March 31, 1997. Accordingly, 9,951,000 shares of preferred stock are available for issuance. SERIES A CONVERTIBLE PREFERRED STOCK (SERIES A) On September 30, 1995, the Company converted all 150,000 previously outstanding shares of its Series A into 165,380 shares of common stock. SERIES C CONVERTIBLE PREFERRED STOCK (SERIES C) The Company has 49,000 shares of Series C outstanding. The Series C is convertible into common stock at $5.04 per share (subject to certain anti-dilution adjustments), has a liquidation preference of $100 per share, and provides voting rights as if such shares had been fully converted into common stock. Each share of Series C entitles the holder to receive dividends in an amount equal to 110% of the dividends per share declared on each share of common stock. The Company may elect to pay dividends on the Series C either in cash or in additional shares of Series C based on its liquidation preference of $100 per share. F-16 51 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 4. PREFERRED STOCK (CONTINUED) SERIES C CONVERTIBLE PREFERRED STOCK (SERIES C) (CONTINUED) The Series C is senior to the common stock of the Company; additionally, a majority of the holders of Series C must consent to (a) the issuance of any equity securities ranking senior to, or on parity with, the Series C, and (b) the repurchase or retirement of any equity securities of the Company other than the Series C. SERIES D PARTICIPATING PREFERRED STOCK (SERIES D) The issuance of 10,000 shares of Series D was authorized in November 1994 in connection with the adoption of the Company's stockholder rights plan. In connection therewith, the Company issued a dividend of one preferred share purchase right (a Right) for each outstanding share of common stock and for each share of common stock issuable upon conversion of outstanding Series C to the stockholders of record on November 11, 1994. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series D at a purchase price of $40 per one one-thousandth of a share of Series D, subject to adjustment (the Purchase Price). The Rights may be exercised (a) 20 days after a person or group of persons has become the beneficial owner of 20% or more of the common stock then outstanding (an Acquiring Person), or (b) 20 business days after the date of commencement of a tender or exchange offer the consummation of which would result in a person or group of persons becoming an Acquiring Person. The Rights, which do not have any voting rights, expire on November 11, 2004 and may be redeemed by the Company at a price of $.01 per Right, subject to adjustment, at any time prior to their expiration and prior to such time as any person or group of persons becomes an Acquiring Person. In the event that a person or group of persons becomes an Acquiring Person, each Right will entitle its holder to purchase, at the Right's then Purchase Price, a number of shares of common stock of the Company having a market value of twice the Purchase Price. If certain mergers or sales of assets by the Company occur, each Right shall entitle the holder to purchase, at the then Purchase Price, a number of shares of common stock of the surviving corporation or purchaser having a market value of twice the Purchase Price. F-17 52 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 5. STOCK OPTIONS AND WARRANTS OPTIONS The Company currently has two stock option plans in effect, the 1987 Option Plan and the 1992 Option Plan (collectively, the Plans). The Plans provide for the issuance of nonqualified and qualified stock options under the Internal Revenue Code of 1986, as amended. An aggregate of 300,000 shares of common stock were initially reserved for grant under the 1992 Option Plan to officers, directors and employees as well as independent contractors and consultants who performed services for the Company. In 1995, the 1992 Option Plan was amended to permit the grant of up to 800,000 shares of common stock and such number of shares have been reserved for grant at March 31, 1997. All remaining shares reserved for grant under the 1987 Option Plan were cancelled upon adoption of the 1992 Option Plan. Persons who are not employees of the Company are eligible to receive only nonqualified stock options. The options may be granted for a term of up to ten years. If an incentive stock option is granted to an individual owning more than 10% of the total combined voting power of all classes of the Company's stock, the exercise price of the option may not be less than 110% of the fair market value of the underlying shares on the date of the grant and the term of the option may not exceed five years. The Plans provide that the aggregate fair market value (determined at the time the option is granted) of the common stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. The Company has elected to follow APB 25 (see Note 1) in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for each of the years ended March 31, 1997 and 1996: risk-free interest rates ranging from 5% to 6%, volatility factors of the expected market price of the Company's common stock of .361, and a weighted average expected life of the options ranging from 7 to 10 years. F-18 53 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 5. STOCK OPTIONS AND WARRANTS (CONTINUED) OPTIONS (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Given this method of amortization, the initial impact of applying SFAS 123 on pro forma net income and pro forma earnings per share is not representative of the potential impact on pro forma amounts in future years, when the effect of amortization from multiple awards would be reflected. The Company's pro forma information follows:
1997 1996 ------------- ----------- Pro forma net loss $ (4,475,000) $ (402,000) Pro forma loss per share $ (0.80) $ (0.08)
F-19 54 5. STOCK OPTIONS AND WARRANTS (CONTINUED) OPTIONS (CONTINUED) The following is a summary of Company stock options granted, exercised and terminated through March 31:
1997 1996 1995 -------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- --------- ------- -------- ------- --------- Outstanding at beginning 605,750 $ 7.51 619,500 $ 7.58 333,000 $ 6.68 of year Granted 200,000 $ 4.75 32,250 $ 6.53 304,750 $ 8.47 Exercised - $ - (6,000) $ 5.00 (3,000) $ 4.00 Canceled (31,500) $ 8.81 (40,000) $ 6.06 (15,250) $ 4.44 ------- -------- ------- -------- ------- -------- Outstanding at end of year 774,250 $ 6.75 605,750 $ 7.51 619,500 $ 7.58 ======= ======== ======= ======== ======= ======== Exercisable at end of year 364,688 $ 7.30 235,625 $ 7.24 156,500 $ 6.70 ======= ======== ======= ======== ======= ======== Weighted average fair value of options granted during year $ 2.41 $ 3.32 $ 4.30 ======== ======== ========
Exercise prices for options outstanding at March 31, 1997 ranged from $3.625 to $9.06. The weighted average remaining contractual life of those options is 8 years. Options vest over a period of 4 or 5 years from respective grant dates. WARRANTS During 1991, warrants to purchase an aggregate of 200,000 shares of common stock were issued by the Company. Warrants for 150,000 shares expired on July 11, 1996 and the remaining warrants for 50,000 shares are exercisable at a price of $6.50 and expire on March 9, 1999, subject to certain anti-dilution adjustments. F-20 55 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 5. STOCK OPTIONS AND WARRANTS (CONTINUED) WARRANTS (CONTINUED) In October 1993, the Company issued a warrant to purchase an aggregate of 50,000 shares of common stock at an exercise price of $4.47 per share to the Chairman of its Board of Directors. The warrant was issued as compensation for services the Chairman provided to the Company. At March 31, 1997, the warrant has been adjusted (due to anti-dilution adjustments) to permit the purchase of up to 55,127 shares of common stock at an exercise price of $4.05 per common share. The warrant is exercisable at any time on or before October 26, 1998. In September 1993, the Company issued to certain of its directors (and their affiliates) warrants which initially allowed the purchase of up to 850,000 shares of common stock at the then exercise price of $4.00 per share. The warrants have been adjusted (due to anti-dilution adjustments) to permit the purchase of up to 937,155 shares of common stock at an exercise price of $3.63 per share and are currently exercisable and expire on September 27, 1998. In August 1994, the Company issued to United Artists Theatre Circuit (UA) warrants to purchase an aggregate of 552,000 shares of common stock, at exercise prices ranging from $6.50 to $8.50, subject to certain anti-dilution adjustments. The warrants become exercisable at dates from August 22, 1995 (300,000) and annually thereafter at 75,000 per year with the remaining 27,000 exercisable on August 22, 1999, and have expiration dates of either August 22, 1999 or August 22, 2000. In September 1995, the Company issued warrants to purchase an aggregate of 150,000 shares of common stock at an exercise price of $5.75 per share, subject to certain anti-dilution adjustments, to financial advisors who assisted in the private placement of the Convertible Notes. The warrants became exercisable on September 1, 1996 and expire on September 1, 2000. In October 1995, the Company issued warrants to purchase an aggregate of 30,000 shares of common stock at an exercise price of $6.44, subject to certain anti-dilution adjustments, to an outside marketing, film production and consulting company. The warrants become exercisable on August 2, 1996 (15,000) and August 2, 1997 (15,000) and expire on August 1, 1998. F-21 56 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 5. STOCK OPTIONS AND WARRANTS (CONTINUED) WARRANTS (CONTINUED) Shares of the Company's common stock reserved for issuance upon exercise of stock options, warrants, preferred stocks and convertible notes are as follows:
