-----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, EMJEQ1Rp6QnQ6B/Bc4t2hPrKsku0rN/G9P+V6pmhDcQ0C/uKiQDNf2diIOs1+pA4 RcGuw5V1Aay1MUdu3umTbg== 0000950148-96-001347.txt : 19960702 0000950148-96-001347.hdr.sgml : 19960702 ACCESSION NUMBER: 0000950148-96-001347 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960701 SROS: NASD 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: 96589495 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 ANNUAL REPORT AS OF 3/31/96 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, 1996. 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, 1996 was approximately $32,262,224 (based on last NASDAQ-reported sale price of $6.50 per share of Common Stock on that date). There were 5,563,799 shares of registrant's common stock outstanding as of June 20, 1996. 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 1996 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............................................................................................ 18 3. Legal Proceedings.................................................................................... 18 4. Submission of Matters to a Vote of Security Holders.................................................. 19 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 20 6. Selected Financial Data............................................................................. 21 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 22 8. Financial Statements and Supplementary Data.......................................................... 29 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................ 29 Part III 10. Directors and Executive Officers of the Registrant.................................................... 30 11. Executive Compensation................................................................................ 30 12. Security Ownership of Certain Beneficial Owners and Management........................................ 30 13. Certain Relationships and Related Transactions........................................................ 30 Part IV 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K............................................................................ 31
2. 3 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 Showscan 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 the experience of "thrill ride" or action entertainment (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. Recently, the Company entered another expanding market with the introduction of its new "ShowMax(TM)" 15/70 format giant screen theatre package. As of June 20, 1996, the Company had 54 Showscan Attractions operating in 20 countries, had 11 additional Showscan Attractions in its delivery and installation backlog, and has contractual commitments for an additional 27 Showscan Attractions in its backlog. 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 25% 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 and at the Asian Trade Center in Osaka, Japan. 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 develops and 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 5 permanent specialty theatres operating as of June 20, 1996. 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 3. 4 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 licensing and distributing movie-based software to third-party owner/operators of Showscan Attractions and from ticket sales at, and licensing of its movie-based software to, O&O Theatres. 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 RENTALS AND ROYALTIES BY INCREASING THE INSTALLED BASE OF SHOWSCAN ATTRACTIONS. The Company seeks to increase the revenues derived from licensing its Showscan films by enlarging the installed base of Showscan Attractions and specialty theatres. As this installed base grows, each Showscan film will be licensed to a greater number of exhibitors thereby increasing revenue, while amortizing the fixed film production costs over a larger revenue base. To increase the installed base of Showscan Attractions, the Company is: (i) Marketing to a wide range of potential customers worldwide while maintaining reasonable profit margins; (ii) Enhancing and expanding its film library utilizing a combination of internal production resources, contract production and partnership arrangements; (iii) Enhancing its proprietary projection and motion base technology; (iv) Entering into additional strategic sales arrangements in Europe, Southeast Asia and certain other countries to supplement existing strategic agreements which cover Japan, Hong Kong and selected portions of China; and (v) Emphasizing sales having multi-location possibilities. (To date, the Company has sold 16 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"), two Showscan Attractions to Boomtown Hotel and Casino, two Showscan Attractions to Ster-Kinekor in South Africa, two Showscan Attractions to Lotte World in Korea and two Showscan Attractions to Parc du Futuroscope in France.) ESTABLISHING ADDITIONAL O&O THEATRES. The Company plans to participate directly in the recurring revenues from ticket sales and film distribution and licensing by increasing its ownership of Showscan Attractions. Although the start-up and the pre-opening marketing and advertising costs of O&O Theatres are sometimes high (which costs the Company intends to defray in part through strategic alliances), the variable costs of ticket sales are low. The Company plans to increase its number of O&O Theatre sites by continuing to enter into venture agreements to open O&O Theatres in high traffic, high visibility locations around the world. 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 4. 5 complexes. See "Item 1. Business -- Motion Simulation Attractions -- Owned and Operated Theatres -- The United Artists Venture," below. The Company intends to continue forming strategic alliances for the financing of its O&O Theatres in order to leverage its own capital into an increased number of O&O Theatres. In order to pursue the strategic alliances portion of its new business strategy, the Company has entered into several alliances that provide the Company with the capability of acquiring and financing Showscan Attractions for its own account. See "Item 1. Business -- Motion Simulation Attractions -- Owned and Operated Theatres," below. PURSUE OTHER BUSINESS OPPORTUNITIES. In addition to increasing the base of Showscan Attractions and specialty theatres, another objective of the Company is to explore and exploit other commercial and entertainment opportunities and revenue sources. During late Fiscal 1996, the Company introduced a new product line called "ShowMax(TM)," a complete 15/70 film format giant screen theatre package that includes state-of-the-art rolling loop projectors, screens, sound systems, synchronization, show control and theatre design. It is anticipated that the ShowMax product line will have a positive impact on revenue in future years. 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 produces, distributes and owns by producing at least three new films annually. During the past fiscal year, the Company released three motion simulation films, and the Company has completed principal photography on one film and has another in production, seven additional simulation films under active development and numerous other simulation films in various stages of development. 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 attraction films. In addition, the Company may produce and/or acquire films that were not filmed using the Showscan process for exhibition in the Company's high definition motion simulation theatre attractions and for distribution to non-Showscan motion simulation attractions. 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-based 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 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. 5. 6 The Company's film library consists of two film libraries -- 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 22 action/thrill-ride films available for use by operators of Showscan Attractions, and the specialty film library contains 16 Showscan specialty films available for exhibition in specialty theatres. The Company is the sole owner of thirteen of the motion simulation films, a joint owner of seven motion simulation films and the distributor of two motion simulation films wholly-owned by an unaffiliated Showscan Attraction operator. Of the 16 Showscan specialty films, seven are owned by the Company. The Company finished production of the motion simulation film "Dracula's Haunted Castle" (a ride through an old, ghost-infested castle) 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), and such live-action films as "Hong Kong Havoc" (involving a speedboat chase through Hong Kong Harbor). The Company now owns 100% of "Cosmic Pinball" and increased its ownership of "Devil's Mine Ride" from 43% to 57% pursuant to acquisitions from certain of the films' producers during the fiscal year ended March 31, 1996. The films that the Company produces are either fully financed by third parties or produced and financed by the Company. When the Company produces films, it typically hires a production company or team of talent 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 all 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. The Company has transferred 14 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 Showscan 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., Thomson Training and Simulation, 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. 6. 7 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 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). Historically, Showscan Attraction installations outside North America have represented a significant portion of the Company's revenues (constituting 61%, 68% and 75% of the Company's revenues for the fiscal years ending March 31, 1996, 1995 and 1994, respectively). The Company's goal is to balance the number of North American and international Showscan Attractions installed worldwide by increasing sales of Showscan Attractions in North America. As of March 31, 1996, Showscan Attractions have been sold or licensed in the United Kingdom, Denmark, Spain, Hong Kong, People's Republic of China, United States, Canada, Argentina, Japan, South Korea, Taiwan, Indonesia, Singapore, France, Belgium, Italy, South Africa, United Arab Emirates, the Philippines 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, 1996. 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 various strategic alliances, as follows: 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 7. 8 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 two sites at new or existing UA movie theatre multiplexes. The UA Venture has declined the two sites, and therefore, UA is currently in the process of constructing for its own account Showscan Attractions at the two sites and is also in the process of preparing offers for six additional sites to 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 owned by MCA Development Company, a division of MCA Inc. ("MCA"). The facilities are leased from MCA pursuant to a profit sharing lease (the "Lease") under which MCA 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 8. 9 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 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. 9. 10 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 and to pay Messrs. Moss and DiBenedetto a percentage of certain profits (as defined) from the Company's share of profits from each 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. The term of the Framingham Venture will expire five years from the date the Showscan Attractions were opened unless extended by mutual agreement for successive periods of five years. Either partner to the Framingham Venture shall have the right to terminate the partnership any time after the first two years, if certain prerequisites, as defined, are not met. In any event, the term of the Framingham Venture expires on December 31, 2025. Upon termination, GCF shall have the option of purchasing the Showscan Attractions by paying to Showscan Framingham, Inc. one-half of the value of such Showscan Attractions as determined by a formula tied to the capital contributions made by the partners. If GCF does not so elect to purchase the Showscan Attractions, then Showscan Framingham, Inc. is required to remove the Company equipment from the GCC movie multiplex and pay to GCF one-half of the net proceeds received upon the resale of such equipment, or if the Company elects to retain such equipment, one-half of the value of such equipment as determined by a formula tied to the value of such equipment at the formation of the Framingham Venture. 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. 10. 11 The Attractions Venture and Maloney own equal interests in Showscan Maloney, LLC, thus the Company's share in the cash flow from the theatre shall be 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 term of Showscan Maloney, LLC will expire on December 31, 2045. MCA Agreement. Pursuant to the Lease entered into with MCA in connection with the CityWalk Venture, MCA has the right, exercisable at MCA's election, to participate in the Company's share of any future O&O Theatres located in California. If MCA makes any such election, MCA 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. 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. 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, 1996, nine permanent and 12 temporary specialty theatres had been sold by the Company. Of the nine permanent theatres, five are currently operating. 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. 11. 12 Showscan motion pictures can be transferred to conventional 35mm/24 fps format for use in conventional movie theatres 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 exceeds the quality that could be obtained in such formats using conventional films. HIGH-DEFINITION TELEVISION The Company believes that the Showscan process may in the future be utilized in programming for high-definition television ("HDTV"). As HDTV is expected to be adopted in the United States, it will significantly improve the picture quality of future television. As a result of its higher picture quality, HDTV will expose certain flaws inherent in conventional film, including problems with resolution and motion. Based on demonstrations of Showscan film on certain HDTV formats, the Company believes that the film speed and quality of Showscan film will largely eliminate both of these problems and, at 60 fps, is directly compatible with the United States television standard and proposed HDTV standard of 60 fields per second. Because the broadcasting requirements of HDTV have not yet been adopted in the United States, and because hardware and software requirements are still evolving, there is no assurance that the Showscan technology will have any commercial application in this area. MOBILE SHOWSCAN ATTRACTIONS The Company is currently designing and developing mobile, 12 and 24-seat Showscan Attractions (the "Mobile Simulators") that are expected to be capable of touring and exhibiting Showscan motion simulation films at various locations. The 12-seat unit will be of a capsule configuration on a six-axis motion base with a rear projection system featuring either NTSC or High Definition video format. The 24-seat Mobile Simulator is expected to feature a full, 20-foot wide screen, the same high-definition video projector and laser disc player used in Showscan's HD Simulation Attractions, and six-axis motion-base systems used in the standard Showscan Attractions. See "Item 1. Business -- Equipment," below. The Company currently expects to transport the Mobile Simulators to motor sports racing events throughout the U.S. and has produced two Showscan films based on auto racing for exhibition at such events. However, because the Company also expects to take the Mobile Simulators to state fairs, sporting events, major exhibitions and other temporary high-traffic locations and destinations, the Mobile Simulators also will be capable of exhibiting all of the Company's other motion simulation films. The Company currently anticipates that the first Mobile Simulator will be owned and operated by the Company. FEATURE-LENGTH MOTION PICTURES The Company believes that there is commercial potential in licensing the Showscan technology for the production, distribution and theatrical exhibition of feature-length motion pictures. Although the Company is continuing to explore possible feature-length motion picture opportunities, to date no feature-length Showscan motion pictures have been produced and no agreements or licenses to produce such films are in effect. The Company plans to license the rights to produce, distribute (in both the foreign and domestic markets) and exhibit Showscan feature-length motion pictures, rather than produce or distribute such motion pictures itself. One factor that has limited the acceptance of the Showscan process for use in producing feature-length motion pictures is the cost of producing and distributing a typical motion picture in Showscan. The Company estimates that the use of the Showscan process would add approximately $2,500,000 to $3,500,000 to the cost of producing an average motion picture in the conventional 35mm format. Most of the additional expense will be 12. 13 incurred in connection with the increased amount of film stock and the additional expense, including laboratory processing costs, of using 70mm film. Before a Showscan feature-length motion picture can be exhibited in an existing theatre, the theatre must be converted to accommodate the Showscan process. The Company believes that the incremental cost of equipping a newly constructed theatre to accommodate the Showscan process would be less than $50,000. The Company also believes that most existing theatres can be converted to accommodate the Showscan process at a cost of approximately $100,000 to $200,000, depending upon the type of equipment to be replaced or modified. Such costs could be higher and will depend upon a number of factors, including the age and size of the theatre and its design and location. Conversely, the conversion cost for theatres already equipped with 70mm curved screens and high-quality sound systems, such as THX-enhanced systems, could be lower. Because of the capabilities of the Showscan projector, theatres converted to exhibit Showscan motion pictures will continue to be capable of exhibiting conventional 35mm or 70mm motion pictures. All of the equipment necessary for Showscan exhibition, including the screens, lamp houses, lenses and components of the sound systems, is currently available from a number of unaffiliated vendors. Although projectors that can be converted for use with Showscan are available from unaffiliated vendors, the Company is the sole source of supply for the kits that are required to convert such projectors for use in the exhibition of Showscan film. Since Showscan motion pictures can be adapted for use in conventional movie theatres, on cable, pay and commercial television, and for the videocassette market, the market for a Showscan motion picture is not limited to Showscan-equipped theatres. A Showscan film converted to a slower frame rate or another medium would not, however, exhibit the depth, clarity, and realism attainable with the Showscan technology, although a converted Showscan film will produce an image that the Company believes is at least as good as that of a conventional 35mm/24 fps film. SALES AND MARKETING The Company's sales and marketing activities are coordinated by the Company's Vice President of Worldwide Sales, 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 1996, the Company extended its agreement with Imagine Japan, Inc. ("Imagine") through December 31, 1996, 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 on terms established by Imagine. However, notwithstanding such resales, Imagine remains liable to the Company for all annual film rental and royalty obligations related to all of the Showscan Attractions sold to Imagine. The Company has also granted Imagine a non-transferable license to exhibit the Showscan Attraction films in the Company's film 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, 1996 although Imagine will continue to remain liable thereafter for all annual film rental and royalty obligations. The Company has entered into certain other sales alliances. The Company has entered into an agreement with Robins Cinema, a United Kingdom entity that owns and manages motion picture theatres in England. The agreement with Robins Cinema designates Robins Cinema as a sales representative for the Company in Western Europe for both third party Showscan Attractions and for O&O Theatre sites. Robins Cinema shall also develop and manage all O&O Theatres established in Western Europe (they currently manage the twin O&O Theatre in the 13. 14 Trocadero Arcade at Piccadilly Circus, London, England). Mr. Charles B. Moss Jr., a director of the Company, is a director of Robins Cinema. Historically, most 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, and Arnold & Richter Cine Technik GmbH, a well-known German camera manufacturer, now manufactures the Arriflex 765, a 65mm camera that can film at 60 fps. 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 15-seat and 18-seat, six-axis dynamic platforms. The Company currently markets the McFadden Quadra Motion System and dynamic platforms as well as the platform and capsule type motion bases manufactured by Thompson Training & Simulation Limited. The Company is also working to develop an electrically-driven (as opposed to hydraulically driven) motion base. This electrically-driven motion base is currently in the development and testing stage. 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- -14- 15 drive sprockets. 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., Ampro Projection Systems, 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, 1996, 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 developing additional components and "options" frequently requested by the Company's customers such as special effects, 160(degree) screens, space saving flat screens, operator consoles, 2-D, 3-D and dome theatre applications to be used in the Company's "ShowMax(TM)" 15/70 giant-screen theatre package and revenue confirmation systems that produce per seat usage reports. The Company is also designing and developing a mobile Showscan Attraction (See "Item 1 Business - Mobile Showscan Attractions"). 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. 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. 15. 16 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 MCA, Inc., 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 new "ShowMax(TM)" 15/70 giant-screen theatre product 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. 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 16. 17 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. Microsoft Corporation had filed an objection to the Company's application to register "CineMania" as a trademark and resolved the dispute by licensing rights for use of the "Cinemania" name to the Company. The Company has also registered "Showscan's The Edge" for use as the name of Company theatres, and "ShowMax" for use with the Company's new 15/70 format product line. 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 $2,054,000 in royalties under the Royalty Agreement through March 31, 1996. 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. As of March 31, 1996, no royalties have been earned under the FGC Agreement. 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. As of March 31, 1996, the Company had paid $426,000 to Mr. Trumbull under this agreement, which payments reduced the principal balance of a $2,000,000 subordinated promissory note issued to Mr. Trumbull by the Company as part of the acquisition of the Showscan patents. The balance of the note, together with accrued and unpaid interest, was paid in full in April, 1995. 17. 18 EMPLOYEES As of June 11, 1996, the Company had 58 employees, nine of whom were employed in management, seven in sales and marketing, fifteen in engineering, assembly and installation, and six 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 $32,612, 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 Since the launch of the Company's new ShowMax(TM) product line on January 30, 1996, four lawsuits have been brought against either the Company or its supplier of 15/70 format projectors. Three of the lawsuits involve 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 seek unspecified damages and ask that the Company be enjoined from any continued use of the ShowMax trademark. The Company disputes each of these claims and has filed and will file all appropriate defenses in response. 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 alleges, among other things, trade secret misappropriation and that the relationship between World Odyssey Inc. and the Company violates certain provisions of a 1994 Settlement Agreement between Imax Corporation, World Odyssey Inc. and N.J. Engineering Inc. In this lawsuit, Imax Corporation seeks unspecified damages and injunctive relief. The Company, World Odyssey Inc. and N.J. Engineering Inc. dispute each of these claims and are jointly defending the lawsuit. 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 are seeking treble damages, costs and injunctive relief. While the Company intends to vigorously pursue each of these lawsuits, the outcome is not certain. The presence of this litigation has hindered the Company's initial entry into the 15/70 format projector market and a negative determination could further hinder such entry. Since the Company has not yet derived any revenues from 18. 19 this product line, the Company believes that any determination in the forgoing suits that prevents the Company from marketing the World Odyssey products and/or from using the name "ShowMax" will not have a material adverse effect on the financial condition of the Company taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS During the fourth quarter of the fiscal year ended March 31, 1996, no matters were submitted to a vote of the Company's stockholders through the solicitation of proxies or otherwise. 19. 20 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, 1995 ------------------------- 1st Quarter $ 8 1/4 $ 6 3/8 2nd Quarter 10 6 5/8 3rd Quarter 8 1/2 6 4th Quarter 6 3/4 5 1/4 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
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, 1996, the Company had 134 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. 20. 21 ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended March 31, --------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in thousands, except share amounts) Statement of Operations Data: Revenues: Film rentals and royalties............ $ 9,039 $ 5,978(1) $ 2,970(1) $ 4,328(1) $ 4,535(1) Equipment sales and related services..................... 8,426 9,459 2,245 6,695 6,999 ----------- ---------- ---------- ---------- ----------- Total revenues........................ 17,465 15,437 5,215 11,023 11,534 Cost of Revenues........................ 8,399 8,584(1) 3,967(1) 6,941(1) 6,056(1) ----------- ---------- ---------- ---------- ----------- Gross profit............................ 9,066 6,853 1,248 4,082 5,478 Other costs and expenses: General and administrative............ 7,576 5,560 5,566 6,286 5,387 Depreciation and amortization......... 971 1,025 2,827 1,369 1,267 Provision for contract modifications.. -- -- 673 -- -- ----------- ---------- ---------- ---------- ----------- 8,547 6,585 9,066 7,655 6,654 ----------- ---------- ---------- ---------- ----------- Operating income (loss)............... 519 268 (7,818) (3,573) (1,176) Other income (expense): Equity in operations of owned and operated theatres................. (217) (502) -- -- -- Other income........................ 358 444 171 164 342 Interest and other expense........... (555) (128) (98) (127) (333) Provision for income taxes............. (4) (3) -- -- -- ----------- ---------- ---------- ---------- ----------- Net income (loss)...................... $ 101 $ 79 $ (7,745) $ (3,536) $ (1,167) =========== ========== ========== ========== =========== Net income (loss) per common share..... $ .02 $ .01 $ (1.68) $ (.76) $ (.28) =========== ========== ========== ========== =========== Weighted average number of common shares............................ 6,317,167 5,788,230 4,679,519 4,679,519 4,160,963 =========== ========== ========== ========== =========== Balance Sheet Data (at end of period): Cash, cash equivalents and short-term investments.......................... $ 8,141 $ 6,791 $ 2,371 $ 2,405 $ 2,717 Accounts receivable, net................ 3,241 2,943 2,569 4,202 3,557 Equipment sales inventory............... 1,547 2,142 1,440 1,414 2,118 Other current assets.................... 1,244 980 1,221 1,974 2,547 Film library (net)...................... 3,481 1,394 1,003 1,488 1,915 Property and equipment (net)............ 1,313 1,728 2,140 4,128 4,483 Owned and operated theatres............. 4,045 2,494 1,386 478 -- Patents and other (net)................. 3,745 3,500 2,994 4,211 4,703 ----------- ---------- ---------- ---------- ----------- Total assets............................ $ 26,757 $ 21,972 $ 15,124 $ 20,300 $ 22,040 =========== ========== ========== ========== =========== Current liabilities..................... $ 6,097 $ 4,860 $ 4,632 $ 4,932 $ 2,774 Note payable and other.................. 6,620(3) 3,121(2) 2,998 3,004 3,366 Series B Preferred Stock................ -- -- 1,678 -- -- Stockholders' equity.................... 14,040 13,991 5,816 12,364 15,900 ----------- ---------- ---------- ---------- ----------- Total liabilities and stockholders' equity ............................... $ 26,757 $ 21,972 $ 15,124 $ 20,300 $ 22,040 =========== ========== ========== ========== ===========
- ----------------------- (1) Restated to conform to 1996 presentation (see Note 1 to Consolidated Financial Statements). (2) Paid in full in April 1995. (3) The Company completed a private placement of convertible notes in September, 1995. 21. 22 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 attractions and specialty theatre equipment (including projectors, screens, sound systems, synchronization and show control and theatre design packages) used to exhibit films in the Showscan process as well as 15/70 format films; (iii) selling motion bases and other equipment used in attractions; (iv) producing films using the Showscan process; and (v) operating 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 Company announced in Fiscal 1996 the new "ShowMax" product line, a complete 15/70 giant screen theatre package. The Company anticipates that the ShowMax product line will have a positive impact on sales in future periods. The principal sources of the Company's revenues are the licensing of the Showscan film library and technologies, the sale and installation of projectors, screens, sound systems and other equipment used to exhibit Showscan films, and the sale of motion bases and other equipment used in most Showscan Attractions. The Company currently derives most of its revenues from export sales. 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, 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. 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. See Notes 6 and 7 to the Consolidated Financial Statements. 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. 22. 23 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. 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. 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. Comparison of Year Ended March 31, 1995 and Year Ended March 31, 1994. Revenues for the fiscal year ended March 31, 1995 ("Fiscal 1995") increased by $10.2 million or 196% from revenues for the fiscal year ended March 31, 1994 ("Fiscal 1994"). Film rentals and royalties increased by 101% to $6 million in Fiscal 1995. The increase in film rentals and royalties was primarily due to the increase in the installed base of operating Showscan Attractions and the modification and extension in Fiscal 1994 of a licensing agreement with a significant Showscan Attraction customer. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of Year Ended March 31, 1994 and Year Ended March 31, 1993," below. Revenues 23. 24 from film rentals and royalties are expected to increase annually in the future as the installed base of Showscan Attractions increases. Revenues from equipment sales and related services for Fiscal 1995 increased by 321% to $9.5 million due to the significant increase in the number of Showscan Attractions opened in Fiscal 1995. Twelve Showscan Attractions opened in Fiscal 1995 as compared to only two in Fiscal 1994. Cost of revenues were 56% of revenues in Fiscal 1995 as compared to 76% in Fiscal 1994. Royalties and film costs as a percentage of film rentals and royalties decreased to 36% in Fiscal 1995 from 49% in Fiscal 1994. This increase in gross margin was principally the result of charges made in Fiscal 1994 to increase inventory reserves, including a one-time charge for costs necessary to upgrade the Company's inventory of projectors used in its film-based Showscan Attractions. No similar charges were made in Fiscal 1995. The cost of the Company's film library is being amortized over estimated future revenues, as revised quarterly, if applicable. Amortization expense of the film library for Fiscal 1995 and Fiscal 1994 was $502,000 and $759,000, respectively. The 34% decrease in amortization was related primarily to the accelerated amortization in Fiscal 1994 of one of the Company's specialty films. General and administrative expenses remained relatively unchanged in absolute terms despite the Company's hiring of additional personnel including a new Chief Executive Officer and a new Chief Financial Officer. The resulting increase in personnel costs was primarily offset by (i) the charging of approximately $446,000 in general and administrative expenses to certain ventures in which the Company has an ownership interest, and (ii) to a lesser extent, a decrease in the reserves for accounts receivable. Approximately $300,000 of accounts receivable that had been previously reserved were collected in Fiscal 1995. Depreciation and amortization decreased by $1.8 million, or 64% in Fiscal 1995. This decrease was related primarily to a $1.5 million write-down in Fiscal 1994 to certain of the Company's camera and film production equipment which, pursuant to the Company's revised business strategy, is not expected to be utilized in future periods. No such write-downs occurred in Fiscal 1995. The Company develops, through various financial arrangements, Showscan Attractions in which the Company has an ownership interest and accounts for its net ownership position under the equity method of accounting. The Company's loss of $502,000 on investment in owned and operated theatres is the result of the operating losses during Fiscal 1995 at two Showscan Attractions, plus site acquisition costs (for future owned and operated theatre locations) incurred through the Showscan Attractions Venture. The CityWalk attraction located at Universal CityWalk adjacent to Universal Studios, Universal City, California is owned by a venture in which the Company has a 50% interest. The loss at that location was primarily the result of lower than expected attendance caused by disruptions due to the construction of a substantial addition to Universal CityWalk in the area adjacent to the theatre and the unseasonably heavy rainfall in January of 1995 in the Southern California area. The second Showscan Attraction, which is 50% owned by a wholly-owned subsidiary of the Company, opened in late September, 1994 at Piccadilly Circus, London, England. The results of operations from the London theatre were adversely affected by (i) seasonal factors (attendance typically increases during summer months), (ii) interruptions during the installation testing period, and (iii) initial start-up expenses relating primarily to marketing and advertising. Operating income increased in Fiscal 1995 to an operating profit of $268,000 from an operating loss of $7,818,000 in Fiscal 1994. This $8.1 million increase in operating income was the result of the significant increases in revenue in both film rentals and royalties and equipment sales and related services and the decreases in depreciation and amortization. The Company's net income of $79,000, or $.01 per share, in Fiscal 1995 compared favorably to the Fiscal 1994 net loss of $7,745,000, or $1.68 loss per share. 24. 25 Comparison of Year Ended March 31, 1994 and Year Ended March 31, 1993. Revenues for the fiscal year ended March 31, 1994 ("Fiscal 1994") decreased by 53% from revenues for the fiscal year ended March 31, 1993 ("Fiscal 1993"). The decrease in revenues reflected a decrease in both revenues from equipment sales and related services and revenues from film rentals and royalties. Film rentals and royalties decreased in Fiscal 1994 primarily due to the modification and extension of a licensing agreement with a significant Showscan Attraction customer. Although the general terms of the modified agreement were similar to the prior agreement, the Company earned film rentals and royalties from the customer ratably during the entire calendar year rather than all at the beginning of each calendar year. Substantially all of the decrease in revenues from film rentals and royalties in Fiscal 1994 resulted from the modification of this license agreement. Revenues from equipment sales and related services for Fiscal 1994 decreased primarily due to the timing of Showscan Attraction sales. Although the total number of sales of Showscan Attractions did not significantly decrease in Fiscal 1994 from Fiscal 1993, all but one sale occurred in the last quarter of Fiscal 1994. Because the Company recognizes equipment sales under the percentage-of-completion method of accounting, generally measured by the percentage of labor hours incurred to date to the estimated total labor hours of each contract, the major portion of the fourth quarter sales were recognized in periods after Fiscal 1994. The lack of sales in the first three quarters of Fiscal 1994 is attributable, in significant part, to the announcement of the potential merger between the Company and one of its competitors, Omni Films International, Inc. The merger did not occur. The Company believes that this announcement created customer uncertainty that delayed purchasing decisions by certain potential customers. The lack of equipment sales also was due to the recessionary conditions that existed in certain of the markets in which the Company transacts business, and to increased worldwide competition. Cost of revenues was 76% in Fiscal 1994 as compared to 63% in Fiscal 1993. Royalties and film costs as a percentage of film rentals increased to 49% in Fiscal 1994 from 35% in Fiscal 1993. Equipment cost of sales as a percentage of equipment sales and related services increased to 112% in Fiscal 1994 from 81% in Fiscal 1993. This reduction in gross margins is primarily attributable to (i) a one-time $525,000 charge for costs necessary to upgrade the Company's inventory of the projectors used in its film-based Showscan Attractions, and (ii) to a lesser extent, certain additional inventory reserves. Depreciation and amortization increased in Fiscal 1994 by $1,458,000. This increase is related primarily to $1,500,000 of write-downs relating to certain of the Company's camera and film production equipment that management does not expect to utilize in future periods pursuant to the Company's revised business strategy. General and administrative expenses for Fiscal 1994 decreased by $720,000, or 11%, due to the reduction in the Company's workforce and the other cost-cutting measures that were implemented during Fiscal 1994. The decrease in these expenses was offset by $200,000 of one-time severance charges and other expenses incurred by the Company in connection with its reorganization. In Fiscal 1994, the Company recorded a provision of $673,000 for certain contract modifications. No such provision was made in Fiscal 1993. The provision is primarily the result of a customer's inability to complete its contractual commitment to purchase certain Showscan Attractions that had been previously ordered by the customer. Due primarily to the reduction in revenues from equipment sales and related services, the $1,500,000 write-down of certain equipment, the decrease in revenues from film rentals and royalties, and the provision for contract modifications, the Company's net loss increased in Fiscal 1994 to $7,745,000, or $1.68 per share of Common Stock, from a net loss of $3,536,000, or $.76 per share of Common Stock in Fiscal 1993. 25. 26 LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996, the Company's working capital increased to $8,076,000 from $4,875,000 at March 31, 1995. Cash, cash equivalents and short-term investments increased to $8,141,000 from $6,791,000 at March 31, 1995. The increase in working capital is primarily due to the completion of a financing transaction (described below) offset primarily by (i) the Company's payment in full of a subordinated note payable, (ii) the funding provided by the Company in connection with the construction of the Showscan Attractions in Framingham, Osaka and San Antonio, and (iii) the Company's purchase of interests in two motion simulation films. Net cash flow provided by operations was $2,990,000 in Fiscal 1996 as a result of positive changes in several categories. Accounts payable and accrued expenses and other current liabilities increased by 105%, while accounts receivable and equipment sales inventory decreased by a combined 15% at March 31, 1996. These changes are primarily attributable to the timing of the Company's Showscan Attraction sales and the specific contract terms of such sales (which contract terms generally affect the timing of collections, shipments to customers and related payment to vendors), and the purchase of interests in two films. Net cash used in the Company's investing activities was $8,016,000 in Fiscal 1996. This was principally the result of $3,086,000 of purchases in short-term investments, plus $2,568,000 of additions to the Company's film library, and $2,211,000 of investments in O&O theatres. Cash flow provided by financing activities was $3,290,000 in Fiscal 1996. During such period, the Company made in April, 1995 a payment in full of $3,121,000 on a subordinated note payable (see below). On September 1, 1995, the Company completed a $7,000,000 ($6,381,000 net of expenses) private placement of convertible notes through a European financial institution. The Company issued secured convertible notes with a conversion price of $5.75 per share. As of March 31, 1996, $380,000 had been converted into 66,085 shares of Common Stock. Subsequently, through June 20, 1996, an additional $480,000 was converted into 83,475 shares of Common Stock. The remaining $6,140,000 of notes are convertible at the option of the holder into 1,067,826 shares of Common Stock. The notes have a four year maturity, bear interest at 8 percent per annum with a semi-annual interest payment schedule commencing March 1, 1996 and are secured by specific assets of the Company, although the security excludes the Company's film library and the capital stock of its subsidiaries, which includes its owned and operated theatres. In addition to the above transactions, on September 30, 1995 the Company converted all of its outstanding Series A Convertible Preferred Stock into 165,380 shares of Common Stock. Each share of Series A Convertible Preferred Stock had a liquidation value of $4.00 and was converted into shares of Common Stock at a conversion rate of 1.1025 shares of Common Stock for each share of preferred stock. At March 31, 1995, the Company owed approximately $3,121,000 under a subordinated note payable to Mr. Douglas Trumbull (the "Trumbull Note"), the inventor of the Showscan process. The Trumbull Note including interest was due and paid in full on April 26, 1995. The above activities had the result of increasing the Company's stockholders equity from $14 million (as of March 31, 1995) to $14.5 million as of March 31, 1996 and also resulted in a significant infusion of cash, increased the film library and the investments in owned and operated theatres. The Company believes that its working capital will be sufficient to fund the costs of operations for the next twelve months. The Company's business strategy includes new film productions, new product development and new product lines, enhancement of existing product lines and possible site acquisitions for additional owned and operated theatres. The Company plans to pursue further financing alternatives by one or more of the following means: the selling of securities, obtaining a line of credit from a banking institution, and/or forming strategic alliances or joint ventures. 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 revised business strategy, specifically with regards to the timing of new film productions and the number of new 26. 27 O&O Theatres. Additionally, the Company has reserved as of June 20, 1996 4,821,834 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 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 on-going film rental 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. Growth Plan Management of the Company has adopted an aggressive growth plan that includes substantial investments in its sales and marketing organizations, the creation of new research and development programs and increased funding of existing programs, and investments in corporate infrastructure that will be required to support significant growth. This plan, which was implemented during the latter half of fiscal 1996 and is planned to continue into fiscal 1997, carries with it a number of risks, including a higher level of operating expenses that may not be adequately covered by increased sales and the complexities associated with managing a larger and faster growing organization. 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 Company's future results will depend in large part on its ability to remain a leader in its business segment. 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, 27. 28 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 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. See also the discussion in "Item 3 -- Legal Proceedings" regarding litigation initiated with respect to the Company's entry into this market. Business Disruption The Company's corporate headquarters, including its research and development operations and most of its manufacturing facilities, 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 a single customer presently operates or is otherwise responsible for twelve 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. Of course, as each of these customers builds more theatres they will then become a concentration in the area of ongoing film rental. In the future, the Company plans to increase the number of customers with which it has multi-system agreements. 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. 28. 29 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. A large portion of the Company's competitive advantage resides in its popular and extensive library of ride films. To maintain this competitive edge, the Company must produce 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 ride 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. 29. 30 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 to be held in August 1996, 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. 30. 31 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) 3.4 Certificate of Designations, Powers and Preferences with respect to Series A Convertible Preferred Stock of Showscan Corporation, as filed with the Secretary of State of Delaware on September 22, 1993.(b) 3.5 Certificate of Designations, Powers and Preferences with respect to Series B Preferred Stock of Showscan Corporation, as filed with the Secretary of State of Delaware on September 22, 1993.(b) 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.(j) 4.1 Specimen certificate of the Common Stock, $.001 par value, of the Company.(a) 4.2 Form of warrants issued to Whale Securities Corp. and its designees.(c) 4.3 Form of warrant issued to Sutro & Co. Incorporated.(a) 4.4 Stock Purchase Warrant, dated March 9, 1989, issued by the Company to Columbia Pictures Industries, Inc.(a) 4.5 Specimen certificate of Series A Convertible Preferred Stock, $.001 par value, of the Company.(g) 4.6 Specimen certificate of Series B Preferred Stock, $.001 par value, of the Company.(g) 31. 32 EXHIBIT NUMBER DESCRIPTION 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) 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. 4.21 Registration Rights Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack M. Ferraro. 4.22 Warrant Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack Erlanger. 4.23 Registration Rights Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack Erlanger. 4.24 Warrant Agreement, dated as of October 3, 1995, by and between Showscan Entertainment Inc. and Intralink Film Graphic Design. 32. 33 EXHIBIT NUMBER DESCRIPTION 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) 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) 33. 34 EXHIBIT NUMBER DESCRIPTION 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) 10.21 Employment Agreement, dated March 3, 1994, between the Company and William C. Soady.(g) 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.* 34. 35 EXHIBIT NUMBER DESCRIPTION 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.* 21.1 List of Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule. ----------------------- * Confidential treatment of this exhibit has been requested and confidential portions have been omitted and filed separately with the Securities and Exchange Commission. (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. 35. 36 B. THE FOLLOWING REPORTS ON FORM 8-K WERE FILED DURING THE FOURTH QUARTER OF THE FISCAL YEAR ENDED MARCH 31, 1996. Current Report, dated May 28, 1996, Item 5. No financial statements were filed with the foregoing Report. 36. 37 INDEX TO FINANCIAL STATEMENTS SHOWSCAN ENTERTAINMENT INC. Report of Independent Auditors...................................................................................F-2 Consolidated Balance Sheets at March 31, 1996 and 1995...........................................................F-3 Consolidated Statements of Operations for the years ended March 31, 1996, 1995 and 1994..........................F-5 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996, 1995, and 1994...............F-6 Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995 and 1994..........................F-7 Notes to Consolidated Financial Statements.......................................................................F-9 Consolidated Financial Statement Schedule: Schedule II. Valuation and Qualifying Accounts....................................................F-27 Supplementary Audited Financial Statements: Financial Statements for Showscan CityWalk Venture for the years ended December 31, 1995 and 1994......F-28 Financial Statements for Cinemania (U.K.) Limited for the years ended December 31, 1995 and 1994.......F-36 Financial Statements for Showscan/General Cinema Ventures for the period from April 24, 1995 (date of formation) to October 31, 1995...............................................................F-45
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 38 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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1996. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1996, 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 5, 1996 F-2 39 Showscan Entertainment Inc. Consolidated Balance Sheets (Dollars in Thousands, Except Share Amounts)
MARCH 31 1996 1995 ------------------- ASSETS Current assets: Cash and cash equivalents $ 5,055 $ 6,791 Short-term investments (Note 1) 3,086 -- Accounts receivable, net of allowances of $215 (1996) and $254 (1995) 2,025 2,046 Unbilled receivables on uncompleted equipment contracts (Note 1) 1,122 870 Due from affiliated entities (Note 7) 1,216 897 Equipment sales inventory 1,547 2,142 Prepaid expenses and other current assets 122 110 ------------------- Total current assets 14,173 12,856 Film library, net (Note 1) 3,481 1,394 Equipment and leasehold improvements, less depreciation and amortization (Note 2) 1,313 1,728 Owned and operated theatres (Notes 1 and 6) 4,045 2,494 Patents and other intellectual properties, net of amortization (Note 1) 1,770 2,204 Other assets, including note receivable from affiliated entity (Note 7) 1,975 1,296 ------------------- Total assets $26,757 $21,972 ===================
See accompanying notes. F-3 40
MARCH 31 1996 1995 ----------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 603 $ 322 Customer advances on uncompleted equipment contracts (Note 1) 2,143 2,929 Accrued expenses and other current liabilities (Note 1) 3,351 1,609 Subordinated note payable (Note 3) -- 3,121 ----------------------- Total current liabilities 6,097 7,981 Convertible notes payable (Note 3) 6,620 -- ----------------------- Total liabilities 12,717 7,981 ----------------------- 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 1996 and 150,000 in 1995 (Note 4) -- -- Series C Convertible Preferred Stock, $.001 par value; 100,000 shares authorized; 49,000 shares issued and outstanding in 1996 and 1995 (Note 4) -- -- Common stock, $.001 par value; 20,000,000 shares authorized; shares issued and outstanding of 5,480,324 in 1996 and 5,242,859 in 1995 5 5 Additional paid-in capital 42,446 42,498 Accumulated deficit (28,411) (28,512) ----------------------- Total stockholders' equity 14,040 13,991 ----------------------- Total liabilities and stockholders' equity $ 26,757 $ 21,972 =======================
See accompanying notes. F-4 41 Showscan Entertainment Inc. Consolidated Statements of Operations (Dollars in Thousands, Except Share Amounts)
YEAR ENDED MARCH 31 1996 1995 1994 -------------------------------------- Revenues (Note 9): Film rentals and royalties $ 9,039 $ 5,978 $ 2,970 Equipment sales and related services 8,426 9,459 2,245 -------------------------------------- 17,465 15,437 5,215 Costs of revenues 8,399 8,584 3,967 -------------------------------------- Gross profit 9,066 6,853 1,248 Other costs and expenses: General and administrative expenses 7,576 5,560 5,566 Depreciation and amortization 971 1,025 2,827 Provision for contract modifications -- -- 673 -------------------------------------- 8,547 6,585 9,066 -------------------------------------- Operating income (loss) 519 268 (7,818) Other income (expense): Equity in operations of owned and operated theatres (Note 6) (217) (502) -- Other income, including interest of $250 (1996), $237 (1995) and $27 (1994) 358 444 171 Other expense, including interest of $410 (1996), $128 (1995) and $98 (1994) (555) (128) (98) -------------------------------------- (414) (186) 73 -------------------------------------- Income (loss) before taxes 105 82 (7,745) Provision for income taxes 4 3 -- -------------------------------------- Net income (loss) $ 101 $ 79 $ (7,745) ====================================== Net income (loss) per common share (Note 1) $ 0.02 $ 0.01 $ (1.68) ======================================
See accompanying notes. F-5 42 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, 1993 - $ - - $ - 4,679,519 $ 5 Proceeds from issuance of Series A Convertible Preferred Stock 150,000 - - - - - Accretion on Series B Preferred Stock - - - - - - Issuance of warrants to purchase common stock - - - - - - Stock issuance costs - - - - - - Net loss - - - - - - ---------------------------------------------------------------------------- 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 Preferred Stock - - 24,000 - - - 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 ============================================================================
Additional Paid-In Accumulated Capital Deficit Total -------------------------------------- Balance at March 31, 1993 $ 33,205 $ (20,846) $ 12,364 Proceeds from issuance of Series A Convertible Preferred Stock 600 - 600 Accretion on Series B Preferred Stock (128) - (128) Issuance of warrants to purchase common stock 925 - 925 Stock issuance costs (200) - (200) Net loss - (7,745) (7,745) -------------------------------------- Balance at March 31, 1994 34,402 (28,591) 5,816 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 Preferred Stock 1,800 - 1,800 Exercise of stock options 12 - 12 Stock issuance costs (436) - (436) Net Income - 79 79 -------------------------------------- Balance at March 31, 1995 42,498 (28,512) 13,991 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 $ 42,446 $(28,411) $ 14,040 ======================================
See accompanying notes. F-6 43 Showscan Entertainment Inc. Consolidated Statements of Cash Flows (Dollars in Thousands)
YEAR ENDED MARCH 31 1996 1995 1994 -------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 101 $ 79 $ (7,745) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 971 1,025 2,827 Amortization of film library 481 502 759 Amortization of debt issue costs 85 - - Provision for doubtful accounts receivable 440 (30) 258 Equity in operations of owned and operated theatres 217 502 - Accrued interest on subordinated note - 123 95 Issuance of common stock and warrants for services - - 75 Changes in operating assets and liabilities: Accounts receivable (419) 353 1,575 Due from affiliated entities (454) (1,543) (200) Equipment sales inventory 595 (702) (26) Unbilled receivables on uncompleted equipment contracts (252) 248 488 Prepaid expenses and other current assets (12) (7) 265 Accounts payable, accrued expenses and other 2,023 (570) (2,294) Customer advances on uncompleted equipment contracts (786) 798 1,893 -------------------------------------- Net cash provided by (used in) operating activities 2,990 778 (2,030) INVESTING ACTIVITIES Purchases of short-term investments (3,086) - (619) Redemptions of short-term investments - 1,243 - Additions to film library (2,568) (891) (274) Investment in owned and operated theatres (2,211) (1,610) (908) Purchases of equipment and leasehold improvements and other, net (151) (275) 378 -------------------------------------- Net cash (used in) provided by investing activities (8,016) (1,533) (1,423)
F-7 44 Showscan Entertainment Inc. Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
YEAR ENDED MARCH 31 1996 1995 1994 ----------------------------------- 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 2,800 Proceeds from exercise of stock options 30 12 - ----------------------------------- Net cash provided by financing activities 3,290 6,418 2,800 ----------------------------------- Net (decrease) increase in cash and cash equivalents (1,736) 5,663 (653) Cash and cash equivalents at beginning of year 6,791 1,128 1,781 ----------------------------------- Cash and cash equivalents at end of year $ 5,055 $ 6,791 $ 1,128 =================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 1,818 $ 4 $ 4 =================================== Income taxes paid $ 4 $ 2 $ 2 ===================================
See accompanying notes. F-8 45 Showscan Entertainment Inc. Notes to Consolidated Financial Statements 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 exhibition 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 simulation motion and specialty theatres are open or under construction in 23 countries around the world, located in theme parks, motion picture mutiplexes, expos, world's 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 Showscan 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 the experience of "thrill ride" or action entertainment (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. In January, 1996 the Company entered into the giant screen theatre business when it announced its new product line, "ShowMax", which is available in 2-D, 3-D and Dome applications. 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 attractions and specialty theatres (including projectors, screens, sound systems, synchronization and show control, and theatre design packages) F-9 46 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BUSINESS OF THE COMPANY (CONTINUED) used to exhibit films in the Showscan process as well as 15/70 format films; (iii) selling motion bases and other equipment used in attractions; (iv) producing films using the Showscan process; and (v) operating 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 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) under the equity method of accounting. RECLASSIFICATIONS To conform to the presentation for the year ended March 31, 1996, the consolidated statements of operations for the years ended March 31, 1995 and 1994 were reclassified, consistent with industry practice, such that certain costs of film rentals and royalties (payments to co-producers) were recorded as costs of revenues, rather than being netted against film rentals and royalties. This reclassification had no effect on gross profit or net income (loss) for any period. Film rental and royalties, and costs of revenues, increased $1,666,000 and $705,000 for the years ended March 31, 1995 and 1994, respectively, from the amounts previously reported. The consolidated financial statements for the years ended March 31, 1995 and 1994 also contain certain other reclassifications to conform to the presentation for the year ended March 31, 1996. F-10 47 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Such films are being amortized over their estimated future revenue stream, as revised quarterly, if applicable. Accumulated amortization of the film library was $6,505,000 and $6,025,000 at March 31, 1996 and 1995, respectively. The Company estimates that approximately 60% of unamortized film costs at March 31, 1996 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 $4,734,000 and $4,300,000 at March 31, 1996 and 1995, 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 48 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND 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. Amortization of leasehold improvements is computed using the straight-line method over the lease term. Depreciation and amortization of equipment and leasehold improvements was $537,000, $590,000 and $2,217,000 for the years 1996, 1995 and 1994, respectively. Depreciation for 1994 includes approximately $1,500,000 of write-downs relating to certain equipment not expected to be utilized by the Company in future periods pursuant to the Company's revised business strategy. 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. NET INCOME (LOSS) PER COMMON SHARE Per share information has been determined on the basis of 6,317,167, 5,788,230 and 4,679,519 weighted average shares outstanding for the years ended March 31, 1996, 1995 and 1994, respectively. 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). For the year ended March 31, 1994, the effect of all common stock equivalents is not included in the per share computation as such items are anti-dilutive. F-12 49 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid equity instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term investments are stated at amortized cost and consist of amounts invested in debt securities (U.S. Treasury Bills) which will be held to maturity. Such securities have maturities ranging from three to nine months from the time of acquisition. Such investments are carried at unamortized cost, which approximate their fair value, based on quoted market prices in an active market. 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 to minimize the Company's credit risk. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Included in accrued expenses and other current liabilities are the following:
1996 1995 ----------------------------------- Accrued royalties $ 988,000 $ 637,000 Purchase of motion simulation films 1,620,000 - Other items 743,000 972,000 ----------------------------------- $ 3,351,000 $ 1,609,000 ===================================
STOCK-BASED COMPENSATION The Company accounts for compensation cost related to employee stock options in accordance with the requirements of Accounting Principles Board Opinion 25 (APB) and intends to continue to do so. APB 25 requires compensation cost for stock-based compensation plans to be recognized based on the difference, if any, between the fair market value of the stock on the date of grant and the option exercise price. F-13 50 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 1. COMPANY BUSINESS AND 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. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements at March 31, 1996 and 1995 were as follows:
1996 1995 ------------------------------------ Showscan equipment $ 4,559,000 $ 4,558,000 Leasehold improvements 927,000 926,000 Office furniture and equipment 769,000 671,000 ------------------------------------ 6,255,000 6,155,000 Less accumulated depreciation and amortization 4,942,000 4,427,000 ------------------------------------ $ 1,313,000 $ 1,728,000 ====================================