MARCH 31, 1997 RANGE OF MARCH 31 EXERCISE PRICES 1997 1996 ---------------- --------- --------- 1987 and 1992 Option Plans $3.625 - $9.0625 837,500* 837,500* Warrants $3.63 - $8.50 1,774,283 1,924,283 Series C $5.04** 972,222 972,222 Convertible Notes $5.75** 989,567 1,151,304 --------- --------- 4,573,572 4,885,309 ========= =========
* At March 31, 1997 and 1996, shares reserved for options which are still available for grant are 66,250 and 231,750, respectively. ** Subject to certain anti-dilution provisions. 6. OWNED AND OPERATED THEATRES The Company has an ownership interest, ranging from 15% to 50%, in selected Showscan motion simulation theatre attractions. The Company operates and/or has an ownership interest in theatre attractions at Universal CityWalk in Universal City, California (November 1993), at the Trocadero Arcade/Piccadilly Circus in London, England (September 1994), Framingham, Massachusetts (May 1995), Osaka, Japan (August 1995), on the Riverwalk in San Antonio, Texas (March 1996), in Austin, Texas (through the UA Venture in July 1997) and in Darling Harbour in Sydney, Australia (July 1997). Generally, in each of these arrangements, the Company receives reimbursement for direct expenses (as defined), 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). Affiliated Ventures The Company and affiliates of certain of its directors have entered into three ventures through March 31, 1997 with respect to owned and operated theatres: F-22 57 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 6. OWNED AND OPERATED THEATRES (CONTINUED) a) Universal CityWalk - The Universal CityWalk Venture (CityWalk Venture) is a joint venture which is 50% owned by a wholly-owned subsidiary of the Company, and 50% owned by affiliates of certain of the directors. The CityWalk Venture also entered into a ten-year profit sharing lease with the owner of Universal CityWalk pursuant to which the owner contributed one-half of the costs incurred for the construction of the theatre. In general, the CityWalk Venture is obligated to pay a base rent plus 50% of the cash flow, as defined, from the operations of the theatre. b) Trocadero Arcade/Piccadilly Circus - The Trocadero Arcade/Piccadilly Circus theatres are owned by Cinemania (UK) Limited, a British corporation, which is 50% owned by a wholly-owned subsidiary of the Company, and 50% owned by affiliates of certain of the directors (investors). In connection with the issuance of preferred stock to the investors, the Company was required to make an initial contribution to this venture which exceeded its ownership interest. The investment account for this venture and additional paid-in-capital for all periods presented has been restated by $742,000 to properly reflect such costs of the preferred stock issuance. The adjustment had no impact on the reported results of operations for any period. c) Riverwalk/San Antonio - The Riverwalk/San Antonio theatre is owned by a limited liability company which is 50% owned by an unaffiliated third party and 50% owned by Showscan Attractions Venture, which is a joint venture 50% owned by a wholly-owned subsidiary of the Company and 50% owned by affiliates of certain of the directors. Thus, the Company effectively has a 25% ownership interest in this theatre. The parties to this venture have agreed to close the theater and liquidate its assets. The parties have further agreed to sell the theater equipment to the Company, which is negotiating to sell the equipment to a non-affiliated third party. The Company expects to fully realize the carrying value of its investment in this venture at March 31, 1997 upon the completion of the liquidation and subsequent sale. The accompanying statement of operations for the year ended March 31, 1997 includes a non-cash charge of $1,771,000 to record the impact of the adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" by certain of the joint ventures. Under the equity method of accounting, the Company has recognized its share of joint venture charges; accordingly, the carrying value of investments in and advances to O&O theatres in the accompanying consolidated balance sheets was reduced by this charge. F-23 58 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 6. OWNED AND OPERATED THEATRES (CONTINUED) The Company has through other financing and/or joint venture arrangements entered into the following additional theatre ventures: UA Venture In August 1994, the Company and United Artists Theatre Circuit Inc. (UA) agreed to be partners in a venture called Showscan/United Artists Theatres Joint Venture (UA Venture). Pursuant to a Theatre Rights Agreement, as amended (TRA), UA has agreed to offer to the UA Venture for ownership and operation by the UA Venture, up to 24 theatre sites prior to August 19, 1999 for the installation of motion simulation attraction threatres in or adjacent to existing or to-be-built UA theatre multiplexes. If the UA Venture declines to acquire a particular site, then UA must install a motion simulation attraction theatre at such site. As of March 31, 1997, UA has offered eight sites of which the UA Venture declined seven of these sites as these sites did not meet the criteria of the UA Venture and on July 1, 1997, the UA Venture exercised its rights under the TRA and accepted the offer by UA for the theatre site in Austin, Texas. The TRA contains certain provisions that require UA to make payments to the Company if UA is unable to meet its obligations under that agreement. The TRA provided that two motion simulation attraction theatres be installed and in operation in Malaysia no later than December 31, 1995. UA was unable to meet this commitment (see Note 7). The TRA has been amended by the Company and UA to eliminate certain installation requirements in Malaysia and to add those requirements to the overall UA obligations. In connection with the amendment, UA relinquished its exclusivity rights to Malaysia and eliminated its rights of first refusal in the Asia Territory (as defined). F-24 59 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 6. OWNED AND OPERATED THEATRES (CONTINUED) Other O&O Theatres The Framingham theatre is 50% owned by a wholly-owned subsidiary of the Company and 50% owned by a subsidiary of General Cinema Corporation. The parties to this venture have agreed to liquidate the assets of the venture. The parties have further agreed to sell certain equipment back to the Company, which has contracted to sell the equipment to a non-affiliated third party. An additional capital contribution may be necessary by one of the parties upon the ultimate settlement and liquidation of the venture; however, the partners believe the contribution to be under $100,000. The Osaka theatre is 50% owned by a wholly-owned subsidiary of the Company and 50% by Imagine Japan, Inc. Sega Enterprises, Ltd. operates the Osaka theatre in exchange for a certain percentage of the gross receipts. The Company has acquired (effective July 1997) a 15% investment interest in a theatre located in Darling Harbour which is owned by Reality Cinema Pty. Ltd., an Australian corporation, by acquiring a 15% ownership in Reality Cinema Pty. Ltd. During 1997, 1996 and 1995, the Company sold equipment to several of these ventures and eliminated the gross profit on such sales to the extent of its ownership percentage ($38,705 in 1997, $382,000 in 1996, and $194,000 in 1995). The amount of profit eliminated is being recognized into income over the depreciation period of the related equipment. 