3. NOTES PAYABLE On September 1, 1995, the Company completed a private placement of $7,000,000 in Convertible Notes through a European financial institution, Banca del Gottardo. The notes mature on September 1, 1999 and bear interest at 8% per annum. Interest is payable semi-annually commencing March 1, 1996. 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 owned and operated theatres. In connection with the private placement, $619,000 of debt issue costs were incurred and are being amortized over the life of the notes. The notes are convertible into 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, 1996, $380,000 of notes were converted into 66,085 shares of common stock. Subsequent to March 31, 1996, an additional $480,000 of notes were converted into 83,475 shares of common stock leaving an outstanding balance of $6,140,000. F-14 51 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 3. NOTES PAYABLE (CONTINUED) The Company believes the carrying amount of the notes approximate their fair value based on current yields for debt issues of similar quality and terms. At March 31, 1995, the Company had a subordinated note payable outstanding which was paid in full in April 1995. The note bore interest at the floating prime rate of the First National Bank of Chicago; accrued interest was $1,547,000 at March 31, 1995. 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, 1996. 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. Each share of Series A had a liquidation value of $4.00 and was convertible at the option of the holders into shares of common stock at a conversion rate (subject to certain anti-dilution adjustments) of 1.103 shares of common stock for each share of Series A. The Series A was not subject to redemption and each share of Series A was entitled to a dividend equal to 110%, subject to adjustment for subdivisions, combinations and stock dividends, of any cash dividends declared on each outstanding share of common stock. The holders of shares of Series A had voting rights as if such shares had been fully converted into 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 F-15 52 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 4. PREFERRED STOCK (CONTINUED) SERIES C CONVERTIBLE PREFERRED STOCK (SERIES C) (CONTINUED) 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. The Company has the right, but not the obligation, to redeem the outstanding shares of the Series C at a redemption price equal to the liquidation price ($100 per share) plus any accrued but unpaid dividends, if any. The Series C is senior to the common stock and other junior stock of the Company and is on a parity with the Series A; additionally, a majority of the holders of Series C must consent to (a) the issuance of any 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 and the Series A. In the event of a "material default" (as defined), the holders of the outstanding Series C will be entitled to (a) require the Company to repurchase the outstanding Series C at a price equal to the liquidation price plus any declared but unpaid dividends plus any accrued interest thereon, (b) require the Company to pay dividends on the Series C only in cash, and (c) receive interest on all past due dividends, if any, at the rate of four percentage points above the then prime rate. 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 A or 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). F-16 53 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 4. PREFERRED STOCK (CONTINUED) SERIES D PARTICIPATING PREFERRED STOCK (SERIES D) (CONTINUED) 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. 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, 1996. 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. F-17 54 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 5. STOCK OPTIONS AND WARRANTS (CONTINUED) OPTIONS (CONTINUED) 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 following table summarizes stock option transactions under the Plans for the remaining unexercised stock options:
STOCK OPTIONS 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- Outstanding at beginning of year 619,500 333,000 334,500 Granted 32,250 304,750 272,500 Exercised ($5.00 per share in 1996 and $4.00 per share in 1995) (6,000) (3,000) - Canceled (40,000) (15,250) (274,000) Outstanding at end of year 605,750 619,500 333,000 Exercisable at end of year 235,625 156,500 47,900 Available for grant at end of year 231,750 238,000 27,500 Price range at end of year $5.00 - $9.06 $5.00 - $9.06 $4.00 - $7.38
WARRANTS During 1991, warrants to purchase an aggregate of 200,000 shares of common stock were issued by the Company. The warrants are exercisable at a price of $6.50 (50,000 shares) and $9.90 (150,000 shares), subject to certain anti-dilution adjustments. The warrants expire on July 11, 1996 (150,000 shares) and March 9, 1999 (50,000 shares). 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 its Chairman of the Board of Directors. The warrant was issued as compensation for services the Chairman provided to the Company. At March 31, 1996, 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. F-18 55 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 5. STOCK OPTIONS AND WARRANTS (CONTINUED) WARRANTS (CONTINUED) 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 from August 22, 1999 to 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 become 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-19 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, 1996 RANGE OF MARCH 31 EXERCISE PRICES 1996 1995 --------------- ------------------------------ 1987 and 1992 Option Plans $5.00 - $9.0625 857,500* 857,500* Warrants $3.63 - $9.90 1,924,283 1,744,282 Series A - - 165,380 Series C $5.04** 972,222 972,222 Convertible Notes $5.75** 1,151,304 - ------------------------------ 4,905,309 3,739,384 ==============================
*At March 31, 1996 and 1995, shares reserved for options which are still available for grant are 231,750 and 238,000, respectively. **Subject to certain anti-dilution provisions. 6. OWNED AND OPERATED THEATRES The Company retains an ownership interest, ranging from 25% to 50%, in selected Showscan 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), and on the Riverwalk in San Antonio, Texas (March 1996). 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 rentals, royalties, and management fees (if applicable). F-20 57 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 6. OWNED AND OPERATED THEATRES (CONTINUED) Affiliated Ventures The Company and affiliates of certain of its directors have entered into three ventures through March 31, 1996 with respect to owned and operated theatres: a) Universal CityWalk - The Universal 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 Universal 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 Universal 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. 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. 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 UA agreed to be partners in a venture called Showscan/United Artists Theatres Joint Venture (UA Venture). F-21 58 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 6. OWNED AND OPERATED THEATRES (CONTINUED) 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 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, 1996, UA has offered two sites (the UA Venture declined the two sites) and is now in the process of preparing offers for six additional sites to the UA Venture. 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). Other O&O Theatres The Framingham theatre is owned by a partnership which is jointly owned by a wholly-owned subsidiary of the Company and by a subsidiary of General Cinema Corporation. 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. During 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 ($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. F-22 59 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 7. RECEIVABLES FROM AFFILIATED ENTITIES At March 31, 1996 and 1995, the Company is due $981,000 and $846,000, respectively, from CineMania (UK) Limited under the terms of a promissory note dated May 1, 1994. Such amounts are included in other assets in the accompanying consolidated balance sheets. The note provides for (a) interest on the unpaid principal balance to be charged at 3% over LIBOR and (b) principal and interest to be repaid in ten semi-annual payments commencing in November 1995, to the extent that CineMania (UK) Limited has cumulative net profits available to make such payments. If no payments are made due to the lack of available profits, interest will continue to accrue until at such time as cumulative profits exist whereby payments will be made. No payments were made through March 31, 1996, although $196,200 was paid subsequently in May 1996. At March 31, 1996, the Company is due $660,000 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. The UA Venture presently intends to accept an offered theatre site by December 31, 1996. During 1996 and 1995, the Company charged approximately $897,000 and $789,000, respectively, to the owned and operated theatre ventures. Such amounts have either been recognized as film rentals and royalties ($565,000 in 1996 and $314,000 in 1995), or offset against general and administrative expenses ($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 ventures. The ventures owed the Company approximately $318,000 and $465,000 at March 31, 1996 and 1995, respectively, (included in due from affiliated entities) for such changes and for costs paid on behalf of the ventures. F-23 60 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES At March 31, 1996, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $27,138,000 and $7,340,000, respectively. The federal net operating loss carryforwards expire through the year ending 2011. The state net operating loss carryforwards expire through the year ending 2001. These net operating loss carryforwards can be used to offset future taxable income, if any. 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, 1996 and 1995 are as follows (in thousands):
1996 1995 -------------------------------- Deferred tax liabilities: Unbilled receivables on uncompleted equipment contracts $ 1,770 $ 1,806 Other 15 - -------------------------------- Total deferred tax liabilities 1,785 1,806 Deferred tax assets: Customer advances on uncompleted equipment contracts 1,505 1,630 Excess of book over tax depreciation 395 552 Patent amortization 339 374 Other 315 368 Net operating loss carryforward 10,181 9,722 -------------------------------- Total deferred tax assets 12,735 12,646 Valuation allowance for deferred tax asset (10,950) (10,840) -------------------------------- Total deferred taxes $ - $ - ================================
F-24 61 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 9. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS Export revenues by geographic area for each of the three years ended March 31 consisted of:
1996 1995 1994 -------------------------------------------------------- Africa $ 281,000 $ 851,000 $ 85,000 Australasia 2,574,000 1,031,000 115,000 Europe 1,992,000 3,531,000 1,490,000 Far East 5,628,000 4,982,000 2,161,000 Other 173,000 225,000 206,000 -------------------------------------------------------- Total export revenues $ 10,648,000 $ 10,620,000 $ 4,057,000 ========================================================
In 1996, 1995 and 1994, the Company earned revenues from a significant customer of approximately $3,407,000, $3,080,000 and $913,000, 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, 1996 are as follows:
1997 $ 430,000 1998 405,000 1999 396,000 2000 391,000 2001 391,000 Thereafter 881,000 ------------------- $ 2,894,000 ===================
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 $280,000 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 $280,000; such amount is included in other assets in the accompanying consolidated balance sheet. F-25 62 Showscan Entertainment Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) Total rental expense charged to operations for the years ended March 31, 1996, 1995 and 1994 was $389,000, $456,000 and $425,000, respectively. Under the terms of a film production agreement, the Company has guaranteed, for four years beginning in 1996, a minimum amount per year of proceeds to the outside investors in the film project. If revenues, as defined, from the exhibition of the film is 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. 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 motion pictures, or other receipts. F-26 63 SHOWSCAN ENTERTAINMENT INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ---------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F - ---------------------------------------------------------------------------------------------------------------------------------- Balance at Charged to Other Beginning Charged to Accounts - Deductions - Balance at End DESCRIPTION of Year Costs and Expenses Described Describe of Year - ---------------------------------------------------------------------------------------------------------------------------------- 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) $254,000 ======== ======== ========= ==========-- ======== Product warrant liability $213,000 $124,000 $ - $ 150,000(b) $187,000 ======== ======== ========= =========--- ======== Year ended 1994: Allowance for doubtful accounts $323,000 $258,000 $ - $ 298,000(a) $283,000 ======== ======== ========== =========--- ======== Product warrant liability $252,000 $130,000 $ - $ 169,000(b) $213,000 ======== ======== ========== =========--- ========
(a) Represents write-off of uncollectible accounts receivable. (b) Represents actual warranty expenditures. F-27 64 Financial Statements Showscan CityWalk Venture Years ended December 31, 1995 and 1994 with Report of Independent Auditors F-28 65 Report of Independent Auditors The Partners Showscan CityWalk Venture We have audited the accompanying balance sheets of Showscan CityWalk Venture as of December 31, 1995 and 1994, and the related statements of operations, partners' capital, and cash flows for the years then ended. 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, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Ernst & Young LLP Los Angeles, California June 5, 1996 F-29 66 Showscan CityWalk Venture Balance Sheets
December 31 1995 1994 ------------------------------ ASSETS Current assets: Cash $ 74,163 $ 77,356 Due from Showscan CityWalk, Inc. (Note 3) 20,000 20,000 Due from Showscan Entertainment Inc. (Note 3) 26,424 - Prepaid expenses and other assets 7,993 60,640 ------------------------------ Total current assets 128,580 157,996 Property and equipment: Leasehold improvements 557,431 544,262 Operating equipment 868,682 818,682 ------------------------------ 1,426,113 1,362,944 Less accumulated depreciation and amortization (312,360 (161,346) ------------------------------ 1,113,753 1,201,598 Other assets 16,211 16,144 ------------------------------ Total assets $ 1,258,544 $ 1,375,738 ============================== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable and accrued liabilities $ 74,708 $ 132,326 Due to Showscan Entertainment Inc. (Note 3) 21,248 19,025 ------------------------------ Total current liabilities 95,956 151,351 Commitments and contingencies (Note 2) Partners' capital (Note 4) 1,162,588 1,224,387 ------------------------------ $ 1,258,544 $ 1,375,738 ==============================
See accompanying notes. F-30 67 Showscan CityWalk Venture Statements of Operations
Year ended December 31 1995 1994 ----------------------------------- Revenues $ 1,000,198 $ 1,206,961 Cost of revenues, primarily film rental, royalty and management fees (Note 3) 293,708 250,383 ----------------------------------- Gross profit 706,490 956,578 Other costs and expenses: Rent 197,923 180,000 Payroll and related items 180,402 191,151 Marketing and advertising 27,235 294,065 Other general and administrative 238,139 263,496 Depreciation and amortization 151,014 148,939 ----------------------------------- 794,713 1,077,651 ----------------------------------- Net loss $ (88,223) $ (121,073) ===================================
See accompanying notes. F-31 68 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 ===============
See accompanying notes. F-32 69 Showscan CityWalk Venture Statements of Cash Flows
Year ended December 31 1995 1994 ----------------------------------- OPERATING ACTIVITIES Net loss $ (88,223) $ (121,073) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 151,014 148,939 Changes in operating assets and liabilities: Due from Showscan Entertainment Inc. (26,424) - Due from Showscan CityWalk, Inc. - (20,000) Prepaid expenses and other assets 52,580 12,387 Accounts payable and accrued expenses (57,618) 95,287 Due to Showscan Entertainment Inc. 2,223 (171,368) ----------------------------------- Net cash provided by (used in) operating activities 33,552 (55,828) INVESTING ACTIVITIES Purchases of property and equipment (63,169) (2,664) ----------------------------------- Net cash used in investing activities (63,169) (2,664) FINANCING ACTIVITIES Capital contributions by partners 26,424 20,000 ----------------------------------- Net cash provided by financing activities 26,424 20,000 ----------------------------------- Decrease in cash (3,193) (38,492) Cash at beginning of year 77,356 115,848 ----------------------------------- Cash at end of year $ 74,163 $ 77,356 =================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for: Interest $ 1,790 $ 6,849 Income taxes $ - $ -
See accompanying notes. F-33 70 Showscan CityWalk Venture Notes to Financial Statements December 31, 1995 and 1994 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. 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. Leasehold improvements are amortized on a straight-line basis over their estimated useful lives or the term of the leases, 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. 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. F-34 71 Showscan CityWalk Venture Notes to Financial Statements (continued) 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., 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 1994. Future minimum payments, by year and in the aggregate, under the lease at December 31, 1995 are as follows:
1996 $ 185,274 1997 185,274 1998 185,274 1999 185,274 2000 185,274 Thereafter 555,822 ---------- Total minimum lease payments $1,482,192 ==========
3. RELATED PARTY TRANSACTIONS For the years ended December 31, 1995 and 1994, cost of revenues shown in the accompanying statements of operations include $184,500 and $180,250, respectively, of amounts paid or owed to Showscan for film rental, royalty and management fees. At December 31, 1995 and 1994, the Venture owed Showscan $21,248 and $19,025, respectively, related to such fees. Amounts due from Showscan CityWalk, Inc. ($20,000 in 1995 and 1994) and Showscan ($26,424 in 1995) relate to capital contributions due the Venture. Such contributions were made subsequent to December 31, 1995. F-35 72 CINEMANIA (UK) LIMITED Audited Financial Statements Year ended 31 December 1995 F-36 73 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, 1995 and 1994, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. 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 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, 1995 and 1994, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Ernst & Young London England June 11, 1996 F-37 74 CINEMANIA (UK) LIMITED - -------------------------------------------------------------------------------- BALANCE SHEET
December 31 December 31 Notes 1995 1994 Assets Current assets: Cash $ 821,401 $ 479,019 Prepaid expenses and other current assets 187,315 138,311 ----------- ----------- Total current assets 1,008,716 617,330 Property and equipment, net 2 2,925,474 3,160,422 ----------- ----------- Total assets $ 3,934,190 $ 3,777,752 =========== =========== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 58,431 $ 179,750 Accrued expenses and other current liabilities 202,048 268,051 Amounts payable to related party 5 22,483 - Current maturities of notes payable to stockholders 3 633,695 127,969 ----------- ----------- Total current liabilities 916,657 575,770 Notes payable to stockholders 3 1,478,619 1,819,616 ----------- ----------- Total liabilities 2,395,276 2,395,386 ----------- ----------- Stockholders' equity: Common stock , (pound)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 (423,040) (590,103) Currency translation adjustments 70,806 81,321 ----------- ----------- Total stockholders' equity 1,538,914 1,382,366 ----------- ----------- Total liabilities and stockholders' equity $ 3,934,190 $ 3,777,752 =========== ===========
See accompanying notes F-38 75 CINEMANIA (UK) LIMITED - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS
Year ended Year ended December 31 December 31 Note 1995 1994 Revenues $ 2,140,118 $ 507,242 Cost of revenues, primarily film rental, royalty and management fees 5 415,035 157,544 ------------ ---------- Gross profit 1,725,083 349,698 Costs and expenses: Rent 344,551 78,348 Payroll and related items 402,359 63,652 Marketing and advertising 87,188 54,044 Pre-opening - 397,151 Other general and administrative 310,338 205,801 Depreciation 265,959 69,528 ------------ ---------- 1,410,395 868,524 ------------ ---------- Operating profit (loss) 314,688 (518,826) Other income(expense): Interest income 24,193 3,199 Interest expense (171,818) (74,476) ------------ ---------- (147,625) (71,277) ------------ ---------- Net profit (loss) $ 167,063 $ (590,103) ============ ========== Net profit (loss) per common share $ 1,671 $ (5,901) ============ ==========
See accompanying notes F-39 76 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 ====== ===== ========== ========= ======= ==========
See accompanying notes F-40 77 CINEMANIA (UK) LIMITED - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS
Year ended Year ended December 31 December 31 1995 1994 OPERATING ACTIVITIES Net profit (loss) $ 167,063 $ (590,103) Adjustments to reconcile net profit (loss) to net cash provided by (used in) operating activities: Depreciation 265,959 69,528 Changes in operating assets and liabilities: Prepaid expenses and other current assets (50,056) (138,311) Accounts payable (121,319) 179,750 Accrued expenses and other liabilities (62,596) 202,116 Amounts payable to related party 22,483 - Interest payable to stockholders 82,597 47,435 ---------- ------------- Net cash provided by (used in) operating activities 304,131 (229,585) INVESTING ACTIVITY Purchases of property and equipment (55,051) (3,211,450) ---------- ------------- Net cash used in investing activity (55,051) (3,211,450) FINANCING ACTIVITIES Proceeds from issuance of common stock - 148 Capital contributions - 1,891,000 Borrowings from stockholders 96,946 1,947,585 ---------- ------------- Net cash provided by financing activities 96,946 3,838,733 Effect of exchange rate changes on cash (3,644) 81,321 ---------- ------------- Net increase in cash 342,382 479,019 Cash at beginning of year 479,019 - ---------- ------------- Cash at end of year $ 821,401 $ 479,019 ========== ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 730 $ 254 Taxes paid $ - $ -
See accompanying notes F-41 78 CINEMANIA (UK) LIMITED - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION 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. 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. Leasehold property is depreciated on a straight line basis over the 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 (1995 -$1.5526:(pound)1, 1994-$1.5645:(pound)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. 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 the years ended December 31, 1995 and 1994. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principals 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. 2. PROPERTY AND EQUIPMENT
1995 1994 Leasehold property $ 40,056 $ 40,363 Operating equipment 3,205,971 3,180,926 Office furniture and fixtures 14,934 8,661 ------------ ----------- 3,260,961 3,229,950 Less accumulated depreciation 335,487 69,528 ------------ ----------- $ 2,925,474 $ 3,160,422 ============ ===========
F-42 79 CINEMANIA (UK) LIMITED - ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 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% (8.875% at December 31, 1995). The aggregate maturities of long-term debt (including interest of $238,940 at December 31, 1995) are as follows:
1995 1996 $ 633,695 1997 422,463 1998 422,463 1999 422,463 2000 211,230 ---------- $2,112,314 ==========
Included within the $633,695 debt due to mature in 1996 is $211,232 which was due to be paid on November 1,1995. However, due to the lack of available profits, no payment was made. The 1994 notes payable to stockholders figures have been restated as a result of the reclassification of an interest amount of $66,789 from current liabilities to long term liabilities. 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 1996 $ 210,000 1997 240,000 1998 247,500 1999 247,500 2000 247,500 2001 and thereafter 1,980,000 -------------- Total minimum lease payments $ 3,172,500 ==============
F-43 80 CINEMANIA (UK) LIMITED - ------------------------------------------------------------------------------- NOTES TO FINACIAL 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 $228,400 ($151,100 - 1994) of amounts paid to and $22,483 ($nil - 1994) of amounts owed to Showscan for film rental, royalty and management fees. Entities controlled by Mr. Charles Moss and Mr. Thomas Di Benedetto each hold a 25% equity interest in the Company. Mr. Moss and Mr. Di Benedetto each have a greater than 10% stockholding in Showscan. F-44 81 AUDITED FINANCIAL STATEMENTS SHOWSCAN/GENERAL CINEMA VENTURES Period from April 24, 1995 (date of formation) to October 31, 1995 F-45 82 Report of Independent Auditors The Partners Showscan/General Cinema Ventures We have audited the accompanying balance sheet of Showscan/General Cinema Ventures (the Venture) as of October 31, 1995, and the related statements of operations, partners' capital, and cash flows for the period from 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 audit. We conducted our audit 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 audit provides 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/General Cinema Ventures at October 31, 1995, and the results of its operations and its cash flows for the period from April 24, 1995 (date of formation) to October 31, 1995 in conformity with generally accepted accounting principles. Ernst & Young LLP Boston, Massachusetts May 17, 1996 F-46 83 Showscan/General Cinema Ventures Balance Sheet October 31, 1995 ASSETS Current assets: Due from related party (Note 2) $ 34,858 Current portion of foregone rent (Note 2) 110,086 ---------- Total current assets 144,944 Property and equipment: Leasehold improvements 1,011,864 Operating equipment 1,723,422 ---------- 2,735,286 Less accumulated depreciation and amortization (189,378) ---------- 2,545,908 Foregone rent, less current portion, net of accumulated amortization of $42,726 (Note 2) 511,188 ---------- Total assets $3,202,040 ========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable and accrued liabilities $ 49,640 Partners' capital 3,152,400 ---------- Total liabilities and partners' capital $3,202,040 ==========
See accompanying notes. F-47 84 Showscan/General Cinema Ventures Statement of Operations Period from April 24, 1995 (date of formation) to October 31, 1995
Revenues $ 159,651 Cost of revenues, primarily film rental and management fees to related parties (Note 2) 86,664 --------- Gross profit 72,987 Other costs and expenses: Rent 71,500 Payroll and related items 30,892 Marketing and advertising 18,865 Other general and administrative 38,012 Depreciation and amortization 189,378 --------- 348,647 --------- (275,660) Interest income 28,774 --------- Net loss $(246,886) ==========
See accompanying notes. F-48 85 Showscan/General Cinema Ventures Statement of Partners' Capital
Beginning partners' capital contributions effective April 24, 1995 $3,399,286 Net loss (246,886) ----------- Partners' capital at October 31, 1995 $3,152,400 ===========
See accompanying notes. F-49 86 Showscan/General Cinema Ventures Statement of Cash Flows Period from April 24, 1995 (date of formation) to October 31, 1995
OPERATING ACTIVITIES Net loss $ (246,886) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 189,378 Foregone rent, net 42,726 Changes in operating assets and liabilities: Due from related party (34,858) Accounts payable and accrued expenses 49,640 ------------- Net cash used in operating activities 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 Cash at beginning of year 0 ------------- Cash at end of year $ 0 ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for: Interest $ - Income taxes $ - NONCASH ACTIVITY Noncash capital contributions: Equipment $ 1,723,422 Leasehold improvements $ 1,011,864 Foregone rent $ 664,000
See accompanying notes. F-50 87 Showscan/General Cinema Ventures Notes to Financial Statements October 31, 1995 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 simulation attraction 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 to the partners, 50% to Showscan and 50% to General Cinema. Showscan and General Cinema hold equal voting interests in the Venture regardless of capital accounts. The term of the Venture is to continue until the earlier of five years measured from the date of opening the theater, with an option to extend for additional five-year periods, or December 31, 2025. Either party may terminate the agreement any time after the first two years if certain prerequisites, as defined in the Venture Agreement, are met. The partners of the Venture have agreed to make additional capital contributions to the Venture as needed to fund its operations. 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. PROPERTY AND EQUIPMENT Property and equipment have been 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. F-51 88 Showscan/General Cinema Ventures Notes to Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depreciation on operating equipment is recorded on a straight-line basis over the estimated useful lives of the assets of five or ten years. Leasehold improvements are amortized on a straight-line basis over their estimated useful lives or the five-year term of the leases, 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. 2. RELATED-PARTY TRANSACTIONS Cost of revenues shown in the accompanying statement of operations includes $43,332 of amounts paid to Showscan Entertainment Inc. for film rental and $43,332 of amounts paid 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 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 approximately $29,000 for the period ended October 31, 1995. 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 amounted to $71,500. 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. F-52 89 Showscan/General Cinema Ventures Notes to Financial Statements (continued) 2. RELATED-PARTY TRANSACTIONS (CONTINUED) 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-53 90 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: June 28, 1996 SHOWSCAN ENTERTAINMENT INC. By /s/ WILLIAM C. SOADY ------------------------------------- William C. Soady 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 June 28, 1996 - ---------------------------------- William D. Eberle /s/ WILLIAM C. SOADY Director; President; Chief Executive June 28, 1996 - ---------------------------------- Officer (Principal Executive Officer) William C. Soady /s/ CHARLES B. MOSS, JR. Director June 28, 1996 - ---------------------------------- Charles B. Moss, Jr. /s/ THOMAS R. DIBENEDETTO Director June 28, 1996 - ---------------------------------- Thomas R. DiBenedetto /s/ KURT C. HALL Director June 28, 1996 - ---------------------------------- Kurt C. Hall /s/ DENNIS POPE Executive Vice President and June 28, 1996 - ---------------------------------- Chief Financial Officer (Principal Dennis Pope Financial Officer) /s/ GREGORY W. BETZ Vice President and Director of Finance June 28, 1996 - ---------------------------------- (Principal Accounting Officer) Gregory W. Betz
91 EXHIBIT INDEX
EXHIBIT NO. PAGE NO. - ----------- -------- 4.20 Warrant Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack M. Ferraro. 4.21 Registration Rights Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack M. Ferraro. 4.22 Warrant Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack Erlanger. 4.23 Registration Rights Agreement, dated as of September 1, 1995, by and between Showscan Entertainment Inc. and Jack Erlanger. 4.24 Warrant Agreement, dated as of October 3, 1995, by and between Showscan Entertainment Inc. and Intralink Film Graphic Design. 10.33 Operating Agreement, dated as of August 25, 1995, by and between Showscan Attractions Venture and Maloney Development Partnership Ltd.* 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.* 21.1 List of Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule.
_______ * Confidential treatment of this exhibit has been requested and confidential portions have been omitted and filed separately with the Securities and Exchange Commission. EX-4.20 2 WARRANT AGREEMENT, SHOWSCAN & JACK FERRARO 1 EXHIBIT 4.20 WARRANT AGREEMENT BETWEEN SHOWSCAN ENTERTAINMENT INC. and JACK M. FERRARO ______________________________ Dated as of September 1, 1995 ______________________________ 2 WARRANT AGREEMENT This Warrant Agreement, dated as of September 1, 1995 (this "Agreement"), is by and between Showscan Entertainment Inc., a Delaware corporation (the "Company"), and Jack M. Ferraro, an individual ("Holder"). WHEREAS, the Company proposes to issue to Holder, or his designee, common stock purchase warrants, as hereinafter described (the "Warrants"), to purchase up to an aggregate of 100,000 shares of Common Stock, $.001 per share par value (the "Common Stock"), of the Company (the Common Stock issuable on exercise of the Warrants being referred to herein as the "Warrant Shares"), pursuant to a consulting letter agreement dated as of August 1, 1995. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Warrant Certificates. The certificates evidencing the Warrants (the "Warrant Certificates") to be delivered pursuant to this Agreement shall be in registered form only and shall be substantially in the form set forth in Exhibit A attached hereto. SECTION 2. Execution of Warrant Certificates. Warrant Certificates shall be signed on behalf of the Company by its Chairman of the Board or its President or a Vice President and by its Secretary or an Assistant Secretary under its corporate seal. SECTION 3. Registration. The Company shall number and register the Warrant Certificates in a register as they are issued. The Company may deem and treat the registered holder(s) of the Warrant Certificates as the absolute owner(s) thereof (notwithstanding any notation of ownership or other writing thereon made by anyone), for all purposes, and shall not be affected by any notice to the contrary. SECTION 4. Registration of Transfers and Exchanges; Right of Refusal. (a) Registration of Transfers and Exchange. The Company shall from time to time register the transfer of any outstanding Warrant Certificates in a Warrant register to be maintained by the Company upon surrender thereof accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the registered holder or holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney. Upon any such registration of transfer, a new Warrant Certificate shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled and disposed of by the Company. The Warrants shall in no event be transferred in an amount which represents the right to purchase fewer than the lesser of (i) 5,000 shares of Common Stock or (ii) the full number of shares of Common Stock for which the Warrants held by the proposed transferor are then exercisable. 1 3 The Warrant holders agree that prior to any proposed transfer of Warrants or of the Warrant Shares, if such transfer is not made pursuant to an effective Registration Statement under the Securities Act of 1933, as amended (the "Act"), or an opinion of counsel, reasonably satisfactory in form and substance to the Company, that the Warrants or Warrant Shares may be sold publicly without registration under the Act, the Warrant holder will, if requested by the Company, deliver to the Company: (1) an investment covenant reasonably satisfactory to the Company signed by the proposed transferee; (2) an agreement by such transferee to the impression of the restrictive investment legend set forth below on the Warrant or the Warrant Shares; (3) an agreement by such transferee that the Company may place a notation in the stock books of the Company or a "stop transfer order" with any transfer agent or registrar with respect to the Warrant Shares; and (4) an agreement by such transferee to be bound by the provisions of this Section 4 relating to the transfer of such Warrant or Warrant Shares. The Warrant holders agree that each certificate representing Warrant Shares will bear the following legend: "The securities evidenced or constituted hereby have been acquired for the purpose of investment only and have not been registered under the Securities Act of 1933, as amended. Such securities may not be sold, transferred, pledged or hypothecated unless the registration provisions of said Act have been complied with or unless the Company has received an opinion of counsel reasonably satisfactory to the Company that such registration is not required." Warrant Certificates may be exchanged at the option of the holder(s) thereof, when surrendered to the Company at its office for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange shall be canceled and disposed of by the Company. (b) Company's Right of First Refusal. Prior to any proposed transfer of Warrants or of Warrant Shares in a negotiated private sale, Holder will give notice (the "Sale Notice") of such proposed transfer to the Company. The Sale Notice will disclose in reasonable detail the identity of the prospective transferee(s), the number of Warrants or Warrant Shares to be transferred and the terms and conditions of the proposed transfer. The Company may elect to purchase all (but not less than all) the securities to be transferred upon 2 4 the same terms and conditions as those set forth in the Sale Notice by delivering a written notice of such election to Holder within 10 days after the Sale Notice has been given to the Company. Such notice shall contain the time and place for the closing of the transaction, which time shall be within 20 days after the Sale Notice has been given to the Company. If the Company does not elect to purchase all of the securities specified in the Sale Notice, Holder may transfer the securities specified in the Sale Notice, subject to Section 4(a) hereof, at a price and on terms no more favorable to the transferee(s) thereof than specified in the Sale Notice during the 60-day period immediately following the date 10 days after the Sale Notice has been given to the Company. Any Warrants or Warrant Shares not transferred within such 60- day period will be subject to the provisions of this Section 4(b) upon subsequent transfer. SECTION 5. Warrants; Exercise of Warrants. Subject to the terms of this Agreement, each Warrant holder shall have the right, which may be exercised commencing at the opening of business on September 1, 1996 and until 5:00 p.m., Los Angeles time on September 1, 2000, to receive from the Company the number of fully paid and nonassessable Warrant Shares which the holder may at the time be entitled to receive on exercise of such Warrants and payment of the Exercise Price then in effect for such Warrant Shares. Each Warrant not exercised prior to 5:00 p.m., Los Angeles time, on September 1, 2000 shall become void and all rights thereunder and all rights in respect thereof under this agreement shall cease as of such time. No adjustments as to dividends will be made upon exercise of the Warrants. A Warrant may be exercised upon surrender to the Company at its office designated for such purpose (the address of which is set forth in Section 13 hereof) of the certificate or certificates evidencing the Warrants to be exercised with the form of election to purchase on the reverse thereof duly filled in and signed, and upon payment to the Company of the exercise price (the "Exercise Price") which is set forth in the form of Warrant Certificate attached hereto as Exhibit A as adjusted as herein provided, for the number of Warrant Shares in respect of which such Warrants are then exercised. Payment of the aggregate Exercise Price shall be made (i) in cash or by certified or official bank check payable to the order of the Company, or (ii) through the surrender of debt or preferred equity securities of the Company having a principal amount or liquidation preference, as the case may be, equal to the aggregate Exercise Price to be paid (the Company will pay the accrued interest or dividends on such surrendered debt or preferred equity securities in cash at the time of surrender notwithstanding the stated terms thereof). Subject to the provisions of Section 6 hereof, upon such surrender of Warrants and payment of the Exercise Price the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the holder and in such name or names as the Warrant holder may designate, a certificate or certificates for the number of full Warrant Shares issuable upon the exercise of such Warrants together with cash as provided in Section 11; provided, however, that if any consolidation, merger or lease or sale of assets is proposed to be effected by the Company as described in subsection (c) of Section 10 hereof, or a tender 3 5 offer or an exchange offer for shares of Common Stock of the Company shall be made, upon such surrender of Warrants and payment of the Exercise Price as aforesaid, the Company shall, as soon as possible, but in any event not later than two business days thereafter, issue and cause to be delivered the full number of Warrant Shares issuable upon the exercise of such Warrants in the manner described in this sentence together with cash as provided in Section 11. Such certificate or certificates shall be deemed to have been issued and any individual, partnership, corporation, association, joint stock company, trust, joint venture, unincorporated organization or governmental entity or any subdivision thereof (each a "Person") so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date of the surrender of such Warrants and payment of the Exercise Price. The Warrants shall be exercisable, at the election of the holders thereof, either in full or from time to time in part and, in the event that a certificate evidencing Warrants is exercised in respect of fewer than all of the Warrant Shares issuable on such exercise at any time prior to the date of expiration of the Warrants, a new certificate evidencing the remaining Warrant or Warrants will be issued and delivered pursuant to the provisions of this Section and of Section 2 hereof. Warrants shall be exercisable for Warrant Shares only in an amount which is at least equal to the lesser of (i) 5,000 Warrant Shares or (ii) the full number of Warrant Shares for which the Warrants held by the Warrant holder are then exercisable. All Warrant Certificates surrendered upon exercise of Warrants shall be canceled and disposed of by the Company. The Company shall keep copies of this Agreement and any notices given or received hereunder available for inspection by the holders during normal business hours at its office. The Company covenants that all Warrant Shares which may be issued upon exercise of Warrants will, upon issue, be fully paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issue thereof. SECTION 6. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant or to a Person outside of the United States, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 7. Mutilated or Missing Warrant Certificates. In case any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant 4 6 Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and an indemnity, if requested, also reasonably satisfactory to it. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. SECTION 8. Reservation of Warrant Shares. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of all outstanding Warrants. SECTION 9. Obtaining Stock Exchange Listings. The Company will use its best efforts to obtain approval for the listing, upon official notice of issuance, of the Warrant Shares on the principal securities exchanges and markets within the United States of America, if any, on which other shares of Common Stock are then listed. SECTION 10. Adjustments of Exercise Price and Number of Warrant Shares. The Exercise Price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Exercise Price pursuant to subsection (a), (b), (d) or (e) of this Section 10, the Warrant holder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of such Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) Adjustment for Certain Special Dividends. In case the Company shall declare a dividend upon the Common Stock payable otherwise than out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, and otherwise than in Common Stock or securities convertible into Common Stock, the Exercise Price in effect immediately prior to the declaration of such dividend shall be reduced by an amount equal, in the case of a dividend in cash, to the amount per share of the Common Stock so declared as payable otherwise than out of earnings or earned surplus or, in the case of any other dividend, to the fair value per share of the Common Stock or the property so declared as payable otherwise than out of earnings or earned surplus, as determined, reasonably and in good faith, by the board of directors of the Company. For the purposes of the foregoing a dividend other than in cash shall be considered payable out of earnings or earned surplus (other than revaluation or paid-in surplus) only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend as determined, in good faith and in the exercise of reasonable business judgment, by the board of directors of the Company. Such 5 7 reductions shall take effect as of the record date for such dividend or, if a record is not taken, on the date as of which the holders of Common Stock of record entitled to such dividend are determined. (b) Subdivision or Combination of Stock. In case the Company shall at any time subdivide the outstanding shares of Common Stock into a greater number of shares, whether through a stock split, stock dividend or otherwise, the number of shares of Common Stock for which the Warrants are exercisable shall be proportionately increased and the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the number of shares of Common Stock for which the Warrants are exercisable shall be proportionately reduced and the Exercise Price in effect immediately prior to such combination shall be proportionately increased. (c) Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, Etc. In case the Company (i) consolidates with or merges into any other Person and is not the continuing or surviving corporation of such consolidation or merger, or (ii) permits any other Person to consolidate with or merge into the Company and the Company is the continuing or surviving corporation but in connection with such consolidation or merger, the Common Stock is changed into or exchanged for stock or other securities of any other corporation or cash or any other assets, or (iii) transfers all or substantially all of its properties and assets to any other Person, or (iv) effects a capital reorganization or reclassification of the capital stock of the Company in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or assets with respect to or in exchange for Common Stock (each of the foregoing events in clauses (i) through (iv) being a "Fundamental Change"), then in each such case proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this subsection (c), the Warrant holders, upon the exercise of the Warrants at any time after the consummation of such Fundamental Change, shall be entitled to receive (at the aggregate Exercise Price in effect for all shares of Common Stock issuable upon such exercise immediately prior to such consummation as adjusted to the time of such transaction), in lieu of shares of Common Stock issuable upon such exercise prior to such consummation, the stock and other securities, cash and assets to which such Warrant holders would have been entitled upon such consummation if such Warrant holders had exercised such Warrants immediately prior thereto (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in this Section 10). In the case of any Fundamental Change the Company shall require the successor or acquiring corporation to assume the obligation to perform each and every covenant and condition of this Agreement to be performed and observed by the Company and all liabilities and obligations of the Company hereunder. (d) Rights, Options, Etc. In case the Company shall issue rights, options, warrants or convertible securities to all or substantially all holders of its Common Stock, without any charge to such holders, entitling them to subscribe for or purchase 6 8 Common Stock at a price per share which is lower at the record date mentioned below than 95% of the then-Current Market Price (as defined below), the Exercise Price in effect immediately prior to such issuance shall be adjusted by multiplying such Exercise Price by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of shares which the aggregate offering price (i.e., the consideration required to be paid, if any, in connection with the exercise of any such rights) of the total number of shares offered would purchase at such Current Market Price and of which the denominator shall be the number of shares of Common stock outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made whenever such rights, options, warrants or convertible securities are issued, and shall become effective immediately and retroactively to the record date for the determination of stockholders entitled to receive such rights, options, warrants or convertible securities. To the extent any of such rights, options, warrants or convertible securities shall lapse, without the exercise thereof, then the Exercise Price shall thereupon be readjusted as though such rights, options, warrants or convertible securities were never issued. (e) Adjustment of Price upon Issuance of Common Stock. If and whenever after the date hereof the Company shall issue or sell any shares of Common Stock for a consideration per share less than 95% of the Current Market Price at the time of such issue or sale, then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest cent) determined by multiplying the Exercise Price in effect immediately prior to such time of such issue or sale by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Current Market Price immediately prior to such issue or sale plus (B) the consideration received by the Company upon such issue or sale, and the denominator of which shall be the product of (C) the total number of shares of Common Stock outstanding immediately after such issue or sale, multiplied by (D) the Current Market Price immediately prior to such issue or sale. No adjustment of the Exercise Price, however, shall be made in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time of, and together with, the next subsequent adjustment which together with any adjustments so carried forward shall amount to $.01 per share or more. For purposes of this subsection (e) of this section, the following clauses shall also be applicable: (i) Issuance of Rights or Options. If at any time after the Effective Date the Company grants (whether directly or by assumption in a merger or otherwise) any rights (other than the Warrants) to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or other securities convertible into or 7 9 exchangeable for Common Stock (such convertible or exchangeable securities being called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined as provided below) is less than 95% of the Current Market Price determined as of the date of granting such rights or options, as the case may be, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share. Except as provided in clause (iii) of this subsection, no further adjustments of the Exercise Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. For the purposes of this clause (i), the price per share for which Common Stock is issuable upon the exercise of any such rights or options or upon conversion or exchange of any such Convertible Securities shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, or in the case of Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon their conversion or exchange by (B) the total number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options. (ii) Issuance of Convertible Securities. If the Company after the Effective Date issues (whether directly or by assumption in a merger or otherwise) or sells any Convertible Securities (other than pursuant to right or options for which an adjustment to the Exercise Price has been made pursuant to Section 10(e)(i)), whether or not the rights to exchange or convert under such securities are immediately exercisable, and the price per share for which Common Stock is issuable upon conversion or exchange of such Convertible Securities (determined as provided below) is less than 95% of the Current Market Price determined as of the date of such issue or sale of such Convertible Securities, as the case may be, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (A) except as provided in clause (iii) of this subsection no further adjustments of the Exercise Price shall be made upon the actual issue of such Common 8 10 Stock upon conversion or exchange of such Convertible Securities, and (B) if any such issue or sale of Convertible Securities occurs for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this subsection (e), no further adjustment of the Exercise Price shall be made by reason of such issue or sale. For the purpose of this clause (ii), the price per share for which Common Stock is issuable upon conversion or exchange of Convertible Securities shall be determined by dividing (1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any rights or options referred to in clause (i) above, or the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or (ii) above, or the rate at which any Convertible Securities referred to in clause (i) or (ii) above are convertible into or exchangeable for Common Stock, changes (other than under or by reason of provisions designed to protect against dilution), then the Exercise Price in effect at the time of such event shall forthwith be readjusted to the Exercise Price which would have been in effect at such time had such rights, options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold, and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the Exercise Price then in effect hereunder shall forthwith be increased to the Exercise Price which would have been in effect at the time of such expiration or termination had such right, option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such right or option referred to in clause (i) above or the rate at which any Convertible Securities referred to in clause (i) or (ii) above are convertible into or exchangeable for Common Stock shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the Exercise Price then in effect hereunder shall forthwith be adjusted to such amount as would have obtained had such right, option or Convertible Security never been issued as to such Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as aforesaid, but only if as a result of such adjustment the Exercise Price then in effect hereunder is thereby decreased. (iv) Consideration for Stock. If any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or 9 11 Convertible Securities are issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection with such issuance or sale. If any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair market value of such consideration as determined, in good faith and in the exercise of reasonable business judgement, by the board of directors of the Company, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection with such issuance or sale. If any shares of Common Stock or Convertible Securities or any rights or options to purchase such shares of Common Stock or Convertible Securities are issued in connection with any merger or consolidation in which the Company is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation), the amount of consideration for such shares or rights or options shall be deemed to be the fair market value as determined, in good faith and in the exercise of reasonable business judgment, by the board of directors of the Company of such portion of the assets and business of the non-surviving corporation as the board of directors determines, in good faith and in the exercise of reasonable business judgment, to be attributable to such shares of Common Stock, Convertible Securities, rights or options, as the case may be. (v) Determination of Current Market Price under Certain Circumstances. Anything herein to the contrary notwithstanding, in determining for any purpose hereunder whether in consideration received by the Company is less than the Current Market Price, the Current Market Price shall be determined as of the date the Company and the other party to the transaction agree in writing on the consideration to be received by the Company for the Common Stock or Convertible Securities rather than on the date of payment of such consideration. (vi) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the Company shall not be required to make any adjustment pursuant to this Section 10(e), either (A) if an adjustment was made pursuant to the provisions of Sections 10(a), (b), (c) or (d) upon such issuance, or (B) with respect to (1) the exercise of one or more of the Warrants or any other options, warrants or convertible securities (including without limitation the Series C Convertible Preferred Stock, the Series A Convertible Preferred Stock and the 8% Convertible Notes due September 1, 1999) which have been issued and are outstanding as of the Effective Date, or (2) the issuance to Holder of any Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock (or the exercise or conversion thereof), for 10 12 consideration below the Current Market Price, or (3) the declaration or payment of dividends on the Series C Preferred Stock in the form of shares of Series C Preferred Stock, or (4) the issuance of Common Stock, or the issuance or exercise of options, rights or warrants therefor, in connection with employee benefit plans, employment or consultant agreements or similar transactions, and pursuant to contracts entered into by the Company prior to the Effective Date. (f) Other Equitable Adjustments. If any event occurs as to which the other provisions of this Section 10 are not strictly applicable (or if strictly applicable would not fairly protect the rights of the Warrant holders in accordance with the basic intent and principles of such provisions) but, in the reasonable opinion of the Company's board of directors, an adjustment should be made to fairly protect the rights of the Warrant holders in accordance with the basic intent and principles of such provisions, then the Company shall appoint a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing, which shall give its opinion upon the adjustment, if any, to be made to protect the Warrant holders against dilution on a basis consistent with the basic intent and principles established in the other provisions of this Section 10. Upon receipt of such opinion, the Company shall forthwith make the adjustments, if any, described therein. (g) Notice of Adjustment. Upon any adjustment of the Exercise Price, then and in each such case the Company shall promptly deliver a notice to the Warrant holders, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of each Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (h) Other Notices. In case at any time: (i) the Company shall declare any cash dividend on its Common Stock; (ii) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (iii) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (iv) the Company shall authorize the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than cash dividends or cash distributions payable out of earnings or earned surplus or dividends payable in Common Stock); 11 13 (v) there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation (other than a subsidiary of the Company in which the Company is the surviving or continuing corporation and no change occurs in the Company's Common Stock), or sale of all or substantially all of its assets to, another Person; (vi) there shall be a voluntary or involuntary dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, or winding up of the Company; or (vii) the Company proposes to take any other action or an event occurs which would require an adjustment of the Exercise Price pursuant to this Section 10; then, in any one or more of said cases, the Company shall give written notice, addressed to the Warrant holders at their addresses as shown on the books of the Company, of (1) the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (2) the date (or, if not then known, a reasonable approximation thereof by the Company) on which such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up or other action, as the case may be, shall take place. Such notice shall also specify (or, if not then known, reasonably approximate) the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up, or other action, as the case may be. Such written notice shall be given at least ten days prior to the action in question and not less than ten days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. Notwithstanding any other provision of this Section 10(h), the Company shall not be required to give any notice to Warrant holders pursuant to this Section 10(h) if the giving of such notice would violate applicable federal or state securities laws or the Company's obligations thereunder. (i) Adjustments below Par Value. Before taking any action which would cause an adjustment pursuant to this Section 10 to reduce the Exercise Price below the then par value (if any) of the Warrant Shares, the Company will take any corporate action which may, in the opinion of its counsel (which may be counsel employed by the Company), be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. SECTION 11. Fractional Interests. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so 12 14 presented. If any fraction of a Warrant Share would, except for the provisions of this Section 11, be issuable on the exercise of any Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the fair market value of such fractional share. SECTION 12. No Stockholder Rights. Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the holders thereof the right to vote or to consent or to receive notice as stockholders in respect of the meetings of stockholders or the election of Directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. SECTION 13. Notices to Company and Warrant Holder. All notices, demands or other communications to any party under this Agreement shall be in writing Including facsimile transmission); shall be sent only by facsimile, by first class United States mail, by nationally recognized courier service, or by personal delivery; and shall be given, if to the Company to: Showscan Entertainment Inc. 3939 Landmark Street Culver City, California 90232-2315 Attention: W. Tucker Lemon, Vice President, General Counsel and Secretary Fax: (310) 280-0476 and with a copy to: Latham & Watkins 633 W. 5th Street, Suite 4000 Los Angeles, California 90071 Attention: John R. Light, Esq. Fax: (213) 891-8763 if to Holder, to: Mr. Jack M. Ferraro 430 River Road Scarborough, New York The Company or the Holder by notice to the other pursuant to this Section 13 may designate additional or different addresses for subsequent notices or communications. SECTION 14. Supplements and Amendments. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Warrant Certificates in order to cure any ambiguity or to correct or supplement any provision contained 13 15 herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company may deem necessary or desirable and which shall not in any way adversely affect the interests of the holders of Warrant Certificates. SECTION 15. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. SECTION 16. Termination. This Agreement shall terminate at 5:00 p.m., Los Angeles time on September 1, 2000. Notwithstanding the foregoing, this Agreement will terminate on any earlier date if all Warrants have been exercised. SECTION 17. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the internal laws of said State. SECTION 19. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company and the registered holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company and the registered holders of the Warrant Certificates. SECTION 20. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. [Signature Page Follows] 14 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. SHOWSCAN ENTERTAINMENT INC. By /s/ DENNIS POPE ----------------------------------- Title: Executive Vice President [Seal] Attest: /s/ W. TUCKER LEMON ------------------------ Title: By /s/ JACK M. FERRARO ---------------------------------- Jack M. Ferraro 15 17 EXHIBIT A [Form of Warrant Certificate] [Face] THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. EXERCISABLE ON OR AFTER SEPTEMBER 1, 1996 AND ON OR BEFORE ON OR BEFORE SEPTEMBER 1, 2000 100,000 Warrants Warrant Certificate SHOWSCAN ENTERTAINMENT INC. This Warrant Certificate certifies that Jack M. Ferraro, or registered assigns, is the registered holder of Warrants expiring September 1, 2000 (the "Warrants") to purchase Common Stock, par value $.001 per share (the "Common Stock"), of Showscan Entertainment Inc., a Delaware corporation (the "Company"). Each Warrant entitles the holder upon exercise to receive from the Company on or before 5:00 p.m. Los Angeles Time on September 1, 2000, one fully paid and nonassessable share of Common Stock (a "Warrant Share") at the initial exercise price (the "Exercise Price") of $5.75 payable in lawful money of the United States of America upon surrender of this Warrant Certificate and payment of the Exercise Price at the office of the Company designated for such purpose, but only subject to the conditions set forth herein and in the Warrant Agreement referred to on the reverse hereof. No Warrant may be exercised after 5:00 p.m., Los Angeles Time on September 1, 2000 and to the extent not exercised by such time such Warrants shall become void. Reference is hereby made to the further provisions of this Warrant Certificate set forth on the reverse hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this place. A-1 18 This Warrant Certificate shall not be valid unless countersigned by the Company, as such term is used in the Warrant Agreement. IN WITNESS WHEREOF, Showscan Entertainment Inc. has caused this Warrant Certificate to be signed by its President and by its Secretary and has caused its corporate seal to be affixed hereunto or imprinted hereon. Dated: September 1, 1995 SHOWSCAN ENTERTAINMENT INC. By _____________________________ President By _____________________________ Secretary A-2 19 [Form of Warrant Certificate] [Reverse] The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring September 1, 2000 entitling the holder on exercise to receive shares of Common Stock, par value $.001 per share, of the Company (the "Common Stock"), and are issued or to be issued pursuant to a Warrant Agreement dated as of September 1, 1995 (the "Warrant Agreement"), duly executed and delivered by the Company, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. A copy of the Warrant Agreement may be obtained by the holder hereof upon written request to the Company. Warrants may be exercised at any time on or after September 1, 1996 and on or before September 1, 2000. The holder of Warrants evidenced by this Warrant Certificate may exercise them by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the Exercise Price in cash at the office of the Company designated for such purpose. In the event that upon any exercise of Warrants evidenced hereby the number of Warrants exercised shall be less than the total number of Warrants evidenced hereby, there shall be issued to the holder hereof or his assignee a new Warrant Certificate evidencing the number of Warrants not exercised. No adjustment shall be made for any dividends on any Common Stock issuable upon exercise of this Warrant. The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price set forth on the face hereof may, subject to certain conditions, be adjusted. If the Exercise Price is adjusted, the Warrant Agreement provides that the number of shares of Common Stock issuable upon the exercise of each Warrant shall be adjusted. No fractions of a share of Common Stock will be issued upon the exercise of any Warrant, but the Company will pay the cash value thereof determined as provided in the Warrant Agreement. The holders of the Warrants are entitled to certain registration rights with respect to the Common Stock purchasable upon exercise thereof. Said registration rights are set forth in full in a Registration Rights Agreement dated as of September 1, 1995, between the Company and Jack M. Ferraro. A copy of the Registration Rights Agreement may be obtained by the holder hereof upon written request to the Company. A-3 20 Warrant Certificates, when surrendered at the office of the Company by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. Upon due presentation for registration of transfer of this Warrant Certificate at the office of the Company a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company may deem and treat the registered holder(s) thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. Neither the Warrants nor this Warrant Certificate entitles any holder hereof to any rights of a stockholder of the Company. A-4 21 [Form of Election to Purchase] (To Be Executed Upon Exercise Of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to receive __________ shares of Common Stock and herewith tenders payment for such shares to the order of Showscan Entertainment Inc. in the amount of $______ in accordance with the terms hereof. The undersigned requests that a certificate for such shares be registered in the name of ________________, whose address is _______________________________ and that such shares be delivered to ________________ whose address is ___________ ______________________. If said number of shares is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the remaining balance of such shares be registered in the name of ______________, whose address is _________________________, and that such Warrant Certificate be delivered to _________________, whose address is __________________. Signature: Date: Signature: A-5 EX-4.21 3 REG. RIGHTS AGREEMENT, SHOWSCAN & FERRARO 1 EXHIBIT 4.21 SHOWSCAN ENTERTAINMENT INC. ____________________ REGISTRATION RIGHTS AGREEMENT Dated as of September 1, 1995 2 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of September 1, 1995, between Showscan Entertainment Inc., a Delaware corporation (the "Company"), and Jack M. Ferraro, an individual ("Investor"), and is made pursuant to that certain Warrant Agreement dated the same date as this Agreement between the Company and the Investor (the "Warrant Agreement"). The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following capitalized terms shall have the following meanings: Board: The Board of Directors of the Company. Claim: Any loss, claim, damages, liability or expense (including the reasonable costs of investigation and legal fees and expenses). Common Stock: The common stock, par value $.001 per share, of the Company. Demand Registration: A registration pursuant to Section 2 hereof. Exchange Act: The Securities Exchange Act of 1934, as from time to time amended. Holder: The beneficial owner of a security. For all purposes of this Agreement, the Company shall be entitled to treat the record owner of a security as the beneficial owner of such security unless the Company has been given written notice of the existence and identity of a different beneficial owner. Indemnified Holder: Any Holder of Registrable Securities, any officer, director, employee or agent of any such Holder and any Person who controls any such Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act. Misstatement: An untrue statement of a material fact or an omission to state a material fact required to be stated in a Registration Statement or Prospectus or necessary to make the statements in a Registration Statement, Prospectus or preliminary prospectus not misleading. 1 3 Person: A natural person, partnership, corporation, business trust, association, joint venture or other entity or a government or agency or political subdivision thereof. Piggyback Registration: A registration pursuant to Section 3 hereof. Prospectus: The prospectus included in any Registration Statement, as supplemented by any and all prospectus supplements and as amended by any and all post-effective amendments and including all material incorporated by reference in such prospectus. Registration: A Demand Registration or a Piggyback Registration. Registration Expenses: The out-of-pocket expenses of a Registration, including: (1) all registration and filing fees (including fees with respect to filings required to be made with the National Association of Securities Dealers); (2) fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determinations of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate); (3) printing, messenger, telephone and delivery expenses; (4) fees and disbursements of counsel for the Company and counsel for the underwriters; (5) fees and disbursements of all independent certified public accountants of the Company incurred in connection with such Registration (including the expenses of any special audit and "cold comfort" letters incident to such registration); and (6) fees and disbursements of underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities); and (7) fees and expenses of any other Persons retained by the Company. 2 4 Registrable Securities: The Warrant Shares; provided, however, as to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have (x) been registered under the Securities Act and disposed of in accordance with the registration statement covering them, (y) become eligible for sale pursuant to Rule 144 or Rule 144A (or any similar provision then in force) under the Securities Act, or (z) in the opinion of counsel to the Company they may be freely transferred (without volume or other limitations) without registration or qualification under the Securities Act or any similar state securities laws. Whenever any particular securities cease to be Registrable Securities, the holder of such securities will be entitled to receive from the Company, without expense, new securities of like tenor not bearing a Securities Act legend of the character set forth in Section 4 of the Warrant Agreement. Registration Statement: Any registration statement which covers Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus included in such registration statement, amendments (including post-effective amendments) and supplements to such registration statement, and all exhibits to and all material incorporated by reference in such registration statement. Securities Act: The Securities Act of 1933, as from time to time amended. SEC: The Securities and Exchange Commission. underwritten registration or underwritten offering: A registration in which securities of the Company are sold to an underwriter for distribution to the public. Warrants: The warrants, each to purchase one share of Common Stock, issued and sold pursuant to the Warrant Agreement. Warrant Shares: (a) the shares of Common Stock issued or issuable upon conversion of the Warrants, and (b) any securities issued or issuable with respect to such Common Stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or reorganization. 2. Demand Registration (a) Timing of Demand Registration The Holders of all of the shares of Registrable Securities then outstanding may request that the Company file a registration statement under the Securities Act covering the shares of Registrable Securities that are the subject of such request at any time after the thirty (30) month anniversary of the date of this Agreement. 3 5 If the Company is requested to effect a Demand Registration and the Company furnishes to the Holders of Registrable Securities requesting such registration a copy of a resolution of the Board certified by the Secretary of the Company stating that in the good faith judgment of the Board (i) it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed on or before the date such filing would otherwise be required hereunder, then the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request for such registration from the Holder or Holders of Registrable Securities requesting such registration; provided that during such time the Company may not file a registration statement for securities to be issued and sold for its own account or that of anyone other than the Holder or Holders of Registrable Securities requesting such registration, or (ii) upon advice of its counsel, it has determined that such filing or registration would result in the integration of the sale of the Registrable Securities with a prior sale of securities by the Company in a private or limited offering such that registration of the securities sold in the prior offering would be required by applicable federal securities laws, then the Company shall have the right to defer such filing for a period of not more than 180 days after receipt of the request for such registration. The Company shall have no obligation to effect any Demand Registration which would necessitate an audit of the Company's financial statements for any period as to which the Company would not otherwise have been required to conduct such an audit under the Securities Exchange Act of 1934, or earlier than any date by which the Company otherwise would have been required to have filed such audited financial statements under the Securities Exchange Act of 1934. (b) Number of Demand Registrations The Company shall be obligated to prepare, file and cause to become effective pursuant to this Section 2 no more than one (1) Registration Statement. The Holders of Registrable Securities shall lose their right to a Demand Registration if any or all of them shall at any time participate in a Piggyback Registration. (c) Required Thresholds The Company shall not be obligated to prepare, file and cause to become effective pursuant to this Section 2 a Registration Statement unless all of the Registrable Securities are requested to be included in the Registration Statement. (d) Underwriter's Cutback If the public offering of Registrable Securities is to be underwritten and, in the good faith judgment of the managing underwriter, the inclusion of all the Registrable Securities requested to be registered hereunder would interfere with the successful marketing of a smaller number of such shares of Registrable Securities, the number of shares of Registrable Securities to be included shall be reduced to such smaller number with the participation in such offering to be pro rata among the Holders of Registrable Securities 4 6 requesting such registration, based upon the number of shares of Registrable Securities owned by such Holders. Any shares that are thereby excluded from the offering shall be withheld from the market by the Holders thereof in accordance with Section 4 hereof. The Company and other Holders of securities of the Company may include such securities in any Demand Registration if, but only if, the managing underwriter concludes that such inclusion will not interfere with the successful marketing of all of the Registrable Securities. (e) Managing Underwriter The managing underwriter or underwriters of any underwritten public offering covered by a Demand Registration shall be selected by the holders of all of the shares of Registrable Securities that initiate such registration, subject to the approval of the Board, which shall not be unreasonably withheld. 3. Piggyback Registrations (a) Participation Each time the Company decides to file a registration statement under the Securities Act covering the offer and sale by it or any of its security holders of any of its securities for money, other than (i) on Forms S-4, S-8, S-20 or any successor or similar forms, or (ii) by a registration which is incident to any offering of the Company's securities pursuant to a merger, combination of interest, recapitalization, consolidation or other reorganization, or in connection with any employee benefit plan, the Company shall give written notice thereof to all Holders of Registrable Securities. Upon the written request of Investor or any subsequent Holder of Registrable Securities made within 20 days after receipt of any such notice (which request will specify the Registrable Securities intended to be disposed of), the Company will, subject to the terms of this Agreement and subject to the full cooperation by Investor or any Holder of Registrable Securities in connection with any such registration, use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register (which in no event shall be less than 50,000 shares in the aggregate and 10,000 shares per selling Holder of Registrable Securities (such number to adjust equitably in the future to account for any stock split, stock combination or similar event)). If the registration statement is to cover an underwritten offering, such Registrable Securities shall be included in the underwriting on the same terms and conditions (including, without limitation, underwriting discounts, commissions and fees) as the securities otherwise being sold through the underwriters. Investor's and any subsequent Holders' rights under this Section 2 shall expire on the seventh anniversary of the date of this Agreement. 5 7 (b) Underwriter's Cutback If in the good faith judgment of the managing underwriter of such offering the inclusion of all of the shares of Registrable Securities and any other Common Stock requested to be registered would interfere with the successful marketing of a smaller number of such shares, then the number of shares of Registrable Securities and other Common Stock to be included in the offering (except for shares to be issued by the Company in an offering initiated by the Company) shall be reduced to such smaller number, provided that such reduction is pro rata with reductions that shall be imposed on any other shares of Common Stock requested to be included. (c) Company Control The Company may decline to file a Registration Statement after giving notice to any Holder pursuant to Section 2(a) above, or withdraw a Registration Statement after filing and after such notice, but prior to the effectiveness thereof, provided that the Company shall promptly notify each Holder in writing of any such action and provided further that the Company shall bear all reasonable expenses incurred by such Holder or otherwise in connection with such withdrawn Registration Statement. 4. Hold-Back Agreements Upon the written request of the managing underwriter of any underwritten offering of the Company's securities, or if reasonably requested by the Company in the case of a registered offering which in not underwritten, a Holder of Registrable Securities shall not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in such registration) without the prior written consent of such managing underwriter or the Company, as the case may be, for a period (not to exceed 30 days before the effective date and 90 days thereafter) that such managing underwriter or the Company, as the case may be, requires; provided that each of the officers and directors of the Company who are stockholders of the Company shall be subject to similar agreements (other than with respect to options granted to officers and directors of the Company under benefit plans approved by the stockholders of the Company) covering at least the same period. 5. Registration Procedures If and whenever the Company is required to register Registrable Securities in a Registration, the Company will use its reasonable best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended plan of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC as soon as practicable a Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration 6 8 Statement to become effective and remain effective until the Registrable Securities covered by such Registration Statement have been sold; provided that the Company shall not be required to maintain the effectiveness of any Registration Statement not covering an underwritten public offering for more than 90 days after such registration statement becomes effective; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement, and such supplements to the Prospectus, as may be required by the rules, regulations or instructions applicable to the registration form used by the Company or by the Securities Act or rules and regulations thereunder to keep the Registration Statement effective until all Registrable Securities covered by such Registration Statement are sold in accordance with the intended plan of distribution set forth in such Registration Statement or supplement to the Prospectus or for such shorter period of time during which such Registration Statement must be kept effective by the terms of this Agreement; (c) promptly notify the selling Holders of Registrable Securities and the managing underwriter, if any, and (if requested by any such Person) confirm such advice in writing, (1) when the Prospectus or any supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, and (5) of the existence of any fact which results in the Registration Statement, the Prospectus or any document incorporated therein by reference containing a Misstatement (and every selling Holder of Registrable Securities agrees to promptly advise the Company at any time that it learns of the existence of such a fact); (d) use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible time; (e) furnish to each selling Holder of Registrable Securities and the managing underwriter, without charge, at least one conformed copy of the Registration Statement and any post-effective amendments thereto, including financial statements and schedules, all 7 9 documents incorporated therein by reference and all exhibits (including those incorporated by reference); (f) deliver to each selling Holder of Registrable Securities and the underwriters, if any, without charge, as many copies of each Prospectus (and each preliminary prospectus) as such Persons may reasonably request (the Company hereby consenting to the use of each such Prospectus (or preliminary prospectus) by each selling Holder of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus (or preliminary prospectus); (g) Use its best efforts to register or qualify the Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as such selling Holders or underwriters may reasonably request in writing; provided that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; (h) use its reasonable best efforts to cause the Registrable Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (i) if the Registration Statement or the Prospectus contains a Misstatement, prepare a supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain a Misstatement; (j) cause all Registrable Securities covered by the Registration Statement to be listed in the Nasdaq National Market, if requested by the Holders of a majority of such Registrable Securities or the managing underwriter, if any; With respect to any registration statement contemplated by Section 3, each selling Holder of Registrable Securities shall provide such information with respect to it, and its intended method of distribution for inclusion in any such registration statement, as the Company shall reasonably request from time to time in writing. 6. Registration Expenses The Registration Expenses of all Registrations shall be borne by the Company. 8 10 7. Indemnification (a) Indemnification by Company The Company agrees to indemnify and hold harmless each Indemnified Holder from and against all Claims arising out of or based upon any Misstatement or alleged Misstatement, except insofar as such Misstatement or alleged Misstatement was based upon information furnished to the Company by such Indemnified Holder or the underwriter expressly for use in the document containing such Misstatement or alleged Misstatement. The foregoing notwithstanding, the Company shall not be liable to the extent that any such Claim arises out of or is based upon a Misstatement or alleged Misstatement made in any preliminary prospectus if (i) such Indemnified Holder failed to send or deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale of Registrable Securities giving rise to such Claim and (ii) the Prospectus would have corrected such untrue statement or omission. In addition, the Company shall not be liable to the extent that any such Claim arises out of or is based upon a Misstatement or alleged Misstatement in a Prospectus, (x) if such Misstatement or alleged Misstatement is corrected in an amendment or supplement to such Prospectus and (y) having previously been furnished by or on behalf of the Company with copies of the Prospectus as so amended or supplemented, such Indemnified Holder thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale to the person who purchased a Registrable Security from such Indemnified Holder and who is asserting such Claim. The Company shall also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in a distribution covered by a Registration Statement, their officers and directors and each Person who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the Indemnified Holders of Registrable Securities. (b) Indemnification Procedures If any action or proceeding (including any governmental investigation or inquiry) shall be brought or asserted against an Indemnified Holder in respect of which indemnity may be sought from the Company, such Indemnified Holder shall promptly notify the Company in writing, and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Holder and the payment of all expenses. Such Indemnified Holder shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such separate 9 11 counsel shall be the expense of such Indemnified Holder unless (i) the Company has agreed to pay such fees and expenses or (ii) the Company shall have failed to assume the defense of such action or proceeding or has failed to employ counsel reasonably satisfactory to such Indemnified Holder in any such action or proceeding. If such Indemnified Holder notifies the Company in writing that it elects to employ separate counsel at the expense of the Company as permitted by the provisions of the preceding paragraph, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Holder. The foregoing notwithstanding, the Company shall not be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for such Indemnified Holder and any other Indemnified Holders (which firm shall be designated in writing by such Indemnified Holders) in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances. The Company shall not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Company agrees to indemnify and hold harmless such Indemnified Holders from and against any loss or liability by reason of such settlement or judgment. (c) Indemnification by Holder of Registrable Securities. Each Holder of Registrable Securities agrees to indemnify and hold harmless the Company, its directors and officers and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Holder, but only with respect to information relating to such Holder furnished in writing by such Holder expressly for use in any Registration Statement, Prospectus or preliminary prospectus. In case any action or proceeding shall be brought against the Company or its directors or officers or any such controlling person, in respect of which indemnity may be sought against a Holder of Registrable Securities, such Holder shall have the rights and duties given the Company and the Company or its directors or officers or such controlling person shall have the rights and duties given to each Holder by Sections 6(a) and 6(b) above. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. 10 12 (d) Contribution If the indemnification provided for in this Section 7 is unavailable to an indemnified party under Section 7(a) or Section 7(c) above (other than by reason of exceptions provided in those Sections) in respect of any Claims referred to in such Sections, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Claims in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the Indemnified Holder on the other in connection with the statements or omissions which resulted in such Claims as well as any other relevant equitable considerations. The amount paid or payable by a party as a result of the Claims referred to above shall be deemed to include, subject to the limitations set forth in Section 7(b), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The relative fault of the Company on the one hand and of the Indemnified Holder on the other shall be determined by reference to, among other things, whether the Misstatement or alleged Misstatement relates to information supplied by the Company or by the Indemnified Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Misstatement or alleged Misstatement. The Company and each Holder of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. Requirements for Participation in Underwritten Offerings No Person may participate in any underwritten offering pursuant to a Registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) cooperates fully in connection with the offering, including without limitation the completion and execution of all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 11 13 9. Suspension of Sales Upon receipt of written notice from the Company that a Registration Statement or Prospectus contains a Misstatement, each Holder of Registrable Securities shall forthwith discontinue disposition of Registrable Securities until such Holder has received copies of the supplemented or amended Prospectus required by Section 5(i) hereof, or until such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the 90-day period referred to in Section 5(a) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement either has received the copies of the supplemented or amended prospectus contemplated by Section 5(i) hereof or has been advised in writing by the Company that the use of the Prospectus may be resumed. 10. Miscellaneous (a) Remedies. Each Holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein, in the Warrant Agreement and granted by law, including recovery of damages, shall be entitled to specific performance of its rights under this Agreement. (b) Amendments and Waivers The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of the Holders of at least a majority of the outstanding shares of Registerable Securities. The foregoing notwithstanding, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders of shares of Registerable Securities whose shares are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders of shares of Registerable Securities may be given by the Holders of a majority of the shares of Registerable Securities being sold pursuant to such Registration Statement. (c) Notices All notices, demands or other communications to any party under this Agreement shall be in writing Including facsimile transmission); shall be sent only by facsimile, by first class United States mail, by nationally recognized courier service, or by personal delivery; and shall be given, if to the Company to: 12 14 Showscan Entertainment Inc. 3939 Landmark Street Culver City, California 90232-2315 Attention: W. Tucker Lemon, Vice President, General Counsel and Secretary Fax: (310) 280-0476 and with a copy to: Latham & Watkins 633 W. 5th Street, Suite 4000 Los Angeles, California 90071 Attention: John R. Light, Esq. Fax: (213) 891-8763 if to Investor, to: Mr. Jack M. Ferraro 430 River Road Scarborough, New York The Company or the Investor by notice to the other pursuant to this Section 9(c) may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. The foregoing notwithstanding, the registration rights granted the Holders of Registerable Securities under this Agreement may not be transferred without the prior written consent of the Company. (e) Counterparts This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Table of Contents and Headings The table of contents and headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 13 15 (h) Governing Law This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (i) Severability In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Forms All references in this Agreement to particular forms of registration statements are intended to include all successor forms which are intended to replace, or to apply to similar transactions as, the forms herein referenced. (k) Entire Agreement. This Agreement and the Warrant Agreement are intended by the parties as the final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Warrant Agreement. This Agreement and the Warrant Agreement supersede all prior agreements and understandings between the parties with respect to such subject matter. [signature pages follow] 14 16 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. SHOWSCAN ENTERTAINMENT INC. By: /s/ DENNIS POPE ---------------------------------------- Title: Executive Vice President ------------------------------------- INVESTOR /s/ JACK M. FERRARO ---------------------------------- Jack M. Ferraro 15 EX-4.22 4 WARRANT AGREEMENT, SHOWSCAN & ERLANGER 1 EXHIBIT 4.22 WARRANT AGREEMENT BETWEEN SHOWSCAN ENTERTAINMENT INC. and JACK ERLANGER ______________________________ Dated as of September 1, 1995 2 WARRANT AGREEMENT This Warrant Agreement, dated as of September 1, 1995 (this "Agreement"), is by and between Showscan Entertainment Inc., a Delaware corporation (the "Company"), and Jack Erlanger, an individual ("Holder"). WHEREAS, the Company proposes to issue to Holder, or his designee, common stock purchase warrants, as hereinafter described (the "Warrants"), to purchase up to an aggregate of 50,000 shares of Common Stock, $.001 per share par value (the "Common Stock"), of the Company (the Common Stock issuable on exercise of the Warrants being referred to herein as the "Warrant Shares"), pursuant to a consulting letter agreement dated as of August 1, 1995. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Warrant Certificates. The certificates evidencing the Warrants (the "Warrant Certificates") to be delivered pursuant to this Agreement shall be in registered form only and shall be substantially in the form set forth in Exhibit A attached hereto. SECTION 2. Execution of Warrant Certificates. Warrant Certificates shall be signed on behalf of the Company by its Chairman of the Board or its President or a Vice President and by its Secretary or an Assistant Secretary under its corporate seal. SECTION 3. Registration. The Company shall number and register the Warrant Certificates in a register as they are issued. The Company may deem and treat the registered holder(s) of the Warrant Certificates as the absolute owner(s) thereof (notwithstanding any notation of ownership or other writing thereon made by anyone), for all purposes, and shall not be affected by any notice to the contrary. SECTION 4. Registration of Transfers and Exchanges; Right of Refusal. (a) Registration of Transfers and Exchange. The Company shall from time to time register the transfer of any outstanding Warrant Certificates in a Warrant register to be maintained by the Company upon surrender thereof accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the registered holder or holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney. Upon any such registration of transfer, a new Warrant Certificate shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled and disposed of by the Company. The Warrants shall in no event be transferred in an amount which represents the right to purchase fewer than the lesser of (i) 5,000 shares of Common Stock or (ii) the full number of shares of Common Stock for which the Warrants held by the proposed transferor are then exercisable. 