7. RECEIVABLES FROM AFFILIATED ENTITIES At March 31, 1997, the Company is due $722,000 from UA in connection with the TRA as discussed in Note 6. The payment terms provide 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); provided, however, that if the UA Venture has not accepted one of the theatre sites it has been offered by UA prior to the Maturity Date, the Maturity Date will be extended 30 days after the date that the UA Venture does accept, but in no event shall the Maturity Date be extended later than August 19, 1999. Effective July 1, 1997, the UA Venture accepted an offered theatre site at Austin, Texas (see Note 6), which will reduce the amount owed by UA by $390,000 (the Company's investment in this theatre). At March 31, 1997, the $390,000 is included in other assets in the accompanying consolidated balance sheet and will be reclassified to Investment in Owned and Operated Theatres effective July 1, 1997. F-25 60 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 7. RECEIVABLES FROM AFFILIATED ENTITIES (CONTINUED) During the fiscal years ended 1997, 1996 and 1995, the Company charged approximately $909,000, $897,000 and $789,000, respectively, to the O&O Theatre joint ventures. Such amounts have either been recognized as film rentals and royalties ($666,000 in 1997, $565,000 in 1996 and $314,000 in 1995), or offset against general and administrative expenses ($243,000 in 1997, $332,000 in 1996 and $475,000 in 1995) in the accompanying consolidated statements of operations. Such amounts represent film rentals and royalties, management and administrative services provided by the Company to the theatre joint ventures. The joint ventures owed the Company approximately $238,000 and $318,000 at March 31, 1997 and 1996, respectively, (included in due from affiliated entities) for such charges and for costs paid on behalf of the ventures. 8. INCOME TAXES At March 31, 1997, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $25,794,000 and $7,927,000, respectively. The federal loss carryforwards expire through the year ending 2012. The state loss carryforwards expire through the year ending 2002. These loss carryforwards can be used to offset future taxable income, if any. The provision for income taxes for all years presented represents minimum state tax liabilities. F-26 61 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts utilized for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of March 31, 1997 and 1996 are as follows (in thousands):
1997 1996 --------- --------- Deferred tax liabilities: Unbilled receivables on uncompleted equipment contracts $ - $ 1,770 --------- --------- Total deferred tax liabilities - 1,770 Deferred tax assets: Customer advances on uncompleted equipment contracts - 1,505 Excess of book over tax depreciation 402 395 Patent amortization 251 339 Amortization of film library 236 127 Other 486 300 Net operating loss carryforward 9,765 10,181 --------- --------- Total deferred tax assets 11,140 12,847 Valuation allowance for deferred tax asset (11,140) (11,077) --------- --------- Total deferred taxes $ - $ - ========= =========
9. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS Export revenues by geographic area for each of the three years ended March 31 consisted of:
1997 1996 1995 -------------- -------------- -------------- Africa $ 215,000 $ 281,000 $ 851,000 Australasia 1,976,000 2,574,000 1,031,000 Europe 1,206,000 1,992,000 3,531,000 Far East 6,048,000 5,628,000 4,982,000 Middle East 1,340,000 48,000 41,000 Other 159,000 125,000 184,000 -------------- -------------- -------------- Total export revenues $ 10,944,000 $ 10,648,000 $ 10,620,000 ============== ============== ==============
F-27 62 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 9. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS (CONTINUED) During the fiscal years ended 1997, 1996 and 1995, the Company earned export revenues from an unaffiliated customer of $3,117,000, $3,407,000 and $3,080,000, respectively. During the fiscal years ended 1997, 1996 and 1995, the Company recognized domestic revenues from UA of approximately $5,405,000, $3,126,000 and $109,000, respectively. 10. COMMITMENTS AND CONTINGENCIES The Company is obligated under various operating leases for its corporate office, storage premises and equipment. Future net minimum rental payments under these leases at March 31, 1997 are as follows: 1998 $ 426,000 1999 426,000 2000 421,000 2001 421,000 2002 416,000 Thereafter 504,000 ------------- $ 2,614,000 =============
The corporate office lease provides for rent adjustments based on increases in the Consumer Price Index. The Company has provided a letter of credit to its landlord in the amount of $295,000 which permits the landlord to draw against the letter of credit upon default by the Company (as defined) under the terms of the lease. The letter of credit is secured by a cash deposit in the amount of $295,000; such amount is included in other assets in the accompanying consolidated balance sheet. Total rental expense charged to operations for the years ended March 31, 1997, 1996 and 1995 was $400,000, $389,000 and $456,000, respectively. Under the terms of a film production agreement, the Company has guaranteed, for four years beginning in 1996, a minimum amount per year ($287,500) of proceeds to the outside investors in the film project. If revenues, as defined, from the distribution of the film are less than the required minimum amount, the Company will contribute the difference to the outside investors. Based upon management's estimate of future revenues to be derived from the film, the Company does not expect to pay any amounts under this guarantee. F-28 63 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company is obligated under various royalty agreements to pay royalties (ranging from 1% to 3%) to various parties, generally based on the gross receipts (as defined) from either the exploitation of the Showscan process (in excess of certain amounts), the exploitation of Showscan feature-length motion pictures, or other receipts. F-29 64 Showscan Entertainment Inc. Schedule II - Valuation and Qualifying Accounts
COL. A COL. B COL. C COL. D COL. E COL. F ----------- ------------ ------------ ------------ ---------------- ------------ Charged Balance at Charged to to Other Balance DESCRIPTION Beginning Costs and Accounts - Deductions - at End of Year Expenses Describe Describe of Year ------------ ------------ ------------ ---------------- ------------ Year ended 1997: Allowance for doubtful accounts $ 215,000 $ 270,000 $ - $ 60,000 (a) $ 425,000 ============ ============ ============ ================ ============ Product warrant liability $ 182,000 $ 67,000 $ - $ 69,000 (b) $ 180,000 ============ ============ ============ ================ ============ Year ended 1996: Allowance for doubtful accounts $ 254,000 $ 440,000 $ - $ 479,000 (a) $ 215,000 ============ ============ ============ ================ ============ Product warrant liability $ 187,000 $ 77,000 $ - $ 82,000 (b) $ 182,000 ============ ============ ============ ================ ============ Year ended 1995: Allowance for doubtful accounts $ 283,000 $ (30,000) $ - $ (1,000)(a) $ 254,000 ============ ============= ============ ================ ============ Product warrant liability $ 213,000 $ 124,000 $ - $ 150,000 (b) $ 187,000 ============ ============ ============ ================ ============
(a) Represents write-off of uncollectible accounts receivable. (b) Represents actual warranty expenditures. F-30 65 Financial Statements Showscan CityWalk Venture Years ended December 31, 1996, 1995 and 1994 with Report of Independent Auditors F-31 66 Report of Independent Auditors The Partners Showscan CityWalk Venture We have audited the accompanying balance sheets of Showscan CityWalk Venture as of December 31, 1996 and 1995, and the related statements of operations, partners' capital, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Venture's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Showscan CityWalk Venture at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 4 to the financial statements, the Venture adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1996. Ernst & Young LLP Los Angeles, California June 27, 1997 F-32 67 Showscan CityWalk Venture Balance Sheets