1 3 The Warrant holders agree that prior to any proposed transfer of Warrants or of the Warrant Shares, if such transfer is not made pursuant to an effective Registration Statement under the Securities Act of 1933, as amended (the "Act"), or an opinion of counsel, reasonably satisfactory in form and substance to the Company, that the Warrants or Warrant Shares may be sold publicly without registration under the Act, the Warrant holder will, if requested by the Company, deliver to the Company: (1) an investment covenant reasonably satisfactory to the Company signed by the proposed transferee; (2) an agreement by such transferee to the impression of the restrictive investment legend set forth below on the Warrant or the Warrant Shares; (3) an agreement by such transferee that the Company may place a notation in the stock books of the Company or a "stop transfer order" with any transfer agent or registrar with respect to the Warrant Shares; and (4) an agreement by such transferee to be bound by the provisions of this Section 4 relating to the transfer of such Warrant or Warrant Shares. The Warrant holders agree that each certificate representing Warrant Shares will bear the following legend: "The securities evidenced or constituted hereby have been acquired for the purpose of investment only and have not been registered under the Securities Act of 1933, as amended. Such securities may not be sold, transferred, pledged or hypothecated unless the registration provisions of said Act have been complied with or unless the Company has received an opinion of counsel reasonably satisfactory to the Company that such registration is not required." Warrant Certificates may be exchanged at the option of the holder(s) thereof, when surrendered to the Company at its office for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange shall be canceled and disposed of by the Company. (b) Company's Right of First Refusal. Prior to any proposed transfer of Warrants or of Warrant Shares in a negotiated private sale, Holder will give notice (the "Sale Notice") of such proposed transfer to the Company. The Sale Notice will disclose in reasonable detail the identity of the prospective transferee(s), the number of Warrants or Warrant Shares to be transferred and the terms and conditions of the proposed transfer. The Company may elect to purchase all (but not less than all) the securities to be transferred upon 2 4 the same terms and conditions as those set forth in the Sale Notice by delivering a written notice of such election to Holder within 10 days after the Sale Notice has been given to the Company. Such notice shall contain the time and place for the closing of the transaction, which time shall be within 20 days after the Sale Notice has been given to the Company. If the Company does not elect to purchase all of the securities specified in the Sale Notice, Holder may transfer the securities specified in the Sale Notice, subject to Section 4(a) hereof, at a price and on terms no more favorable to the transferee(s) thereof than specified in the Sale Notice during the 60-day period immediately following the date 10 days after the Sale Notice has been given to the Company. Any Warrants or Warrant Shares not transferred within such 60- day period will be subject to the provisions of this Section 4(b) upon subsequent transfer. SECTION 5. Warrants; Exercise of Warrants. Subject to the terms of this Agreement, each Warrant holder shall have the right, which may be exercised commencing at the opening of business on September 1, 1996 and until 5:00 p.m., Los Angeles time on September 1, 2000, to receive from the Company the number of fully paid and nonassessable Warrant Shares which the holder may at the time be entitled to receive on exercise of such Warrants and payment of the Exercise Price then in effect for such Warrant Shares. Each Warrant not exercised prior to 5:00 p.m., Los Angeles time, on September 1, 2000 shall become void and all rights thereunder and all rights in respect thereof under this agreement shall cease as of such time. No adjustments as to dividends will be made upon exercise of the Warrants. A Warrant may be exercised upon surrender to the Company at its office designated for such purpose (the address of which is set forth in Section 13 hereof) of the certificate or certificates evidencing the Warrants to be exercised with the form of election to purchase on the reverse thereof duly filled in and signed, and upon payment to the Company of the exercise price (the "Exercise Price") which is set forth in the form of Warrant Certificate attached hereto as Exhibit A as adjusted as herein provided, for the number of Warrant Shares in respect of which such Warrants are then exercised. Payment of the aggregate Exercise Price shall be made (i) in cash or by certified or official bank check payable to the order of the Company, or (ii) through the surrender of debt or preferred equity securities of the Company having a principal amount or liquidation preference, as the case may be, equal to the aggregate Exercise Price to be paid (the Company will pay the accrued interest or dividends on such surrendered debt or preferred equity securities in cash at the time of surrender notwithstanding the stated terms thereof). Subject to the provisions of Section 6 hereof, upon such surrender of Warrants and payment of the Exercise Price the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the holder and in such name or names as the Warrant holder may designate, a certificate or certificates for the number of full Warrant Shares issuable upon the exercise of such Warrants together with cash as provided in Section 11; provided, however, that if any consolidation, merger or lease or sale of assets is proposed to be effected by the Company as described in subsection (c) of Section 10 hereof, or a tender 3 5 offer or an exchange offer for shares of Common Stock of the Company shall be made, upon such surrender of Warrants and payment of the Exercise Price as aforesaid, the Company shall, as soon as possible, but in any event not later than two business days thereafter, issue and cause to be delivered the full number of Warrant Shares issuable upon the exercise of such Warrants in the manner described in this sentence together with cash as provided in Section 11. Such certificate or certificates shall be deemed to have been issued and any individual, partnership, corporation, association, joint stock company, trust, joint venture, unincorporated organization or governmental entity or any subdivision thereof (each a "Person") so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date of the surrender of such Warrants and payment of the Exercise Price. The Warrants shall be exercisable, at the election of the holders thereof, either in full or from time to time in part and, in the event that a certificate evidencing Warrants is exercised in respect of fewer than all of the Warrant Shares issuable on such exercise at any time prior to the date of expiration of the Warrants, a new certificate evidencing the remaining Warrant or Warrants will be issued and delivered pursuant to the provisions of this Section and of Section 2 hereof. Warrants shall be exercisable for Warrant Shares only in an amount which is at least equal to the lesser of (i) 5,000 Warrant Shares or (ii) the full number of Warrant Shares for which the Warrants held by the Warrant holder are then exercisable. All Warrant Certificates surrendered upon exercise of Warrants shall be canceled and disposed of by the Company. The Company shall keep copies of this Agreement and any notices given or received hereunder available for inspection by the holders during normal business hours at its office. The Company covenants that all Warrant Shares which may be issued upon exercise of Warrants will, upon issue, be fully paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issue thereof. SECTION 6. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant or to a Person outside of the United States, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 7. Mutilated or Missing Warrant Certificates. In case any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant 4 6 Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and an indemnity, if requested, also reasonably satisfactory to it. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. SECTION 8. Reservation of Warrant Shares. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of all outstanding Warrants. SECTION 9. Obtaining Stock Exchange Listings. The Company will use its best efforts to obtain approval for the listing, upon official notice of issuance, of the Warrant Shares on the principal securities exchanges and markets within the United States of America, if any, on which other shares of Common Stock are then listed. SECTION 10. Adjustments of Exercise Price and Number of Warrant Shares. The Exercise Price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Exercise Price pursuant to subsection (a), (b), (d) or (e) of this Section 10, the Warrant holder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of such Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) Adjustment for Certain Special Dividends. In case the Company shall declare a dividend upon the Common Stock payable otherwise than out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, and otherwise than in Common Stock or securities convertible into Common Stock, the Exercise Price in effect immediately prior to the declaration of such dividend shall be reduced by an amount equal, in the case of a dividend in cash, to the amount per share of the Common Stock so declared as payable otherwise than out of earnings or earned surplus or, in the case of any other dividend, to the fair value per share of the Common Stock or the property so declared as payable otherwise than out of earnings or earned surplus, as determined, reasonably and in good faith, by the board of directors of the Company. For the purposes of the foregoing a dividend other than in cash shall be considered payable out of earnings or earned surplus (other than revaluation or paid-in surplus) only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend as determined, in good faith and in the exercise of reasonable business judgment, by the board of directors of the Company. Such reductions shall take effect as of the record date for such dividend or, if a record is not taken, 5 7 on the date as of which the holders of Common Stock of record entitled to such dividend are determined. (b) Subdivision or Combination of Stock. In case the Company shall at any time subdivide the outstanding shares of Common Stock into a greater number of shares, whether through a stock split, stock dividend or otherwise, the number of shares of Common Stock for which the Warrants are exercisable shall be proportionately increased and the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the number of shares of Common Stock for which the Warrants are exercisable shall be proportionately reduced and the Exercise Price in effect immediately prior to such combination shall be proportionately increased. (c) Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, Etc. In case the Company (i) consolidates with or merges into any other Person and is not the continuing or surviving corporation of such consolidation or merger, or (ii) permits any other Person to consolidate with or merge into the Company and the Company is the continuing or surviving corporation but in connection with such consolidation or merger, the Common Stock is changed into or exchanged for stock or other securities of any other corporation or cash or any other assets, or (iii) transfers all or substantially all of its properties and assets to any other Person, or (iv) effects a capital reorganization or reclassification of the capital stock of the Company in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or assets with respect to or in exchange for Common Stock (each of the foregoing events in clauses (i) through (iv) being a "Fundamental Change"), then in each such case proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this subsection (c), the Warrant holders, upon the exercise of the Warrants at any time after the consummation of such Fundamental Change, shall be entitled to receive (at the aggregate Exercise Price in effect for all shares of Common Stock issuable upon such exercise immediately prior to such consummation as adjusted to the time of such transaction), in lieu of shares of Common Stock issuable upon such exercise prior to such consummation, the stock and other securities, cash and assets to which such Warrant holders would have been entitled upon such consummation if such Warrant holders had exercised such Warrants immediately prior thereto (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in this Section 10). In the case of any Fundamental Change the Company shall require the successor or acquiring corporation to assume the obligation to perform each and every covenant and condition of this Agreement to be performed and observed by the Company and all liabilities and obligations of the Company hereunder. (d) Rights, Options, Etc. In case the Company shall issue rights, options, warrants or convertible securities to all or substantially all holders of its Common Stock, without any charge to such holders, entitling them to subscribe for or purchase Common Stock at a price per share which is lower at the record date mentioned below than 6 8 95% of the then-Current Market Price (as defined below), the Exercise Price in effect immediately prior to such issuance shall be adjusted by multiplying such Exercise Price by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of shares which the aggregate offering price (i.e., the consideration required to be paid, if any, in connection with the exercise of any such rights) of the total number of shares offered would purchase at such Current Market Price and of which the denominator shall be the number of shares of Common stock outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made whenever such rights, options, warrants or convertible securities are issued, and shall become effective immediately and retroactively to the record date for the determination of stockholders entitled to receive such rights, options, warrants or convertible securities. To the extent any of such rights, options, warrants or convertible securities shall lapse, without the exercise thereof, then the Exercise Price shall thereupon be readjusted as though such rights, options, warrants or convertible securities were never issued. (e) Adjustment of Price upon Issuance of Common Stock. If and whenever after the date hereof the Company shall issue or sell any shares of Common Stock for a consideration per share less than 95% of the Current Market Price at the time of such issue or sale, then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest cent) determined by multiplying the Exercise Price in effect immediately prior to such time of such issue or sale by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Current Market Price immediately prior to such issue or sale plus (B) the consideration received by the Company upon such issue or sale, and the denominator of which shall be the product of (C) the total number of shares of Common Stock outstanding immediately after such issue or sale, multiplied by (D) the Current Market Price immediately prior to such issue or sale. No adjustment of the Exercise Price, however, shall be made in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time of, and together with, the next subsequent adjustment which together with any adjustments so carried forward shall amount to $.01 per share or more. For purposes of this subsection (e) of this section, the following clauses shall also be applicable: (i) Issuance of Rights or Options. If at any time after the Effective Date the Company grants (whether directly or by assumption in a merger or otherwise) any rights (other than the Warrants) to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such convertible or exchangeable securities being 7 9 called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined as provided below) is less than 95% of the Current Market Price determined as of the date of granting such rights or options, as the case may be, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share. Except as provided in clause (iii) of this subsection, no further adjustments of the Exercise Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. For the purposes of this clause (i), the price per share for which Common Stock is issuable upon the exercise of any such rights or options or upon conversion or exchange of any such Convertible Securities shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, or in the case of Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon their conversion or exchange by (B) the total number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options. (ii) Issuance of Convertible Securities. If the Company after the Effective Date issues (whether directly or by assumption in a merger or otherwise) or sells any Convertible Securities (other than pursuant to right or options for which an adjustment to the Exercise Price has been made pursuant to Section 10(e)(i)), whether or not the rights to exchange or convert under such securities are immediately exercisable, and the price per share for which Common Stock is issuable upon conversion or exchange of such Convertible Securities (determined as provided below) is less than 95% of the Current Market Price determined as of the date of such issue or sale of such Convertible Securities, as the case may be, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (A) except as provided in clause (iii) of this subsection no further adjustments of the Exercise Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (B) if any such 8 10 issue or sale of Convertible Securities occurs for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this subsection (e), no further adjustment of the Exercise Price shall be made by reason of such issue or sale. For the purpose of this clause (ii), the price per share for which Common Stock is issuable upon conversion or exchange of Convertible Securities shall be determined by dividing (1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any rights or options referred to in clause (i) above, or the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or (ii) above, or the rate at which any Convertible Securities referred to in clause (i) or (ii) above are convertible into or exchangeable for Common Stock, changes (other than under or by reason of provisions designed to protect against dilution), then the Exercise Price in effect at the time of such event shall forthwith be readjusted to the Exercise Price which would have been in effect at such time had such rights, options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold, and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the Exercise Price then in effect hereunder shall forthwith be increased to the Exercise Price which would have been in effect at the time of such expiration or termination had such right, option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such right or option referred to in clause (i) above or the rate at which any Convertible Securities referred to in clause (i) or (ii) above are convertible into or exchangeable for Common Stock shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the Exercise Price then in effect hereunder shall forthwith be adjusted to such amount as would have obtained had such right, option or Convertible Security never been issued as to such Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as aforesaid, but only if as a result of such adjustment the Exercise Price then in effect hereunder is thereby decreased. (iv) Consideration for Stock. If any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities are issued or sold for cash, the consideration received therefor 9 11 shall be deemed to be the amount received by the Company therefor, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection with such issuance or sale. If any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair market value of such consideration as determined, in good faith and in the exercise of reasonable business judgement, by the board of directors of the Company, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection with such issuance or sale. If any shares of Common Stock or Convertible Securities or any rights or options to purchase such shares of Common Stock or Convertible Securities are issued in connection with any merger or consolidation in which the Company is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation), the amount of consideration for such shares or rights or options shall be deemed to be the fair market value as determined, in good faith and in the exercise of reasonable business judgment, by the board of directors of the Company of such portion of the assets and business of the non-surviving corporation as the board of directors determines, in good faith and in the exercise of reasonable business judgment, to be attributable to such shares of Common Stock, Convertible Securities, rights or options, as the case may be. (v) Determination of Current Market Price under Certain Circumstances. Anything herein to the contrary notwithstanding, in determining for any purpose hereunder whether in consideration received by the Company is less than the Current Market Price, the Current Market Price shall be determined as of the date the Company and the other party to the transaction agree in writing on the consideration to be received by the Company for the Common Stock or Convertible Securities rather than on the date of payment of such consideration. (vi) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the Company shall not be required to make any adjustment pursuant to this Section 10(e), either (A) if an adjustment was made pursuant to the provisions of Sections 10(a), (b), (c) or (d) upon such issuance, or (B) with respect to (1) the exercise of one or more of the Warrants or any other options, warrants or convertible securities (including without limitation the Series C Convertible Preferred Stock, the Series A Convertible Preferred Stock and the 8% Convertible Notes due September 1, 1999) which have been issued and are outstanding as of the Effective Date, or (2) the issuance to Holder of any Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock (or the exercise or conversion thereof), for consideration below the Current Market Price, or (3) the declaration or payment of 10 12 dividends on the Series C Preferred Stock in the form of shares of Series C Preferred Stock, or (4) the issuance of Common Stock, or the issuance or exercise of options, rights or warrants therefor, in connection with employee benefit plans, employment or consultant agreements or similar transactions, and pursuant to contracts entered into by the Company prior to the Effective Date. (f) Other Equitable Adjustments. If any event occurs as to which the other provisions of this Section 10 are not strictly applicable (or if strictly applicable would not fairly protect the rights of the Warrant holders in accordance with the basic intent and principles of such provisions) but, in the reasonable opinion of the Company's board of directors, an adjustment should be made to fairly protect the rights of the Warrant holders in accordance with the basic intent and principles of such provisions, then the Company shall appoint a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing, which shall give its opinion upon the adjustment, if any, to be made to protect the Warrant holders against dilution on a basis consistent with the basic intent and principles established in the other provisions of this Section 10. Upon receipt of such opinion, the Company shall forthwith make the adjustments, if any, described therein. (g) Notice of Adjustment. Upon any adjustment of the Exercise Price, then and in each such case the Company shall promptly deliver a notice to the Warrant holders, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of each Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (h) Other Notices. In case at any time: (i) the Company shall declare any cash dividend on its Common Stock; (ii) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (iii) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (iv) the Company shall authorize the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than cash dividends or cash distributions payable out of earnings or earned surplus or dividends payable in Common Stock); 11 13 (v) there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation (other than a subsidiary of the Company in which the Company is the surviving or continuing corporation and no change occurs in the Company's Common Stock), or sale of all or substantially all of its assets to, another Person; (vi) there shall be a voluntary or involuntary dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, or winding up of the Company; or (vii) the Company proposes to take any other action or an event occurs which would require an adjustment of the Exercise Price pursuant to this Section 10; then, in any one or more of said cases, the Company shall give written notice, addressed to the Warrant holders at their addresses as shown on the books of the Company, of (1) the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (2) the date (or, if not then known, a reasonable approximation thereof by the Company) on which such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up or other action, as the case may be, shall take place. Such notice shall also specify (or, if not then known, reasonably approximate) the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up, or other action, as the case may be. Such written notice shall be given at least ten days prior to the action in question and not less than ten days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. Notwithstanding any other provision of this Section 10(h), the Company shall not be required to give any notice to Warrant holders pursuant to this Section 10(h) if the giving of such notice would violate applicable federal or state securities laws or the Company's obligations thereunder. (i) Adjustments below Par Value. Before taking any action which would cause an adjustment pursuant to this Section 10 to reduce the Exercise Price below the then par value (if any) of the Warrant Shares, the Company will take any corporate action which may, in the opinion of its counsel (which may be counsel employed by the Company), be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. SECTION 11. Fractional Interests. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so 12 14 presented. If any fraction of a Warrant Share would, except for the provisions of this Section 11, be issuable on the exercise of any Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the fair market value of such fractional share. SECTION 12. No Stockholder Rights. Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the holders thereof the right to vote or to consent or to receive notice as stockholders in respect of the meetings of stockholders or the election of Directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. SECTION 13. Notices to Company and Warrant Holder. All notices, demands or other communications to any party under this Agreement shall be in writing Including facsimile transmission); shall be sent only by facsimile, by first class United States mail, by nationally recognized courier service, or by personal delivery; and shall be given, if to the Company to: Showscan Entertainment Inc. 3939 Landmark Street Culver City, California 90232-2315 Attention: W. Tucker Lemon, Vice President, General Counsel and Secretary Fax: (310) 280-0476 and with a copy to: Latham & Watkins 633 W. 5th Street, Suite 4000 Los Angeles, California 90071 Attention: John R. Light, Esq. Fax: (213) 891-8763 if to Holder, to: Mr. Jack Erlanger 2 East 88th Street New York, New York 10128 The Company or the Holder by notice to the other pursuant to this Section 13 may designate additional or different addresses for subsequent notices or communications. SECTION 14. Supplements and Amendments. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Warrant Certificates in order to cure any ambiguity or to correct or supplement any provision contained 13 15 herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company may deem necessary or desirable and which shall not in any way adversely affect the interests of the holders of Warrant Certificates. SECTION 15. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. SECTION 16. Termination. This Agreement shall terminate at 5:00 p.m., Los Angeles time on September 1, 2000. Notwithstanding the foregoing, this Agreement will terminate on any earlier date if all Warrants have been exercised. SECTION 17. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the internal laws of said State. SECTION 19. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company and the registered holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company and the registered holders of the Warrant Certificates. SECTION 20. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. [Signature Page Follows] 14 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. SHOWSCAN ENTERTAINMENT INC. By /s/ Dennis Pope ------------------------------ Title: Executive Vice President [Seal] Attest: /s/ W. Tucker Lemon ----------------------------------------- Title: Vice President and General Counsel By /s/ Jack Erlanger -------------------------- Jack Erlanger 15 17 EXHIBIT A [Form of Warrant Certificate] [Face] THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. EXERCISABLE ON OR AFTER SEPTEMBER 1, 1996 AND ON OR BEFORE SEPTEMBER 1, 2000 50,000 Warrants Warrant Certificate SHOWSCAN ENTERTAINMENT INC. This Warrant Certificate certifies that Jack Erlanger, or registered assigns, is the registered holder of Warrants expiring September 1, 2000 (the "Warrants") to purchase Common Stock, par value $.001 per share (the "Common Stock"), of Showscan Entertainment Inc., a Delaware corporation (the "Company"). Each Warrant entitles the holder upon exercise to receive from the Company on or before 5:00 p.m. Los Angeles Time on September 1, 2000, one fully paid and nonassessable share of Common Stock (a "Warrant Share") at the initial exercise price (the "Exercise Price") of $5.75 payable in lawful money of the United States of America upon surrender of this Warrant Certificate and payment of the Exercise Price at the office of the Company designated for such purpose, but only subject to the conditions set forth herein and in the Warrant Agreement referred to on the reverse hereof. No Warrant may be exercised after 5:00 p.m., Los Angeles Time on September 1, 2000 and to the extent not exercised by such time such Warrants shall become void. Reference is hereby made to the further provisions of this Warrant Certificate set forth on the reverse hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this place. A-1 18 This Warrant Certificate shall not be valid unless countersigned by the Company, as such term is used in the Warrant Agreement. IN WITNESS WHEREOF, Showscan Entertainment Inc. has caused this Warrant Certificate to be signed by its President and by its Secretary and has caused its corporate seal to be affixed hereunto or imprinted hereon. Dated: September 1, 1995 SHOWSCAN ENTERTAINMENT INC. By _____________________________ President By _____________________________ Secretary A-2 19 [Form of Warrant Certificate] [Reverse] The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring September 1, 2000 entitling the holder on exercise to receive shares of Common Stock, par value $.001 per share, of the Company (the "Common Stock"), and are issued or to be issued pursuant to a Warrant Agreement dated as of September 1, 1995 (the "Warrant Agreement"), duly executed and delivered by the Company, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. A copy of the Warrant Agreement may be obtained by the holder hereof upon written request to the Company. Warrants may be exercised at any time on or after September 1, 1996 and on or before September 1, 2000. The holder of Warrants evidenced by this Warrant Certificate may exercise them by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the Exercise Price in cash at the office of the Company designated for such purpose. In the event that upon any exercise of Warrants evidenced hereby the number of Warrants exercised shall be less than the total number of Warrants evidenced hereby, there shall be issued to the holder hereof or his assignee a new Warrant Certificate evidencing the number of Warrants not exercised. No adjustment shall be made for any dividends on any Common Stock issuable upon exercise of this Warrant. The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price set forth on the face hereof may, subject to certain conditions, be adjusted. If the Exercise Price is adjusted, the Warrant Agreement provides that the number of shares of Common Stock issuable upon the exercise of each Warrant shall be adjusted. No fractions of a share of Common Stock will be issued upon the exercise of any Warrant, but the Company will pay the cash value thereof determined as provided in the Warrant Agreement. The holders of the Warrants are entitled to certain registration rights with respect to the Common Stock purchasable upon exercise thereof. Said registration rights are set forth in full in a Registration Rights Agreement dated as of September 1, 1995, between the Company and Jack Erlanger. A copy of the Registration Rights Agreement may be obtained by the holder hereof upon written request to the Company. A-3 20 Warrant Certificates, when surrendered at the office of the Company by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. Upon due presentation for registration of transfer of this Warrant Certificate at the office of the Company a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company may deem and treat the registered holder(s) thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. Neither the Warrants nor this Warrant Certificate entitles any holder hereof to any rights of a stockholder of the Company. A-4 21 [Form of Election to Purchase] (To Be Executed Upon Exercise Of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to receive __________ shares of Common Stock and herewith tenders payment for such shares to the order of Showscan Entertainment Inc. in the amount of $______ in accordance with the terms hereof. The undersigned requests that a certificate for such shares be registered in the name of ________________, whose address is _______________________________ and that such shares be delivered to ________________ whose address is ___________ ______________________. If said number of shares is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the remaining balance of such shares be registered in the name of ______________, whose address is _________________________, and that such Warrant Certificate be delivered to _________________, whose address is __________________. Signature: Date: Signature: A-5 EX-4.23 5 REG. RIGHTS AGREEEMENT, SHOWSCAN & ERLANGER 1 EXHIBIT 4.23 SHOWSCAN ENTERTAINMENT INC. ____________________ REGISTRATION RIGHTS AGREEMENT Dated as of September 1, 1995 2 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of September 1, 1995, between Showscan Entertainment Inc., a Delaware corporation (the "Company"), and Jack Erlanger, an individual ("Investor"), and is made pursuant to that certain Warrant Agreement dated the same date as this Agreement between the Company and the Investor (the "Warrant Agreement"). The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following capitalized terms shall have the following meanings: Board: The Board of Directors of the Company. Claim: Any loss, claim, damages, liability or expense (including the reasonable costs of investigation and legal fees and expenses). Common Stock: The common stock, par value $.001 per share, of the Company. Exchange Act: The Securities Exchange Act of 1934, as from time to time amended. Holder: The beneficial owner of a security. For all purposes of this Agreement, the Company shall be entitled to treat the record owner of a security as the beneficial owner of such security unless the Company has been given written notice of the existence and identity of a different beneficial owner. Indemnified Holder: Any Holder of Registrable Securities, any officer, director, employee or agent of any such Holder and any Person who controls any such Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act. Misstatement: An untrue statement of a material fact or an omission to state a material fact required to be stated in a Registration Statement or Prospectus or necessary to make the statements in a Registration Statement, Prospectus or preliminary prospectus not misleading. Person: A natural person, partnership, corporation, business trust, association, joint venture or other entity or a government or agency or political subdivision thereof. 