DECEMBER 31 1996 1995 ------------- ------------- ASSETS Current assets: Cash $ 104,923 $ 74,163 Due from Showscan CityWalk, Inc. (Note 3) - 20,000 Due from Showscan Entertainment Inc. (Note 3) - 26,424 Prepaid expenses and other assets 49,957 7,993 ------------- ------------- Total current assets 154,880 128,580 Property and equipment: Leasehold improvements 557,431 557,431 Operating equipment 879,064 868,682 ------------- ------------- 1,436,495 1,426,113 Less accumulated depreciation and amortization (1,236,610) (312,360) ------------- ------------- 199,885 1,113,753 Other assets 19,241 16,211 ------------- ------------- Total assets $ 374,006 $ 1,258,544 ============= ============= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable and accrued liabilities $ 69,926 $ 74,708 Due to Showscan Entertainment Inc. (Note 3) 23,558 21,248 ------------- ------------- Total current liabilities 93,484 95,956 Commitments and contingencies (Note 2) Partners' capital 280,522 1,162,588 ------------- ------------- Total liabilities and partners' capital $ 374,006 $ 1,258,544 ============= =============
See accompanying notes. F-33 68 Showscan CityWalk Venture Statements of Operations
YEAR ENDED DECEMBER 31 1996 1995 1994 ------------- ------------- ------------- Revenues $ 996,380 $ 1,000,198 $ 1,206,961 Cost of revenues, primarily film rental, royalty and management fees (Note 3) 264,749 293,708 250,383 ------------- ------------- ------------- Gross profit 731,631 706,490 956,578 Other costs and expenses: Rent 183,182 197,923 180,000 Payroll and related items 216,178 180,402 191,151 Marketing and advertising 13,494 27,235 294,065 Other general and administrative 273,693 238,139 263,496 Impairment loss on long-lived assets (Note 4) 770,000 - - Depreciation and amortization 157,150 151,014 148,939 ------------- ------------- ------------- 1,613,697 794,713 1,077,651 ------------- ------------- ------------- Net loss $ (882,066)$ (88,223)$ (121,073) ============= ============= =============
See accompanying notes. F-34 69 Showscan CityWalk Venture Statements of Partners' Capital Partners' capital at December 31, 1993 $ 1,325,460 Capital contributions 20,000 Net loss (121,073) ------------- Partners' capital at December 31, 1994 1,224,387 Capital contributions 26,424 Net loss (88,223) ------------- Partners' capital at December 31, 1995 1,162,588 Net loss (882,066) ------------- Partners' capital at December 31, 1996 $ 280,522 =============
See accompanying notes. F-35 70 Showscan CityWalk Venture Statements of Cash Flows
YEAR ENDED DECEMBER 31 1996 1995 1994 ----------- ----------- ----------- OPERATING ACTIVITIES Net loss $ (882,066) $ (88,223) $ (121,073) Adjustments to reconcile net loss to net cash provided by operating activities: Impairment loss on long-lived assets 770,000 - - Loss on disposal of assets 3,102 - - Depreciation and amortization 157,150 151,014 148,939 Changes in operating assets and liabilities: Prepaid expenses and other assets (44,994) 52,580 12,387 Accounts payable and accrued expenses (4,782) (57,618) 95,287 Due to Showscan Entertainment Inc. 2,310 2,223 (171,368) ----------- ----------- ----------- Net cash provided by operating activities 720 59,976 35,828 INVESTING ACTIVITIES Purchases of property and equipment (16,384) (63,169) (2,664) ----------- ----------- ----------- Net cash used in investing activities (16,384) (63,169) (2,664) FINANCING ACTIVITIES Capital contributions by partners - 26,424 20,000 Due from Showscan Entertainment Inc. 26,424 (26,424) - Due from Showscan CityWalk, Inc. 20,000 - (20,000) ----------- ----------- ----------- Net cash provided by financing activities 46,424 - - ----------- ----------- ----------- Increase (decrease) in cash 30,760 (3,193) (38,492) Cash at beginning of year 74,163 77,356 115,848 ----------- ----------- ----------- Cash at end of year $ 104,923 $ 74,163 $ 77,356 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for: Interest $ 1,441 $ 1,790 $ 6,849 Income taxes $ - $ - $ -
See accompanying notes. F-36 71 Showscan CityWalk Venture Notes to Financial Statements December 31, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Showscan CityWalk Venture (the Venture) is a venture engaged in the business of operating a Showscan motion simulation attraction theatre. The theatre opened in late November 1993 at Universal CityWalk adjacent to Universal Studios, Universal City, California. The Venture is 50% owned by Showscan CityWalk, Inc., a wholly-owned subsidiary of Showscan Entertainment Inc. (Showscan). Moss Family LA Corp. and DiBenedetto CityWalk Limited Partnership (collectively the Investors) each own 25% of the Venture. The principals of the Investors are greater than 10% stockholders and members of the Board of Directors of Showscan. Cumulative net income or loss of the Venture is allocated to the partners in accordance with their respective ownership percentage interests. REVENUE RECOGNITION The Venture recognizes revenue from ticket sales at the time the tickets are purchased. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation on operating equipment is recorded on a straight-line basis over the estimated useful lives of the assets, generally 3 to 10 years. Operating equipment consists of projection and motion-based equipment used in the operation of the theatre. Leasehold improvements are amortized on a straight-line basis over their estimated useful lives or the term of the lease, whichever is shorter. INCOME TAXES No provision has been made for income taxes in the accompanying financial statements; such taxes, if any, are the responsibility of the individual partners. F-37 72 Showscan CityWalk Venture Notes to Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. COMMITMENTS AND CONTINGENCIES In connection with the establishment of the Universal CityWalk theatre, the Venture entered into a ten-year profit sharing lease pursuant to which MCA Development Company, a division of MCA, Inc. (now known as Universal Studios Recreation, a division of Universal Studios), contributed one-half of the costs incurred for the construction of the theatre. The lease expires in November 2002, subject to options to extend it for three five-year periods. The Venture is obligated to pay base rent equal to $180,000 (subject to annual Consumer Price Index increases) per year plus 50% of the cash flow, as defined (Percentage Rent), from the operations of the theatre. Percentage rent paid was $13,358 in 1995 and none in 1996 and 1994. Future minimum payments, by year and in the aggregate, under the lease at December 31, 1996 are as follows: 1997 $ 185,274 1998 185,274 1999 185,274 2000 185,274 2001 185,274 Thereafter 370,548 ------------- Total minimum lease payments $ 1,296,918 =============
3. RELATED PARTY TRANSACTIONS For the years ended December 31, 1996, 1995 and 1994, cost of revenues shown in the accompanying statements of operations include $185,700, $184,500 and $180,250, respectively, of amounts paid or owed to Showscan for film rental, royalty and management fees. At December 31, 1996 and 1995, the Venture owed Showscan $23,558 and $21,248, respectively, related to such fees. F-38 73 Showscan CityWalk Venture Notes to Financial Statements (continued) 3. RELATED PARTY TRANSACTIONS (CONTINUED) Amounts due from Showscan CityWalk, Inc. and Showscan related to capital contributions due the Venture. Such contributions were made subsequent to December 31, 1995. 4. IMPAIRMENT OF LONG-TERM ASSETS During 1996, the Venture adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). The continued operating losses were indicators of potential impairment. The estimated undiscounted cash flows anticipated from operating the Venture indicated that a write-down to fair market value was required under SFAS No. 121. Accordingly, the Venture recorded a non-cash charge of $770,000 for the impairment of its long-lived assets. The impairment loss was calculated based on the excess of the carrying amount of the assets over the discounted cash flow expected to be received from the operation of the Venture. F-39 74 CINEMANIA (UK) LIMITED AUDITED FINANCIAL STATEMENTS Year ended 31 December 1996 F-40 75 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS CINEMANIA (UK) LIMITED We have audited the accompanying balance sheets of Cinemania (UK) Limited as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cinemania (UK) Limited at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with United States generally accepted accounting principles. As discussed in Note 6 to the financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1996. Ernst & Young London England June 27, 1997 F-41 76 Cinemania (UK) Limited Balance Sheet