1 3 Piggyback Registration: A registration pursuant to Section 2 hereof. Prospectus: The prospectus included in any Registration Statement, as supplemented by any and all prospectus supplements and as amended by any and all post-effective amendments and including all material incorporated by reference in such prospectus. Registration Expenses: The out-of-pocket expenses of a Registration, including: (1) all registration and filing fees (including fees with respect to filings required to be made with the National Association of Securities Dealers); (2) fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determinations of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate); (3) printing, messenger, telephone and delivery expenses; (4) fees and disbursements of counsel for the Company and counsel for the underwriters; (5) fees and disbursements of all independent certified public accountants of the Company incurred in connection with such Registration (including the expenses of any special audit and "cold comfort" letters incident to such registration); and (6) fees and disbursements of underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities); and (7) fees and expenses of any other Persons retained by the Company. Registrable Securities: The Warrant Shares; provided, however, as to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have (x) been registered under the Securities Act and disposed of in accordance with the registration statement covering them, (y) become eligible for sale pursuant to Rule 144 or Rule 144A (or any similar provision then in force) under the Securities Act, or (z) in the opinion of counsel to the Company they may be freely transferred (without volume or other limitations) without registration or qualification 2 4 under the Securities Act or any similar state securities laws. Whenever any particular securities cease to be Registrable Securities, the holder of such securities will be entitled to receive from the Company, without expense, new securities of like tenor not bearing a Securities Act legend of the character set forth in Section 4 of the Warrant Agreement. Registration Statement: Any registration statement which covers Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus included in such registration statement, amendments (including post-effective amendments) and supplements to such registration statement, and all exhibits to and all material incorporated by reference in such registration statement. Securities Act: The Securities Act of 1933, as from time to time amended. SEC: The Securities and Exchange Commission. underwritten registration or underwritten offering: A registration in which securities of the Company are sold to an underwriter for distribution to the public. Warrants: The warrants, each to purchase one share of Common Stock, issued and sold pursuant to the Warrant Agreement. Warrant Shares: (a) the shares of Common Stock issued or issuable upon conversion of the Warrants, and (b) any securities issued or issuable with respect to such Common Stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or reorganization. 2. Piggyback Registrations (a) Participation Each time the Company decides to file a registration statement under the Securities Act covering the offer and sale by it or any of its security holders of any of its securities for money, other than (i) on Forms S-4, S-8, S-20 or any successor or similar forms, or (ii) by a registration which is incident to any offering of the Company's securities pursuant to a merger, combination of interest, recapitalization, consolidation or other reorganization, or in connection with any employee benefit plan, the Company shall give written notice thereof to all Holders of Registrable Securities. Upon the written request of Investor or any subsequent Holder of Registrable Securities made within 20 days after receipt of any such notice (which request will specify the Registrable Securities intended to be disposed of), the Company will, subject to the terms of this Agreement and subject to the full cooperation by Investor or any Holder of Registrable Securities in connection with any such 3 5 registration, use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register (which in no event shall be less than 50,000 shares in the aggregate and 10,000 shares per selling Holder of Registrable Securities (such number to adjust equitably in the future to account for any stock split, stock combination or similar event)). If the registration statement is to cover an underwritten offering, such Registrable Securities shall be included in the underwriting on the same terms and conditions (including, without limitation, underwriting discounts, commissions and fees) as the securities otherwise being sold through the underwriters. Investor's and any subsequent Holders' rights under this Section 2 shall expire on the seventh anniversary of the date of this Agreement. (b) Underwriter's Cutback If in the good faith judgment of the managing underwriter of such offering the inclusion of all of the shares of Registrable Securities and any other Common Stock requested to be registered would interfere with the successful marketing of a smaller number of such shares, then the number of shares of Registrable Securities and other Common Stock to be included in the offering (except for shares to be issued by the Company in an offering initiated by the Company) shall be reduced to such smaller number, provided that such reduction is pro rata with reductions that shall be imposed on any other shares of Common Stock requested to be included. (c) Company Control The Company may decline to file a Registration Statement after giving notice to any Holder pursuant to Section 2(a) above, or withdraw a Registration Statement after filing and after such notice, but prior to the effectiveness thereof, provided that the Company shall promptly notify each Holder in writing of any such action and provided further that the Company shall bear all reasonable expenses incurred by such Holder or otherwise in connection with such withdrawn Registration Statement. 3. Hold-Back Agreements Upon the written request of the managing underwriter of any underwritten offering of the Company's securities, or if reasonably requested by the Company in the case of a registered offering which in not underwritten, a Holder of Registrable Securities shall not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in such registration) without the prior written consent of such managing underwriter or the Company, as the case may be, for a period (not to exceed 30 days before the effective date and 90 days thereafter) that such managing underwriter or the Company, as the case may be, requires; provided that each of the officers and directors of the Company who are stockholders of the Company shall be subject to similar agreements (other than with respect to options granted to officers and directors of the 4 6 Company under benefit plans approved by the stockholders of the Company) covering at least the same period. 4. Registration Procedures If and whenever the Company is required to register Registrable Securities in a Piggyback Registration, the Company will use its reasonable best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended plan of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC as soon as practicable a Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become effective and remain effective until the Registrable Securities covered by such Registration Statement have been sold; provided that the Company shall not be required to maintain the effectiveness of any Registration Statement not covering an underwritten public offering for more than 90 days after such registration statement becomes effective; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement, and such supplements to the Prospectus, as may be required by the rules, regulations or instructions applicable to the registration form used by the Company or by the Securities Act or rules and regulations thereunder to keep the Registration Statement effective until all Registrable Securities covered by such Registration Statement are sold in accordance with the intended plan of distribution set forth in such Registration Statement or supplement to the Prospectus or for such shorter period of time during which such Registration Statement must be kept effective by the terms of this Agreement; (c) promptly notify the selling Holders of Registrable Securities and the managing underwriter, if any, and (if requested by any such Person) confirm such advice in writing, (1) when the Prospectus or any supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, 5 7 (4) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, and (5) of the existence of any fact which results in the Registration Statement, the Prospectus or any document incorporated therein by reference containing a Misstatement (and every selling Holder of Registrable Securities agrees to promptly advise the Company at any time that it learns of the existence of such a fact); (d) use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible time; (e) furnish to each selling Holder of Registrable Securities and the managing underwriter, without charge, at least one conformed copy of the Registration Statement and any post-effective amendments thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (f) deliver to each selling Holder of Registrable Securities and the underwriters, if any, without charge, as many copies of each Prospectus (and each preliminary prospectus) as such Persons may reasonably request (the Company hereby consenting to the use of each such Prospectus (or preliminary prospectus) by each selling Holder of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus (or preliminary prospectus); (g) use its best efforts to register or qualify the Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as such selling Holders or underwriters may reasonably request in writing; provided that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; (h) use its reasonable best efforts to cause the Registrable Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (i) if the Registration Statement or the Prospectus contains a Misstatement, prepare a supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain a Misstatement; 6 8 (j) cause all Registrable Securities covered by the Registration Statement to be listed in the Nasdaq National Market, if requested by the Holders of a majority of such Registrable Securities or the managing underwriter, if any; With respect to any registration statement contemplated by Section 2, each selling Holder of Registrable Securities shall provide such information with respect to it, and its intended method of distribution for inclusion in any such registration statement, as the Company shall reasonably request from time to time in writing. 5. Registration Expenses The Registration Expenses of all Piggyback Registrations shall be borne by the Company. 6. Indemnification (a) Indemnification by Company The Company agrees to indemnify and hold harmless each Indemnified Holder from and against all Claims arising out of or based upon any Misstatement or alleged Misstatement, except insofar as such Misstatement or alleged Misstatement was based upon information furnished to the Company by such Indemnified Holder or the underwriter expressly for use in the document containing such Misstatement or alleged Misstatement. The foregoing notwithstanding, the Company shall not be liable to the extent that any such Claim arises out of or is based upon a Misstatement or alleged Misstatement made in any preliminary prospectus if (i) such Indemnified Holder failed to send or deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale of Registrable Securities giving rise to such Claim and (ii) the Prospectus would have corrected such untrue statement or omission. In addition, the Company shall not be liable to the extent that any such Claim arises out of or is based upon a Misstatement or alleged Misstatement in a Prospectus, (x) if such Misstatement or alleged Misstatement is corrected in an amendment or supplement to such Prospectus and (y) having previously been furnished by or on behalf of the Company with copies of the Prospectus as so amended or supplemented, such Indemnified Holder thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale to the person who purchased a Registrable Security from such Indemnified Holder and who is asserting such Claim. The Company shall also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in a distribution covered by a Registration Statement, their officers and directors and each Person who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange 7 9 Act) to the same extent as provided above with respect to the indemnification of the Indemnified Holders of Registrable Securities. (b) Indemnification Procedures If any action or proceeding (including any governmental investigation or inquiry) shall be brought or asserted against an Indemnified Holder in respect of which indemnity may be sought from the Company, such Indemnified Holder shall promptly notify the Company in writing, and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Holder and the payment of all expenses. Such Indemnified Holder shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such separate counsel shall be the expense of such Indemnified Holder unless (i) the Company has agreed to pay such fees and expenses or (ii) the Company shall have failed to assume the defense of such action or proceeding or has failed to employ counsel reasonably satisfactory to such Indemnified Holder in any such action or proceeding. If such Indemnified Holder notifies the Company in writing that it elects to employ separate counsel at the expense of the Company as permitted by the provisions of the preceding paragraph, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Holder. The foregoing notwithstanding, the Company shall not be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for such Indemnified Holder and any other Indemnified Holders (which firm shall be designated in writing by such Indemnified Holders) in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances. The Company shall not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Company agrees to indemnify and hold harmless such Indemnified Holders from and against any loss or liability by reason of such settlement or judgment. (c) Indemnification by Holder of Registrable Securities. Each Holder of Registrable Securities agrees to indemnify and hold harmless the Company, its directors and officers and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Holder, but only with respect to information relating to such Holder furnished in writing by such Holder expressly for use in any Registration Statement, Prospectus or preliminary prospectus. 8 10 In case any action or proceeding shall be brought against the Company or its directors or officers or any such controlling person, in respect of which indemnity may be sought against a Holder of Registrable Securities, such Holder shall have the rights and duties given the Company and the Company or its directors or officers or such controlling person shall have the rights and duties given to each Holder by Sections 6(a) and 6(b) above. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. (d) Contribution If the indemnification provided for in this Section 6 is unavailable to an indemnified party under Section 6(a) or Section 6(c) above (other than by reason of exceptions provided in those Sections) in respect of any Claims referred to in such Sections, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Claims in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the Indemnified Holder on the other in connection with the statements or omissions which resulted in such Claims as well as any other relevant equitable considerations. The amount paid or payable by a party as a result of the Claims referred to above shall be deemed to include, subject to the limitations set forth in Section 6(b), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The relative fault of the Company on the one hand and of the Indemnified Holder on the other shall be determined by reference to, among other things, whether the Misstatement or alleged Misstatement relates to information supplied by the Company or by the Indemnified Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Misstatement or alleged Misstatement. The Company and each Holder of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9 11 7. Requirements for Participation in Underwritten Offerings No Person may participate in any underwritten offering pursuant to a Registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) cooperates fully in connection with the offering, including without limitation the completion and execution of all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 8. Suspension of Sales Upon receipt of written notice from the Company that a Registration Statement or Prospectus contains a Misstatement, each Holder of Registrable Securities shall forthwith discontinue disposition of Registrable Securities until such Holder has received copies of the supplemented or amended Prospectus required by Section 4(i) hereof, or until such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the 90-day period referred to in Section 4(a) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement either has received the copies of the supplemented or amended prospectus contemplated by Section 4(i) hereof or has been advised in writing by the Company that the use of the Prospectus may be resumed. 9. Miscellaneous (a) Remedies. Each Holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein, in the Warrant Agreement and granted by law, including recovery of damages, shall be entitled to specific performance of its rights under this Agreement. (b) Amendments and Waivers The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of the Holders of at least a majority of the outstanding shares of Registerable Securities. The foregoing notwithstanding, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders of shares of Registerable Securities whose shares are being sold pursuant to a Registration Statement and that does not directly or indirectly 10 12 affect the rights of other Holders of shares of Registerable Securities may be given by the Holders of a majority of the shares of Registerable Securities being sold pursuant to such Registration Statement. (c) Notices All notices, demands or other communications to any party under this Agreement shall be in writing Including facsimile transmission); shall be sent only by facsimile, by first class United States mail, by nationally recognized courier service, or by personal delivery; and shall be given, if to the Company to: Showscan Entertainment Inc. 3939 Landmark Street Culver City, California 90232-2315 Attention: W. Tucker Lemon, Vice President, General Counsel and Secretary Fax: (310) 280-0476 and with a copy to: Latham & Watkins 633 W. 5th Street, Suite 4000 Los Angeles, California 90071 Attention: John R. Light, Esq. Fax: (213) 891-8763 if to Investor, to: Mr. Jack Erlanger 2 East 88th Street New York, New York 10128 The Company or the Investor by notice to the other pursuant to this Section 9(c) may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. The foregoing notwithstanding, the registration rights granted the Holders of Registerable Securities under this Agreement may not be transferred without the prior written consent of the Company. 11 13 (e) Counterparts This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Table of Contents and Headings The table of contents and headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (i) Severability In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Forms All references in this Agreement to particular forms of registration statements are intended to include all successor forms which are intended to replace, or to apply to similar transactions as, the forms herein referenced. (k) Entire Agreement. This Agreement and the Warrant Agreement are intended by the parties as the final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Warrant Agreement. This Agreement and the Warrant Agreement supersede all prior agreements and understandings between the parties with respect to such subject matter. [signature pages follow] 12 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. SHOWSCAN ENTERTAINMENT INC. By: /s/ DENNIS POPE ---------------------------------------- Title: Executive Vice President ------------------------------------- INVESTOR /s/ JACK ERLANGER ------------------------------------------ Jack Erlanger 13 EX-4.24 6 WARRANT AGREEMENT W/ INTRALINK FILM GRAPHIC DESIGN 1 EXHIBIT 4.24 WARRANT AGREEMENT BETWEEN SHOWSCAN ENTERTAINMENT INC. and INTRALINK FILM GRAPHIC DESIGN ______________________________ Dated as of October 3, 1995 ______________________________ 2 WARRANT AGREEMENT This Warrant Agreement, dated as of October 3, 1995 (this "Agreement"), is by and between Showscan Entertainment Inc., a Delaware corporation (the "Company"), and Intralink Film Graphic Design, a California corporation ("Holder"). WHEREAS, the Company proposes to issue to Holder, or its designee, common stock purchase warrants, as hereinafter described (the "Warrants"), to purchase up to an aggregate of 30,000 shares of Common Stock, $.001 per share par value (the "Common Stock"), of the Company (the Common Stock issuable on exercise of the Warrants being referred to herein as the "Warrant Shares"), pursuant to a Consulting Agreement, dated as of August 1, 1995, by and between the Company and Holder (the "Consulting Agreement"). NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Warrant Certificates. The certificates evidencing the Warrants (the "Warrant Certificates") to be delivered pursuant to this Agreement shall be in registered form only and shall be substantially in the form set forth in Exhibit A attached hereto. SECTION 2. Execution of Warrant Certificates. Warrant Certificates shall be signed on behalf of the Company by its Chairman of the Board or its President or a Vice President and by its Secretary or an Assistant Secretary under its corporate seal. SECTION 3. Registration. The Company shall number and register the Warrant Certificates in a register as they are issued. The Company may deem and treat the registered holder(s) of the Warrant Certificates as the absolute owner(s) thereof (notwithstanding any notation of ownership or other writing thereon made by anyone), for all purposes, and shall not be affected by any notice to the contrary. SECTION 4. Registration of Transfers and Exchanges; Right of Refusal. (a) Registration of Transfers and Exchange. The Company shall from time to time register the transfer of any outstanding Warrant Certificates in a Warrant register to be maintained by the Company upon surrender thereof accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the registered holder or holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney. Upon any such registration of transfer, a new Warrant Certificate shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled and disposed of by the Company. The Warrants shall in no event be transferred in an amount which represents the right to purchase fewer than the lesser of (i) 5,000 shares of Common Stock or (ii) the full number of shares of Common Stock for which the Warrants held by the proposed transferor are then exercisable. 1 3 The Warrant holders agree that prior to any proposed transfer of Warrants or of the Warrant Shares, if such transfer is not made pursuant to an effective Registration Statement under the Securities Act of 1933, as amended (the "Act"), or an opinion of counsel, reasonably satisfactory in form and substance to the Company, that the Warrants or Warrant Shares may be sold publicly without registration under the Act, the Warrant holder will, if requested by the Company, deliver to the Company: (1) an investment covenant reasonably satisfactory to the Company signed by the proposed transferee; (2) an agreement by such transferee to the impression of the restrictive investment legend set forth below on the Warrant or the Warrant Shares; (3) an agreement by such transferee that the Company may place a notation in the stock books of the Company or a "stop transfer order" with any transfer agent or registrar with respect to the Warrant Shares; and (4) an agreement by such transferee to be bound by the provisions of this Section 4 relating to the transfer of such Warrant or Warrant Shares. The Warrant holders agree that each certificate representing Warrant Shares will bear the following legend: "The securities evidenced or constituted hereby have been acquired for the purpose of investment only and have not been registered under the Securities Act of 1933, as amended. Such securities may not be sold, transferred, pledged or hypothecated unless the registration provisions of said Act have been complied with or unless the Company has received an opinion of counsel reasonably satisfactory to the Company that such registration is not required." Warrant Certificates may be exchanged at the option of the holder(s) thereof, when surrendered to the Company at its office for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange shall be canceled and disposed of by the Company. (b) Company's Right of First Refusal. Prior to any proposed transfer of Warrants or of Warrant Shares in a negotiated private sale, Holder will give notice (the "Sale Notice") of such proposed transfer to the Company. The Sale Notice will disclose in reasonable detail the identity of the prospective transferee(s), the number of Warrants or Warrant Shares to be transferred and the terms and conditions of the proposed transfer. The Company may elect to purchase all (but not less than all) the securities to be transferred upon 2 4 the same terms and conditions as those set forth in the Sale Notice by delivering a written notice of such election to Holder within 10 days after the Sale Notice has been given to the Company. Such notice shall contain the time and place for the closing of the transaction, which time shall be within 20 days after the Sale Notice has been given to the Company. If the Company does not elect to purchase all of the securities specified in the Sale Notice, Holder may transfer the securities specified in the Sale Notice, subject to Section 4(a) hereof, at a price and on terms no more favorable to the transferee(s) thereof than specified in the Sale Notice during the 60-day period immediately following the date 10 days after the Sale Notice has been given to the Company. Any Warrants or Warrant Shares not transferred within such 60- day period will be subject to the provisions of this Section 4(b) upon subsequent transfer. SECTION 5. Warrants; Exercise of Warrants. Subject to the terms of this Agreement and the vesting set forth below, each Warrant holder shall have the right, which may be exercised commencing at the opening of business on August 1, 1996 and until 5:00 p.m., Los Angeles time on October 3, 1998, to receive from the Company the number of fully paid and nonassessable Warrant Shares which the holder may at the time be entitled to receive on exercise of such Warrants and payment of the Exercise Price then in effect for such Warrant Shares. The Holder shall be entitled to exercise fifty percent (50%) of the Warrants beginning on August 1, 1996 and the remaining fifty percent (50%) shall vest on August 1, 1997. In each case, the vesting shall be conditioned upon the Consulting Agreement being in full force and effect and unterminated on each such date. Termination of the Consulting Agreement shall terminate and cancel all unvested Warrants on the date of termination. Each vested Warrant not exercised prior to 5:00 p.m., Los Angeles time, on October 3, 1998 shall become void and all rights thereunder and all rights in respect thereof under this agreement shall cease as of such time. No adjustments as to dividends will be made upon exercise of the Warrants. A Warrant may be exercised upon surrender to the Company at its office designated for such purpose (the address of which is set forth in Section 13 hereof) of the certificate or certificates evidencing the Warrants to be exercised with the form of election to purchase on the reverse thereof duly filled in and signed, and upon payment to the Company of the exercise price (the "Exercise Price") which is set forth in the form of Warrant Certificate attached hereto as Exhibit A as adjusted as herein provided, for the number of Warrant Shares in respect of which such Warrants are then exercised. Payment of the aggregate Exercise Price shall be made (i) in cash or by certified or official bank check payable to the order of the Company, or (ii) through the surrender of debt or preferred equity securities of the Company having a principal amount or liquidation preference, as the case may be, equal to the aggregate Exercise Price to be paid (the Company will pay the accrued interest or dividends on such surrendered debt or preferred equity securities in cash at the time of surrender notwithstanding the stated terms thereof). Subject to the provisions of Section 6 hereof, upon such surrender of Warrants and payment of the Exercise Price the Company shall issue and cause to be delivered with all 3 5 reasonable dispatch to or upon the written order of the holder and in such name or names as the Warrant holder may designate, a certificate or certificates for the number of full Warrant Shares issuable upon the exercise of such Warrants together with cash as provided in Section 11; provided, however, that if any consolidation, merger or lease or sale of assets is proposed to be effected by the Company as described in subsection (c) of Section 10 hereof, or a tender offer or an exchange offer for shares of Common Stock of the Company shall be made, upon such surrender of Warrants and payment of the Exercise Price as aforesaid, the Company shall, as soon as possible, but in any event not later than two business days thereafter, issue and cause to be delivered the full number of Warrant Shares issuable upon the exercise of such Warrants in the manner described in this sentence together with cash as provided in Section 11. Such certificate or certificates shall be deemed to have been issued and any individual, partnership, corporation, association, joint stock company, trust, joint venture, unincorporated organization or governmental entity or any subdivision thereof (each a "Person") so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date of the surrender of such Warrants and payment of the Exercise Price. The Warrants shall be exercisable, at the election of the holders thereof, either in full or from time to time in part and, in the event that a certificate evidencing Warrants is exercised in respect of fewer than all of the Warrant Shares issuable on such exercise at any time prior to the date of expiration of the Warrants, a new certificate evidencing the remaining Warrant or Warrants will be issued and delivered pursuant to the provisions of this Section and of Section 2 hereof. Warrants shall be exercisable for Warrant Shares only in an amount which is at least equal to the lesser of (i) 5,000 Warrant Shares or (ii) the full number of Warrant Shares for which the Warrants held by the Warrant holder are then exercisable. All Warrant Certificates surrendered upon exercise of Warrants shall be canceled and disposed of by the Company. The Company shall keep copies of this Agreement and any notices given or received hereunder available for inspection by the holders during normal business hours at its office. The Company covenants that all Warrant Shares which may be issued upon exercise of Warrants will, upon issue, be fully paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issue thereof. SECTION 6. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant or to a Person outside of the United States, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 4 6 SECTION 7. Mutilated or Missing Warrant Certificates. In case any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and an indemnity, if requested, also reasonably satisfactory to it. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. SECTION 8. Reservation of Warrant Shares. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of all outstanding Warrants. SECTION 9. Obtaining Stock Exchange Listings. The Company will use its best efforts to obtain approval for the listing, upon official notice of issuance, of the Warrant Shares on the principal securities exchanges and markets within the United States of America, if any, on which other shares of Common Stock are then listed. SECTION 10. Adjustments of Exercise Price and Number of Warrant Shares. The Exercise Price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Exercise Price pursuant to subsection (a), (b), (d) or (e) of this Section 10, the Warrant holder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of such Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) Adjustment for Certain Special Dividends. In case the Company shall declare a dividend upon the Common Stock payable otherwise than out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, and otherwise than in Common Stock or securities convertible into Common Stock, the Exercise Price in effect immediately prior to the declaration of such dividend shall be reduced by an amount equal, in the case of a dividend in cash, to the amount per share of the Common Stock so declared as payable otherwise than out of earnings or earned surplus or, in the case of any other dividend, to the fair value per share of the Common Stock or the property so declared as payable otherwise than out of earnings or earned surplus, as determined, reasonably and in good faith, by the board of directors of the Company. For the purposes of the foregoing a dividend other than in cash shall be considered payable out of earnings or earned surplus (other 5 7 than revaluation or paid-in surplus) only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend as determined, in good faith and in the exercise of reasonable business judgment, by the board of directors of the Company. Such reductions shall take effect as of the record date for such dividend or, if a record is not taken, on the date as of which the holders of Common Stock of record entitled to such dividend are determined. (b) Subdivision or Combination of Stock. In case the Company shall at any time subdivide the outstanding shares of Common Stock into a greater number of shares, whether through a stock split, stock dividend or otherwise, the number of shares of Common Stock for which the Warrants are exercisable shall be proportionately increased and the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the number of shares of Common Stock for which the Warrants are exercisable shall be proportionately reduced and the Exercise Price in effect immediately prior to such combination shall be proportionately increased. (c) Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, Etc. In case the Company (i) consolidates with or merges into any other Person and is not the continuing or surviving corporation of such consolidation or merger, or (ii) permits any other Person to consolidate with or merge into the Company and the Company is the continuing or surviving corporation but in connection with such consolidation or merger, the Common Stock is changed into or exchanged for stock or other securities of any other corporation or cash or any other assets, or (iii) transfers all or substantially all of its properties and assets to any other Person, or (iv) effects a capital reorganization or reclassification of the capital stock of the Company in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or assets with respect to or in exchange for Common Stock (each of the foregoing events in clauses (i) through (iv) being a "Fundamental Change"), then in each such case proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this subsection (c), the Warrant holders, upon the exercise of the Warrants at any time after the consummation of such Fundamental Change, shall be entitled to receive (at the aggregate Exercise Price in effect for all shares of Common Stock issuable upon such exercise immediately prior to such consummation as adjusted to the time of such transaction), in lieu of shares of Common Stock issuable upon such exercise prior to such consummation, the stock and other securities, cash and assets to which such Warrant holders would have been entitled upon such consummation if such Warrant holders had exercised such Warrants immediately prior thereto (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in this Section 10). In the case of any Fundamental Change the Company shall require the successor or acquiring corporation to assume the obligation to perform each and every covenant and condition of this Agreement to be performed and observed by the Company and all liabilities and obligations of the Company hereunder. 