December 31 December 31 Notes 1996 1995 Assets Current assets: Cash $ 280,785 $ 821,401 Prepaid expenses and other current assets 238,341 187,315 ------------ --------------- Total current assets 519,126 1,008,716 Property and equipment, net 2 and 6 282,340 2,925,474 ------------ --------------- Total assets $ 801,466 $ 3,934,190 ------------ --------------- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 92,932 $ 58,431 Accrued expenses and other current liabilities 102,635 202,048 Amounts payable to related party 5 47,761 22,483 Current maturities of notes payable to stockholders 3 712,048 633,695 ------------ --------------- Total current liabilities 955,376 916,657 Notes payable to stockholders 3 1,155,201 1,478,619 ------------ --------------- Total liabilities 2,110,577 2,395,276 ------------ --------------- Stockholders' equity: Common stock, Pound Sterling 1 ($1.48) par value; 1,000 shares authorised; 100 shares issued and outstanding 148 148 Additional paid-in capital 1,891,000 1,891,000 Accumulated deficit (3,428,366) (423,040) Currency translation adjustments 228,107 70,806 ------------ --------------- Total stockholders' equity (1,309,111) 1,538,914 ------------ --------------- Total liabilities and stockholders' equity $ 801,466 $ 3,934,190 ============ ===============
See accompanying notes F-42 77 Cinemania (UK) Limited Statement of Operations
Year ended Year ended Year ended December 31 December 31 December 31 Note 1996 1995 1994 Revenues $ 1,728,567 $ 2,140,118 $ 507,242 Cost of revenues, primarily film rental, royalty and management fees 5 306,294 415,035 157,544 ----------- ----------- ----------- Gross profit 1,422,273 1,725,083 349,698 Costs and expenses: Rent 568,388 344,551 78,348 Payroll and related items 418,326 402,359 63,652 Marketing and advertising 30,915 87,188 54,044 Pre-opening - - 397,151 Other general and administrative 234,777 310,338 205,801 Depreciation 304,611 265,959 69,528 Impairment loss on long-lived assets 6 2,750,000 - - ----------- ----------- ----------- 4,307,017 1,410,395 868,524 ----------- ----------- ----------- Operating (loss)/profit (2,884,744) 314,688 (518,826) Other income(expense): Interest income 21,973 24,193 3,199 Interest expense (142,555) (171,818) (74,476) ----------- ----------- ----------- (120,582) (147,625) (71,277) ----------- ----------- ----------- Net (loss)/profit $(3,005,326) $ 167,063 $ (590,103) =========== =========== =========== Net (loss)/profit per common share $ (30,053) $ 1,671 $ (5,901) =========== =========== ==========
See accompanying notes F-43 78 Cinemania (UK) Limited Statement of stockholders' equity
Common stock Additional Currency Number of paid in Accumulated translation shares Amount capital deficit adjustments Total $ $ $ $ $ Balance at December 31, 1993 - - - - - - Proceeds from issuance of common stock 100 148 - - - 148 Capital contributions - - 1,891,000 - 1,891,000 Net loss (590,103) (590,103) Foreign exchange gain on translation - - - - 81,321 81,321 ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1994 100 148 1,891,000 (590,103) 81,321 1,382,366 Net profit - - - 167,063 - 167,063 Foreign exchange loss on translation - - - - (10,515) (10,515) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1995 100 148 1,891,000 (423,040) 70,806 1,538,914 Net loss - - - (3,005,326) - (3,005,326) Foreign exchange gain on translation - - - - 157,301 157,301 ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 100 148 1,891,000 (3,428,366) 228,107 (1,309,111) =========== =========== =========== =========== =========== ===========
See accompanying notes F-44 79 Cinemania (UK) Limited Statement of cash flows
Year ended Year ended Year ended December 31 December 31 December 31 1996 1995 1994 OPERATING ACTIVITIES Net (loss)/profit $(3,005,326) $ 167,063 $ (590,103) Adjustments to reconcile net (loss)/profit to net cash provided by/used in) operating activities: Depreciation 304,611 265,959 69,528 Impairment loss 2,750,000 - - Changes in operating assets and liabilities: Prepaid expenses and other current assets (31,878) (50,056) (138,311) Accounts payable 28,529 (121,319) 179,750 Accrued expenses and other liabilities (120,067) (62,596) 202,116 Amounts payable to related party 22,979 22,483 - Interest payable to stockholders 116,589 82,597 47,435 ----------- ---------- ---------- Net cash provided by operating activities 65,437 304,131 (229,585) INVESTING ACTIVITY Purchases of property and equipment (112,448) (55,051) (3,211,450) ----------- ---------- ---------- Net cash used in investing activity (112,448) (55,051) (3,211,450) FINANCING ACTIVITIES Proceeds from issuance of common stock - - 148 Capital contributions - - 1,891,000 Repayments to stockholders (443,146) - - Borrowings from stockholders - 96,946 1,947,558 ----------- ---------- ---------- Net cash (used in) provided by financing activities (443,146) 96,946 3,838,733 Effect of exchange rate changes on cash (50,459) (3,644) 81,321 ----------- ---------- ---------- Net (decrease)/increase in cash (540,616) 342,382 479,019 Cash at beginning of year 821,401 479,019 - ----------- ---------- ---------- Cash at end of year $ 280,785 $ 821,401 $ 479,019 =========== ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 283,575 $ 730 $ 254 Taxes paid $ - $ - $ -
See accompanying notes F-45 80 Cinemania (UK) Limited Notes to Financial Statements 1. ORGANISATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANISATION AND BUSINESS Cinemania (UK) Limited (the Company), owns a Showscan motion simulation twin theatre attraction based at Piccadilly Circus, London, England. The Company was incorporated in December 1993. The Showscan attraction opened on September 26 1994. REVENUE RECOGNITION The company recognises revenues from ticket sales at the time the tickets are purchased. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of equipment is computed using the straight line method over the estimated useful lives of the assets, ranging from 3 to 10 years. Leasehold property is depreciated on a straight line basis over the initial term of the lease. FOREIGN CURRENCY TRANSLATION The financial position and results of operations of the Company are measured using local currency as the functional currency. Assets and liabilities of the Company are translated into US dollars at the exchange rate in effect at the year end (1996 -$1.7113: Pound Sterling 1, 1995- $1.5526: Pound Sterling 1). Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are included in stockholders' equity. PREPAID EXPENSES AND OTHER CURRENT ASSETS These costs relate mainly to the prepaid running costs of the Company such as rent, rates, service charges and insurance. INCOME TAXES The company accounts for income taxes using Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, the liability method is used. Under this method, deferred tax assets and liabilities are measured using the enacted tax rates and laws for the year in which the taxes are expected to be paid. NET PROFIT (LOSS) PER COMMON SHARE The net profit (loss) per common share has been determined on the basis of the 100 weighted average shares outstanding for each of the three years in the period ended December 31, 1996. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. F-46 81 Cinemania (UK) Limited Notes to Financial Statements 2. PROPERTY AND EQUIPMENT
1996 1995 Leasehold property $ 44,150 $ 40,056 Operating equipment 3,588,721 3,205,971 Office furniture and fixtures 39,567 $14,934 ----------- ---------- 3,672,438 3,260,961 Less accumulated depreciation 3,390,098 335,487 ----------- ---------- $ 282,340 $2,925,474 =========== ==========
3. NOTES PAYABLE TO STOCKHOLDERS The loans, which are due to mature on May 1, 2000, are repayable in 10 semi-annual instalments commencing November 1, 1995, only to the extent that the company has cumulative net profits available to make such payments. If no payments are made due to lack of profits available, interest will accrue until such time as cumulative profits exist whereby payments will be made. Interest is payable at LIBOR plus 3% (8.563% and 8.875% at December 31, 1996 and 1995 respectively). The aggregate maturities of long-term debt (including interest of $238,940 at December 31, 1996) are as follows:
1996 1997 $ 712,048 1998 462,080 1999 462,080 2000 231,041 ------------- $ 1,867,249 =============
Included within the $712,048 debt due to mature in 1997 is $249,975 which was due to be paid on November 1, 1996. However, due to the lack of available profits, no payment was made. 4. LEASES The Company leases its theatre location under an operating lease, having a non-cancellable term expiring in 2008, with a renewal option for 10 years. Future minimum payments under leases with terms of one year or more are approximately as follows:
Operating leases 1997 $ 240,000 1998 247,500 1999 247,500 2000 247,500 2001 and thereafter 1,980,000 ----------- Total minimum lease payments $ 2,962,500 ===========
F-47 82 Cinemania (UK) Limited Notes to Financial Statements 5. RELATED PARTY TRANSACTIONS Showscan Entertainment Inc. (Showscan) holds a 50% equity interest in the Company. Cost of revenues shown in the accompanying statement of operations includes $156,637, $228,400 and $151,000 in 1996, 1995 and 1994 respectively, of amounts paid to and $47,761, $22,483 and $nil in 1996, 1995 and 1994 respectively of amounts owed to Showscan for film rental and royalty fees. Entities controlled by Mr Charles Moss and Mr Thomas DiBenedetto each hold a 25% equity interest in the Company. Mr Moss and Mr DiBenedetto each have a greater than 10% stockholding in Showscan and are directors of Showscan. 6. IMPAIRMENT OF LONG-TERM ASSETS During 1996, the company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The recent decline in attendance and the operating loss generated during 1996 was a potential indicator of impairment. The estimated undiscounted cash flows anticipated from operating the Company indicated that a write-down to fair market value was required under SFAS No. 121. Accordingly, the company recorded a non-cash charge of $2,750,000 for the impairment of its long-lived assets. The impairment loss was calculated based on the excess of the carrying amount of the assets over the discounted cash flow expected to be received from the operation of the theatre. F-48 83 AUDITED FINANCIAL STATEMENTS--LIQUIDATION BASIS SHOWSCAN/GENERAL CINEMA VENTURES Year ended October 31, 1996 and period from April 24, 1995 (date of formation) to October 31, 1995 F-49 84 Report of Independent Auditors The Partners Showscan/General Cinema Ventures We have audited the accompanying statements of net assets in liquidation of Showscan/General Cinema Ventures (the Venture) as of October 31, 1996 and 1995, and the related statements of operations--liquidation basis, statements of changes in net assets in liquidation, and cash flows-liquidation basis for the year ended October 31, 1996 and for the period April 24, 1995 (date of formation) to October 31, 1995. These financial statements are the responsibility of the Venture's management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, the partners have agreed to sell the assets and dissolve the partnership. Accordingly, as of October 31, 1996, the Venture has changed its basis of accounting from a going-concern basis to a liquidation basis. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets of Showscan/General Cinema Ventures at October 31, 1996 and 1995, and the results of its operations and its cash flows for the year ended October 31, 1996 and for the period April 24, 1995 (date of formation) to October 31, 1995 in conformity with generally accepted accounting principles. Ernst & Young LLP Boston, Massachusetts June 6, 1997 F-50 85 Showscan/General Cinema Ventures Statements of Net Assets in Liquidation
OCTOBER 31 ASSETS 1996 1995 ------------ ------------ Current assets: Current portion of foregone rent $ 123,256 $ 110,086 Other assets 3,783 -- ------------ ------------ Total current assets 127,039 110,086 Property and equipment: Leasehold improvements 1,011,864 1,011,864 Operating equipment 1,723,422 1,723,422 ------------ ------------ 2,735,286 2,735,286 Less accumulated depreciation and amortization (568,111) (189,378) ------------ ------------ 2,167,175 2,545,908 Foregone rent, less current portion, net of accumulated amortization of $146,254 in 1996 and $42,726 in 1995 394,490 511,188 ------------ ------------ Total assets $ 2,688,704 $ 3,167,182 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Due to Showscan $ 72,468 $ -- Due to (from) General Cinema Theatre 100,299 (34,858) Accounts payable and accrued expenses 25,108 49,640 ------------ ------------ Total current liabilities 197,875 14,782 Net assets in liquidation 2,490,829 3,152,400 ------------ ------------ Total liabilities and net assets in liquidation $ 2,688,704 $ 3,167,182 ============ ============
See accompanying notes. F-51 86 Showscan/General Cinema Ventures Statements of Operations--Liquidation Basis
PERIOD FROM APRIL 24, 1995 (DATE OF YEAR ENDED FORMATION) TO OCTOBER 31 OCTOBER 31 1996 1995 ----------------- --------------- Revenues $ 274,366 $ 159,651 Cost of revenues, primarily film rental and management fees to related parties 230,195 86,664 --------- --------- Gross profit 44,171 72,987 Other costs and expenses: Rent 165,000 71,500 Payroll and related items 70,586 30,892 Marketing and advertising 27,263 18,865 Other general and administrative 125,632 38,012 Depreciation and amortization 378,733 189,378 --------- --------- 767,214 348,647 --------- --------- (723,043) (275,660) Interest income 61,472 28,774 Net loss $(661,571) $(246,886) ========= =========
See accompanying notes. F-52 87 Showscan/General Cinema Ventures Statements of Changes in Net Assets in Liquidation Beginning net assets effective April 24, 1995 $ 3,399,286 Cash contributions 97,643 Cash distributions (97,643) Allocation of net loss (246,886) ----------- Net assets at October 31, 1995 3,152,400 Allocation of net loss (661,571) ----------- Net assets at October 31, 1996 $ 2,490,829 ===========
See accompanying notes. F-53 88 Showscan/General Cinema Ventures Statements of Cash Flows--Liquidation Basis
PERIOD FROM APRIL 24, 1995 (DATE OF YEAR ENDED FORMATION) TO OCTOBER 31 OCTOBER 31 1996 1995 ------------- ------------- OPERATING ACTIVITIES Net loss $ (661,571) $ (246,886) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 378,733 189,378 Foregone rent, net 103,528 42,726 Changes in operating assets and liabilities: Other assets (3,783) -- Due to Showscan 72,468 -- Due to/(from) General Cinema 135,157 (34,858) Accounts payable and accrued expenses (24,532) 49,640 ------------- ------------- Net cash used in operating activities 0 0 FINANCING ACTIVITIES Capital contributions -- 97,643 Capital distributions -- (97,643) ------------- ------------- Net cash used in financing activities -- 0 ------------- ------------- Net increase in cash and cash equivalents 0 0 Cash at beginning of year 0 0 ============= ============= Cash at end of year $ -0- $ -0- ============= ============= NONCASH ACTIVITY Noncash capital contributions: Equipment $ -- $ 1,723,422 Leasehold improvements $ -- $ 1,011,864 Foregone rent $ -- $ 664,000
See accompanying notes. F-54 89 Showscan/General Cinema Ventures Notes to Financial Statements--Liquidation Basis October 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Showscan/General Cinema Ventures (the Venture) is a partnership engaged in the business of operating twin Showscan motion attraction simulation theaters. The theaters opened in late May 1995 at the Framingham General Cinema 14-screen multiplex in Framingham, Massachusetts. The Venture is 50% owned by Showscan Framingham, Inc. (Showscan), a wholly-owned subsidiary of Showscan Entertainment Inc., and 50% owned by General Cinema of Framingham Inc. (General Cinema), a wholly-owned subsidiary of General Cinema Corp. of Massachusetts. Net income or loss of the Venture is allocated 50% to Showscan and 50% to General Cinema. Showscan and General Cinema hold equal voting interests in the Venture regardless of capital accounts. The partners of the Venture have agreed to close the twin Showscan motion attraction simulation theaters and liquidate the assets of the Venture. The partners have further agreed to sell the simulation attraction equipment back to Showscan at its current fair market value, which approximates the underlying net book value of the equipment. The remainder of the assets will be allocated, as defined in the Venture Agreement, back to the partners. An additional capital contribution may be necessary by one of the partners upon settlement and liquidation of the Venture; however, the partners believe the contribution will be under $100,000. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION The Venture recognizes revenue from ticket sales at the time the tickets are purchased. F-55 90 Showscan/General Cinema Ventures Notes to Financial Statements--Liquidation Basis (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment were contributed to the Venture as part of the initial capital contributions of the partners and are carried at values representing cost, as specified in the Venture Agreement. Other assets purchased specifically for the Venture are carried at the cost to the contributor. Depreciation on operating equipment was recorded on a straight-line basis over the estimated useful lives of the assets of five or ten years. Leasehold improvements were being amortized on a straight-line basis over the shorter of their estimated useful lives or the five-year term of the leases. INCOME TAXES No provision has been made for income taxes in the accompanying financial statements; such taxes, if any, are the responsibility of the individual partners. RECLASSIFICATION Certain 1995 amounts have been reclassified to conform to 1996 presentation. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet for foregone rent, accounts payable, due to Showscan and General Cinema Theatre approximate their fair values. 2. RELATED-PARTY TRANSACTIONS Cost of revenues shown in the accompanying statement of operations includes $130,199 and $43,332 at October 31, 1996 and 1995, respectively, of amounts paid or due to Showscan Entertainment Inc. for film rental and $99,996 and $43,332 at October 31, 1996 and 1995, respectively, of amounts paid or due to General Cinema for management fees. In accordance with the Venture agreement, General Cinema was credited with a capital contribution to the Venture in the amount of $664,000, representing the present value of F-56 91 Showscan/General Cinema Ventures Notes to Financial Statements--Liquidation Basis (continued) 2. RELATED-PARTY TRANSACTIONS (CONTINUED) five years of rent which would be payable by the Venture to General Cinema but for which payment was waived. Such amount has been classified as an asset on the Venture's balance sheet as foregone rent. The initial undiscounted value of the foregone rent was $881,250. The discounting effect of the rent resulted in the Venture recognizing interest income of $61,472 and $28,774 for the period ended October 31, 1996 an 1995, respectively. Rent expense is being recognized on a straight-line basis over the 60-month lease period concluding May of 1999. Related rent expense for the year ended October 31, 1996 and 1995 amounted to $165,000 and $71,500, respectively. General Cinema also made in-kind capital contributions in the form of leasehold improvements and equipment, which are being carried at cost of approximately $1.1 million as specified in the venture agreement. As part of its initial capital contribution, Showscan made a noncash contribution of certain operating equipment valued at $1,602,000. As specified in the Venture Agreement, such value represents 90% of the price Showscan generally charges unaffiliated parties for the purchase of such equipment. In addition, Showscan made a cash capital contribution of approximately $98,000, which was then paid out as a distribution to General Cinema in order to equalize the capital accounts as called for in the Venture Agreement. F-57 92 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. Date: July 14, 1997 SHOWSCAN ENTERTAINMENT INC. By /s/ DENNIS POPE ------------------------------------- Dennis Pope President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1933, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ WILLIAM D. EBERLE Chairman of the Board July 14, 1997 - ------------------------------------- William D. Eberle /s/ DENNIS POPE Director; President; Chief Executive July 14, 1997 - ------------------------------------- Officer (Principal Executive Officer) Dennis Pope /s/ CHARLES B. MOSS, JR. Director July 14, 1997 - ------------------------------------- Charles B. Moss, Jr. /s/ THOMAS R. DIBENEDETTO Director July 14, 1997 - ------------------------------------- Thomas R. DiBenedetto /s/ KURT C. HALL Director July 14, 1997 - ------------------------------------- Kurt C. Hall /s/ WILLIAM C. SOADY Director July 14, 1997 - ------------------------------------- William C. Soady /s/ GREGORY W. BETZ Vice President and Director of Finance July 14, 1997 - ------------------------------------- (Principal Accounting Officer) Gregory W. Betz
EX-3.8 2 BY-LAWS 1 EXHIBIT 3.8 * * * * * BY-LAWS * * * * * SHOWSCAN ENTERTAINMENT INC. ARTICLE I OFFICES Section 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held in the City of Los Angeles, State of California, at such place as may be fixed from time to time by the board of directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders, commencing with the year 1986, shall be held on the 1st Tuesday in April if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 A.M., or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which they shall elect by a -1- 2 plurality vote a board of directors, and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders for any purpose or purposes, unless otherwise prescribed by statute, may be called at any time by the President or Secretary at the written request of a majority of the board of directors, or by stockholders owning not less than 10% in amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote at such meetings, but such meetings may not be called by any other person or persons. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less that 10 nor more than 60 days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote -2- 3 thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the affirmative vote of the holders of a majority of the stock having voting power present in person or represented by proxy at such meeting shall decide any question (other than the election of directors) brought before such meeting, unless the question is one upon which by express provisions of the Delaware General Corporation Law or of the certificate of incorporation require the affirmative vote of a greater percentage or a vote by classes, in which case such greater or class vote shall be required. If the question brought before such meeting involves the election of directors, then the candidates receiving the highest number of votes, up to the number of directors to be elected, shall be deemed elected. Section 10. Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. -3- 4 ARTICLE III DIRECTORS Section 1. The authorized number of directors shall not be less than four nor more than nine, unless changed by amendment to these by-laws. The exact number of directors shall be fixed, within the limits specified, by amendment of the next sentence duly adopted by the board. The exact number of directors shall be six, until changed as provided in this Section 1. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these by-laws directed or required to be exercised or done by the stockholders. MEETING OF THE BOARD OF DIRECTORS Section 4. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, -4- 5 provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 7. Special meetings of the board may be called by the president on at least 48 hours' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors unless the board consists of only one director; in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director. Section 8. At all meetings of the board a majority of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors and directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 10. Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. -5- 6 COMMITTEES OF DIRECTORS Section 11. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation) adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Section 12. Each committee shall keep regular minutes of its meeting and report the same to the board of directors when required. -6- 7 COMPENSATION OF DIRECTORS Section 13. Unless otherwise restricted by the certificate of incorporation or these by-laws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. REMOVAL OF DIRECTORS Section 14. Unless otherwise restricted by the certificate of incorporation or by law, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. -7- 8 ARTICLE V OFFICERS Section 1. The officers of the corporation shall be chosen by the board of directors and shall be one or more Co-Chairmen of the board of directors, a Chief Executive Officer, a President, an Executive Vice President, a Financial Vice President, a Secretary and a Treasurer. The board of directors may also choose additional vice presidents, and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these by-laws otherwise provide. Section 2. The board of directors at its first meeting after each annual meeting of stockholders shall choose a president, a secretary and a treasurer. Section 3. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the board of directors. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors. CHAIRMAN OF THE BOARD Section 6. The Co-Chairman of the Board shall preside at all meetings of the stockholders, the Board of Directors, or committees of the Board of which they are members. They shall have the overall supervision of the business of the corporation and shall direct the policies of the corporation, subject to such policies and directions as may be provided by the Board of Directors. PRESIDENT Section 7. The President shall be the Chief Executive Officer of the corporation. He shall have authority to designate the duties and powers of other officers and delegate special powers and duties to specified officers, so long as -8- 9 such designation shall not be inconsistent with the statutes, these by-laws or action of the Board of Directors. He shall also have power to execute, and shall execute, deeds, mortgages, bonds, contracts or other instruments of the corporation except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. The President may sign with the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, certificates for shares of stock of the corporation the issuance of which shall have been duly authorized by the Board of Directors, and shall vote, or give a proxy to any other person to vote, all shares of the stock of any other corporation standing in the name of the corporation. The President in general shall have all other powers and shall perform all other duties which are incident to the chief executive office of a corporation or as may be prescribed by the Board of Directors from time to time. VICE-CHAIRMAN OF THE BOARD Section 8. In the absence of both of the Co-Chairman of the Board, or in the event of their inability or refusal to act, the Vice-Chairman of the Board shall perform all duties of the Co-Chairman of the Board and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Co-Chairman of the Board. The Vice-Chairman of the Board shall have such other powers and perform such other duties, not inconsistent with the statutes, these by-laws, or action of the Board of Directors, as from time to time may be prescribed for him by the Board of Directors or the Co-Chairman of the Board. The Vice-Chairman of the Board may sign, with the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certificates for shares of stock of the corporation, the issuance of which shall have been duly authorized by the Board of Directors. THE VICE-PRESIDENTS Section 9. In the absence of the president or in the event of his inability or refusal to act, the vice-president (or in the event there be more than one vice-president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. -9- 10 THE SECRETARY AND ASSISTANT SECRETARY Section 10. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 11. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS Section 12. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. Section 13. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 14. If required by the board of directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of -10- 11 all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 15. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI CERTIFICATES FOR SHARES Section 1. The shares of the corporation shall be represented by a certificate or shall be uncertificated. Certificates shall be signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or vice-president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation. Upon the face or back of each stock certificate issued to represent any partly paid shares, or upon the books and records of the corporation in the case of uncertified partly paid shares, shall be set forth the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summaries on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance of transfer of uncertified stock, the corporation shall send to the registered owners thereof a written notice -11- 12 containing the information required to be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a) or a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Any of or all the signatures on a certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The board of directors may direct a new certificate or certificates or uncertificated shares to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates or uncertificated shares, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated shares such uncertificated shares shall be cancelled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the corporation. -12- 13 FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purposes of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting: provided, however, that the board of directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividend may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose -13- 14 as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ANNUAL STATEMENT Section 3. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. CHECKS Section 4. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. FISCAL YEAR Section 5. The fiscal year of the corporation shall be fixed by resolution of the board of directors. SEAL Section 6. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII AMENDMENTS Section 1. These by-laws may be altered, amended or repealed, in whole or in part, or new by-laws may be adopted by the majority vote or written consent of the stockholders or the board of directors. -14- 15 ARTICLE IX INDEMNIFICATION Section 1. Power to Indemnify in Actions, Suits or Proceedings other Than Those by or in the Right of the Corporation. Subject to Section 3 of this Article IX, the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction , or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article IX, the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the -15- 16 Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability by in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 3. Authorization of Indemnification. Any indemnification under this Article IX (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article IX, as the case may be. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent, however, that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case. Section 4. Good Faith Defined. For the purposes of any determination under Section 3 of this Article IX, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the corporation or another enterprise, or on information supplied to him by the officers of the corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the corporation or another enterprise or on information or records given or reports made to the corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the corporation or another enterprise. The term "another enterprise" as used in this Section 4 shall mean any other corporation or any partnership, joint venture, trust or other enterprise of which such person is or was serving at the request of the corporation as a director, officer, employee or agent. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a -16- 17 person may be deemed to have met the applicable standard of conduct set forth in Sections 1 or 2 of this Article IX, as the case may be. Section 5. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 3 of this Article IX, and notwithstanding the absence of any determination thereunder, any director, officer, employee or agent may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Sections 1 and 2 of this Article IX. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standards of conduct set forth in Sections 1 or 2 of this Article IX, as the case may be. Notice of any application for indemnification pursuant to this Section 5 shall be given to the corporation promptly upon the filing of such application. Section 6. Expenses Payable in Advance. Expenses incurred in defending or investigating a threatened or pending action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article IX. Section 7. Non-exclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by or granted pursuant to this Article IX shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-Law, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the corporation that indemnification of the persons specified in Sections 1 and 2 of this Article IX shall be made to the fullest extent permitted by law. The provisions of this Article IX shall not be deemed to preclude the indemnification of any person who is not specified in Sections 1 or 2 of this Article IX but whom the corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise. -17- 18 Section 8. Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article IX. Section 9. Meaning of "Corporation" for Purposes of Article IX. For purposes of this Article IX, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article IX with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. Section 10. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. -18- EX-23.1 3 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-78236) pertaining to the 1992 Stock Option Plan of Showscan Entertainment Inc. of our report dated June 27, 1997, with respect to the consolidated financial statements and schedule of Showscan Entertainment Inc. included in the Annual Report (Form 10-K) for the year ended March 31, 1997. Ernst & Young LLP Los Angeles, California July 11, 1997 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 2,562 0 4,025 425 1,289 1,072 6,158 5,290 19,928 3,995 5,690 0 0 6 19,922 19,928 11,475 17,711 8,842 10,854 10,080 0 692 (3,915) (4) (3,919) 0 0 0 (3,919) (.70) 0
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