6 8 (d) Rights, Options, Etc. In case the Company shall issue rights, options, warrants or convertible securities to all or substantially all holders of its Common Stock, without any charge to such holders, entitling them to subscribe for or purchase Common Stock at a price per share which is lower at the record date mentioned below than 95% of the then-Current Market Price (as defined below), the Exercise Price in effect immediately prior to such issuance shall be adjusted by multiplying such Exercise Price by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of shares which the aggregate offering price (i.e., the consideration required to be paid, if any, in connection with the exercise of any such rights) of the total number of shares offered would purchase at such Current Market Price and of which the denominator shall be the number of shares of Common stock outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made whenever such rights, options, warrants or convertible securities are issued, and shall become effective immediately and retroactively to the record date for the determination of stockholders entitled to receive such rights, options, warrants or convertible securities. To the extent any of such rights, options, warrants or convertible securities shall lapse, without the exercise thereof, then the Exercise Price shall thereupon be readjusted as though such rights, options, warrants or convertible securities were never issued. (e) Adjustment of Price upon Issuance of Common Stock. If and whenever after the date hereof the Company shall issue or sell any shares of Common Stock for a consideration per share less than 95% of the Current Market Price at the time of such issue or sale, then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest cent) determined by multiplying the Exercise Price in effect immediately prior to such time of such issue or sale by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Current Market Price immediately prior to such issue or sale plus (B) the consideration received by the Company upon such issue or sale, and the denominator of which shall be the product of (C) the total number of shares of Common Stock outstanding immediately after such issue or sale, multiplied by (D) the Current Market Price immediately prior to such issue or sale. No adjustment of the Exercise Price, however, shall be made in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time of, and together with, the next subsequent adjustment which together with any adjustments so carried forward shall amount to $.01 per share or more. For purposes of this subsection (e) of this section, the following clauses shall also be applicable: 7 9 (i) Issuance of Rights or Options. If at any time after the Effective Date the Company grants (whether directly or by assumption in a merger or otherwise) any rights (other than the Warrants) to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such convertible or exchangeable securities being called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined as provided below) is less than 95% of the Current Market Price determined as of the date of granting such rights or options, as the case may be, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share. Except as provided in clause (iii) of this subsection, no further adjustments of the Exercise Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. For the purposes of this clause (i), the price per share for which Common Stock is issuable upon the exercise of any such rights or options or upon conversion or exchange of any such Convertible Securities shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, or in the case of Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon their conversion or exchange by (B) the total number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options. (ii) Issuance of Convertible Securities. If the Company after the Effective Date issues (whether directly or by assumption in a merger or otherwise) or sells any Convertible Securities (other than pursuant to right or options for which an adjustment to the Exercise Price has been made pursuant to Section 10(e)(i)), whether or not the rights to exchange or convert under such securities are immediately exercisable, and the price per share for which Common Stock is issuable upon conversion or exchange of such Convertible Securities (determined as provided below) is less than 95% of the Current Market Price determined as of the date of such issue or sale of such Convertible Securities, as the case may be, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such 8 10 Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (A) except as provided in clause (iii) of this subsection no further adjustments of the Exercise Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (B) if any such issue or sale of Convertible Securities occurs for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this subsection (e), no further adjustment of the Exercise Price shall be made by reason of such issue or sale. For the purpose of this clause (ii), the price per share for which Common Stock is issuable upon conversion or exchange of Convertible Securities shall be determined by dividing (1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any rights or options referred to in clause (i) above, or the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or (ii) above, or the rate at which any Convertible Securities referred to in clause (i) or (ii) above are convertible into or exchangeable for Common Stock, changes (other than under or by reason of provisions designed to protect against dilution), then the Exercise Price in effect at the time of such event shall forthwith be readjusted to the Exercise Price which would have been in effect at such time had such rights, options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold, and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the Exercise Price then in effect hereunder shall forthwith be increased to the Exercise Price which would have been in effect at the time of such expiration or termination had such right, option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such right or option referred to in clause (i) above or the rate at which any Convertible Securities referred to in clause (i) or (ii) above are convertible into or exchangeable for Common Stock shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the Exercise Price then in effect hereunder shall forthwith be adjusted to such amount as would have obtained had such right, option or Convertible Security never been issued as to such Common Stock and had adjustments been made upon the issuance of the 9 11 shares of Common Stock delivered as aforesaid, but only if as a result of such adjustment the Exercise Price then in effect hereunder is thereby decreased. (iv) Consideration for Stock. If any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities are issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection with such issuance or sale. If any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair market value of such consideration as determined, in good faith and in the exercise of reasonable business judgement, by the board of directors of the Company, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection with such issuance or sale. If any shares of Common Stock or Convertible Securities or any rights or options to purchase such shares of Common Stock or Convertible Securities are issued in connection with any merger or consolidation in which the Company is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation), the amount of consideration for such shares or rights or options shall be deemed to be the fair market value as determined, in good faith and in the exercise of reasonable business judgment, by the board of directors of the Company of such portion of the assets and business of the non-surviving corporation as the board of directors determines, in good faith and in the exercise of reasonable business judgment, to be attributable to such shares of Common Stock, Convertible Securities, rights or options, as the case may be. (v) Determination of Current Market Price under Certain Circumstances. Anything herein to the contrary notwithstanding, in determining for any purpose hereunder whether in consideration received by the Company is less than the Current Market Price, the Current Market Price shall be determined as of the date the Company and the other party to the transaction agree in writing on the consideration to be received by the Company for the Common Stock or Convertible Securities rather than on the date of payment of such consideration. (vi) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the Company shall not be required to make any adjustment pursuant to this Section 10(e), either (A) if an adjustment was made pursuant to the provisions of Sections 10(a), (b), (c) or (d) upon such issuance, or (B) with respect to (1) the exercise of one or more of the Warrants or any other options, warrants or convertible 10 12 securities (including without limitation the Series C Convertible Preferred Stock, the Series A Convertible Preferred Stock and the 8% Convertible Notes due September 1, 1999) which have been issued and are outstanding as of the Effective Date, or (2) the issuance to Holder of any Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock (or the exercise or conversion thereof), for consideration below the Current Market Price, or (3) the declaration or payment of dividends on the Series C Preferred Stock in the form of shares of Series C Preferred Stock, or (4) the issuance of Common Stock, or the issuance or exercise of options, rights or warrants therefor, in connection with employee benefit plans, employment or consultant agreements or similar transactions, and pursuant to contracts entered into by the Company prior to the Effective Date. (f) Other Equitable Adjustments. If any event occurs as to which the other provisions of this Section 10 are not strictly applicable (or if strictly applicable would not fairly protect the rights of the Warrant holders in accordance with the basic intent and principles of such provisions) but, in the reasonable opinion of the Company's board of directors, an adjustment should be made to fairly protect the rights of the Warrant holders in accordance with the basic intent and principles of such provisions, then the Company shall appoint a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing, which shall give its opinion upon the adjustment, if any, to be made to protect the Warrant holders against dilution on a basis consistent with the basic intent and principles established in the other provisions of this Section 10. Upon receipt of such opinion, the Company shall forthwith make the adjustments, if any, described therein. (g) Notice of Adjustment. Upon any adjustment of the Exercise Price, then and in each such case the Company shall promptly deliver a notice to the Warrant holders, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of each Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (h) Other Notices. In case at any time: (i) the Company shall declare any cash dividend on its Common Stock; (ii) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (iii) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; 11 13 (iv) the Company shall authorize the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than cash dividends or cash distributions payable out of earnings or earned surplus or dividends payable in Common Stock); (v) there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation (other than a subsidiary of the Company in which the Company is the surviving or continuing corporation and no change occurs in the Company's Common Stock), or sale of all or substantially all of its assets to, another Person; (vi) there shall be a voluntary or involuntary dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, or winding up of the Company; or (vii) the Company proposes to take any other action or an event occurs which would require an adjustment of the Exercise Price pursuant to this Section 10; then, in any one or more of said cases, the Company shall give written notice, addressed to the Warrant holders at their addresses as shown on the books of the Company, of (1) the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (2) the date (or, if not then known, a reasonable approximation thereof by the Company) on which such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up or other action, as the case may be, shall take place. Such notice shall also specify (or, if not then known, reasonably approximate) the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up, or other action, as the case may be. Such written notice shall be given at least ten days prior to the action in question and not less than ten days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. Notwithstanding any other provision of this Section 10(h), the Company shall not be required to give any notice to Warrant holders pursuant to this Section 10(h) if the giving of such notice would violate applicable federal or state securities laws or the Company's obligations thereunder. (i) Adjustments below Par Value. Before taking any action which would cause an adjustment pursuant to this Section 10 to reduce the Exercise Price below the then par value (if any) of the Warrant Shares, the Company will take any corporate action which may, in the opinion of its counsel (which may be counsel employed by the Company), be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. 12 14 SECTION 11. Fractional Interests. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 11, be issuable on the exercise of any Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the fair market value of such fractional share. SECTION 12. No Stockholder Rights. Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the holders thereof the right to vote or to consent or to receive notice as stockholders in respect of the meetings of stockholders or the election of Directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. SECTION 13. Notices to Company and Warrant Holder. All notices, demands or other communications to any party under this Agreement shall be in writing Including facsimile transmission); shall be sent only by facsimile, by first class United States mail, by nationally recognized courier service, or by personal delivery; and shall be given, if to the Company to: Showscan Entertainment Inc. 3939 Landmark Street Culver City, California 90232-2315 Attention: W. Tucker Lemon, Vice President, General Counsel and Secretary Fax: (310) 280-0476 if to Holder, to: Intralink Film Graphic Design 155 North LaPeer Drive Los Angeles, CA 90048 Attention: Mr. Anthony Goldschmidt The Company or the Holder by notice to the other pursuant to this Section 13 may designate additional or different addresses for subsequent notices or communications. SECTION 14. Supplements and Amendments. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Warrant Certificates in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company may 13 15 deem necessary or desirable and which shall not in any way adversely affect the interests of the holders of Warrant Certificates. SECTION 15. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. SECTION 16. Termination. This Agreement shall terminate at 5:00 p.m., Los Angeles time on October 3, 1998. Notwithstanding the foregoing, this Agreement will terminate on any earlier date if all Warrants have been exercised. SECTION 17. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the internal laws of said State. SECTION 19. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company and the registered holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company and the registered holders of the Warrant Certificates. SECTION 20. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. [Signature Page Follows] 14 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. SHOWSCAN ENTERTAINMENT INC. By: /s/ WILLIAM SOADY _______________________________________ Title: President and CEO _______________________________________ [Seal] Attest: /s/ W. TUCKER LEMON ________________________ Title: Vice President INTRALINK FILM GRAPHIC DESIGN By: /s/ DAVID H. STERN __________________________________________ Title: Senior Vice President _______________________________________ 15 17 EXHIBIT A [Form of Warrant Certificate] [Face] THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. EXERCISABLE ON OR AFTER AUGUST 1, 1996 AND ON OR BEFORE OCTOBER 3, 1998 30,000 Warrants Warrant Certificate SHOWSCAN ENTERTAINMENT INC. This Warrant Certificate certifies that Intralink Film Graphic Design, or registered assigns, is the registered holder of Warrants expiring October 3, 1998 (the "Warrants") to purchase Common Stock, par value $.001 per share (the "Common Stock"), of Showscan Entertainment Inc., a Delaware corporation (the "Company"). Each Warrant entitles the holder upon exercise to receive from the Company on or before 5:00 p.m. Los Angeles Time on October 3, 1998, one fully paid and nonassessable share of Common Stock (a "Warrant Share") at the initial exercise price (the "Exercise Price") of $6.4375 payable in lawful money of the United States of America upon surrender of this Warrant Certificate and payment of the Exercise Price at the office of the Company designated for such purpose, but only subject to the conditions set forth herein and in the Warrant Agreement referred to on the reverse hereof. No Warrant may be exercised after 5:00 p.m., Los Angeles Time on October 3, 1998 and to the extent not exercised by such time such Warrants shall become void. Reference is hereby made to the further provisions of this Warrant Certificate set forth on the reverse hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Warrant Certificate shall not be valid unless countersigned by the Company, as such term is used in the Warrant Agreement. A-1 18 IN WITNESS WHEREOF, Showscan Entertainment Inc. has caused this Warrant Certificate to be signed by its President and by its Secretary and has caused its corporate seal to be affixed hereunto or imprinted hereon. Dated: October 3, 1995 SHOWSCAN ENTERTAINMENT INC. By _____________________________ President By _____________________________ Secretary A-2 19 [Form of Warrant Certificate] [Reverse] The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring October 3, 1998 entitling the holder on exercise to receive shares of Common Stock, par value $.001 per share, of the Company (the "Common Stock"), and are issued or to be issued pursuant to a Warrant Agreement dated as of October 3, 1995 (the "Warrant Agreement"), duly executed and delivered by the Company, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. A copy of the Warrant Agreement may be obtained by the holder hereof upon written request to the Company. Warrants may be exercised at any time on or after August 1, 1996 and on or before October 3, 1998. The holder of Warrants evidenced by this Warrant Certificate may exercise them by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the Exercise Price in cash at the office of the Company designated for such purpose. In the event that upon any exercise of Warrants evidenced hereby the number of Warrants exercised shall be less than the total number of Warrants evidenced hereby, there shall be issued to the holder hereof or its assignee a new Warrant Certificate evidencing the number of Warrants not exercised. No adjustment shall be made for any dividends on any Common Stock issuable upon exercise of this Warrant. The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price set forth on the face hereof may, subject to certain conditions, be adjusted. If the Exercise Price is adjusted, the Warrant Agreement provides that the number of shares of Common Stock issuable upon the exercise of each Warrant shall be adjusted. No fractions of a share of Common Stock will be issued upon the exercise of any Warrant, but the Company will pay the cash value thereof determined as provided in the Warrant Agreement. Warrant Certificates, when surrendered at the office of the Company by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. Upon due presentation for registration of transfer of this Warrant Certificate at the office of the Company a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in A-3 20 exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company may deem and treat the registered holder(s) thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. Neither the Warrants nor this Warrant Certificate entitles any holder hereof to any rights of a stockholder of the Company. A-4 21 [Form of Election to Purchase] (To Be Executed Upon Exercise Of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to receive __________ shares of Common Stock and herewith tenders payment for such shares to the order of Showscan Entertainment Inc. in the amount of $______ in accordance with the terms hereof. The undersigned requests that a certificate for such shares be registered in the name of ________________, whose address is _______________________________ and that such shares be delivered to ________________ whose address is ___________ ______________________. If said number of shares is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the remaining balance of such shares be registered in the name of ______________, whose address is _________________________, and that such Warrant Certificate be delivered to _________________, whose address is __________________. Signature: Date: Signature: A-5 EX-10.33 7 OPER. AGREEMENT W/ MALONEY DEVELOPMENT PARTNERSHIP 1 Exhibit 10.33 OPERATING AGREEMENT OF SHOWSCAN MALONEY, LLC August 25, 1995 2 OPERATING AGREEMENT OF SHOWSCAN MALONEY, LLC This Operating Agreement ("Agreement") is entered into as of August 25, 1995, by and among SHOWSCAN ATTRACTIONS VENTURE, a California general partnership ("SHOWSCAN"), and MALONEY DEVELOPMENT PARTNERSHIP LTD., a Texas limited partnership ("MALONEY"), as the sole members (SHOWSCAN and MALONEY are referred to herein individually as a "Member" and collectively as the "Members"), all of whom do hereby form a limited liability company pursuant to the Texas Limited Liability Company Act (the "Act"), upon the following terms and conditions: ARTICLE 1 DEFINITIONS For purposes of this Agreement, the terms set forth in Exhibit "A," when used herein with initial capitalization and not otherwise defined herein, shall have the meanings set forth on Exhibit "A". All other terms used herein with initial capitalization shall have the meanings set forth herein where the terms first are defined. ARTICLE 2 FORMATION, OPERATING AGREEMENT, NAME, PRINCIPAL EXECUTIVE OFFICE AND AGENT 2.1 Creation of Company. The parties hereto form a limited liability company (the "Company") pursuant to the provisions of the Act, and adopt and enter into this Agreement upon the terms and conditions set forth herein. To the extent the rights or obligations of the Members are different by reasons of any provision of this Agreement than they would be in the absence of such provisions, this Agreement, shall, to the extent permitted by the Act, control. 2.2 Name. The name of the Company shall be SHOWSCAN MALONEY, LLC, a Texas limited liability company. The business of the Company may be 2 3 conducted under any name chosen by the Members, and the Members may, in their sole discretion, by unanimous agreement, at any time and from time to time, change the name of the Company. 2.3 Principal Office. The principal place of business of the Company shall be located at 245 East Commerce Street, San Antonio, Texas 78205, or at such other place in the State of Texas as the Members may from time to time determine by unanimous agreement. 2.4 Agent. The name and address of the agent for service of process is MALONEY, 245 East Commerce Street, San Antonio, Texas 78205. ARTICLE 3 PURPOSES, OBJECTIVES AND TERM OF THE COMPANY 3.1 Term. The Company's term commenced with the filing of its Articles of Organization with the Secretary of State of the State of Texas on September 29, 1995 as document 7014146-22, and shall continue until December 31, 2045, unless terminated or dissolved sooner, in accordance with the provisions of this Agreement. 3.2 Purpose. The primary purpose of the Company shall be to acquire, own, develop and operate a high definition based SHOWSCAN simulation Theatre (the "Showscan Theatre"), comprised of one twenty four seat, H. D., Intamin Maxi-Motion motion base and seats, to be located on the San Antonio RiverWalk in San Antonio, Texas. In addition, the Company has been formed for the purpose of purchasing, acquiring, holding, owning, maintaining, managing, improving, developing, operating, selling, transferring, conveying, leasing, mortgaging, exchanging or otherwise disposing of or dealing in or with property of every and any nature whatsoever, including without limitation interests in other limited liability companies, partnerships, corporations or other entities and engaging in any lawful act or activity for which a limited liability company may be organized under Texas law and which is related to the primary purpose of the Company. The Company may do and perform everything which may be necessary, advisable, suitable or proper for the carrying out of its purpose and any such business and perform any and all acts in connection with accomplishing any of the purposes set forth in this Section. 3 4 ARTICLE 4 CAPITAL CONTRIBUTIONS, LLC INTERESTS, PERCENTAGES AND CAPITAL ACCOUNTS 4.1 Purchase of LLC Interests. The Members shall purchase equal interests ("LLC Interests") in the Company for a Capital Contribution of $1,000, each, in cash. The LLC Interests for each Member shall be 50%. Each LLC Interest, upon payment in full of the purchase price of $1,000, shall, except as described below, be fully paid and nonassessable and no Member shall be required to make further Capital Contributions to the Company. Unless otherwise agreed, the Members agree to contribute to the Company equally such funds as may be required to fund Company operations, as may be determined from time to time by unanimous consent of the Members. 4.2 Additional Required Capital Contributions. The Members shall make in kind capital contributions as follows: 4.2.1 Showscan. SHOWSCAN shall make in-kind capital contributions to the Company of equipment, including motion bases, seats and related mechanical equipment, shipping, installation and pre-show equipment (the "Showscan Equipment"). Such equipment shall be valued at {text redacted} of Showscan's {text redacted} for such equipment, estimated at {text redacted} (the actual price to be determined following installation), which value the parties hereto ascribe to be the fair market value of such capital contribution. 4.2.2 Maloney. MALONEY shall make in-kind capital contributions to the Company by constructing the tenant improvements to the premises to be occupied by the Company for the Showscan Theatre at 245 East Commerce Street, San Antonio, Texas 78205 (the "Premises") and contributing {text redacted} and {text redacted} to the Premises for the {text redacted} of {text redacted} of the Showscan Theatre. The tenant improvements shall be valued at their actual direct cost for the goods and services provided, which value the parties hereto ascribe to be the fair market value of such capital contribution. The parties agree that the present value of the minimum guaranteed rent and common area maintenance charges, which the parties agree is {text redacted}, is the fair market value of MALONEY s contribution. Accordingly, to equalize the initial Capital Contributions of the Members, as described in Section 4.2.3 below, it is currently estimated that MALONEY will be required to make a cash Capital Contribution of approximately {text redacted}, which sum MALONEY 4 5 agrees to pay {text redacted} at the time that SHOWSCAN orders the motion bases included in the Showscan Equipment and {text redacted} in accordance with Section 4.2.3, all of which sums shall be immediately disbursed, as a return of capital, to SHOWSCAN. 4.2.3 Equalization of Capital Accounts; Working Capital. Upon the opening of the Showscan Theatres (which shall be the first date of paid public admissions to the Showscan Theatres), the Members shall certify to each other (with documentation) the direct cost of their respective in-kind contributions. Upon acceptance of such cost statements, the Member with the lower in-kind capital contribution shall contribute cash to the Company in an amount equal to fifty percent (50%) of such deficit, which cash will be immediately disbursed to the other Member, as a return of Capital, so as to equalize the capital accounts of the Members. After such equalization of Capital Contributions, the Members shall agree on the working capital needs of the Company and, to the extent necessary make additional, equal, cash contributions to the capital of the Company. 4.3 Further Contributions, Interest on Capital and Withdrawal of Capital Contributions. There shall be no required capital contributions other than as expressly set forth in this Agreement. No Member shall have the right to make voluntary capital contributions to the Company, other than as expressly set forth in this Agreement, without the prior written consent of the other Member. There shall be no interest payable on any capital contributions made by any Member to the Company. No Member shall have the right or power to (a) withdraw or reduce his contribution to the capital of the Company except as a result of the dissolution of the Company or as otherwise provided by law, or (b) demand or receive property other than cash in return for his contribution. Except as described herein, no Member shall have priority over any other Member either as to the return of contributions of capital or as to net income, net loss, tax credits, other items or distributions. 4.4 Capital Accounts. A capital account ("Capital Account") shall be established for each Member, in accordance with the definition contained in Exhibit A. The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. To the extent such provisions are inconsistent with such Regulations or are incomplete with respect thereto, Capital Accounts shall be maintained in accordance with such Regulations. In the event a Member, or the holder of an Economic Interest, transfers an LLC Interest in accordance 5 6 with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred LLC Interest. 4.5 Loans by Members. With the approval of each of the Members, either Member may loan funds to the Company at such terms and rates as the Company may deem reasonable at the time. It is agreed among the Members that any liability of the Company shall be satisfied from Company assets only. 4.6 No Personal Liability. Members shall not be bound by, or be personally liable for, any judgment of a court, or in any other manner for any of the debts, expenses, liabilities, contracts, leases or obligations of the Company. 4.7 Liability for Certain Distributions. A Member or Assignee of Record may be obligated to return an improper Distribution received from the Company to the extent that (a) the Member or assignee of record has actual knowledge of the facts indicating the impropriety of the Distribution and (b) immediately after giving effect to such Distribution, all liabilities of the Company, other than liabilities to Members or Assignees of Record on account of their LLC Interest and liabilities as to which recourse of creditors is limited to specified property of the Company, exceed the fair market value of the Company's assets, provided that the fair market value of any property that is subject to a liability as to which recourse of creditors is so limited shall be included in the Company's assets only to the extent that the fair market value of the property exceeds the liability. 6 7 ARTICLE 5 MANAGEMENT OF THE COMPANY 5.1 Time Devoted to the Company. The Members shall devote such time on behalf of the Company as may be necessary to conduct the Company business. 5.2 Management. SHOWSCAN is hereby appointed as the sole Manager of the Company. SHOWSCAN shall have such rights, duties and powers as are specified in this Agreement, by the Act or conferred upon it by Vote of the Members. 5.2.1 Duties of the Manager The Manager is the general manager and chief executive officer of the Company and has, subject to the control of the Members, general supervision, direction, and control of the business of the Company. The Manager shall preside at all meetings of the Members. The Manager shall have the general powers and duties of management typically vested in the office of president of a corporation, and such other powers and duties as may be prescribed by the Members. Until the Members shall have elected more than one Manager, the term "Manager" as used in this Agreement, shall mean the Person who alone has the powers and duties specified in this Section. 5.2.2 Subordinate Officers. The Members may appoint a secretary, a chief financial officer, and such other officers of the Company as the business of the Company may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in this Agreement, or as the Members determine. 5.2.3 Removal and Resignation. Any Manager or other officer of the Company may be removed, with or without cause, by the Vote of the Members. Any Manager or other officer of the Company may resign at any time without prejudice to any rights of the Company under any contract to which the Manager or other officer of the Company is a party, by giving written notice to the Members, or to the Manager, as applicable. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 5.2.4 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled by a Vote of the Members 7 8 through the appointment of a successor officer who shall hold the office for the unexpired term. 5.3 Acts Requiring Unanimous Consent. Notwithstanding the foregoing, neither the Manager or any other Member shall have the authority, without the written consent or ratification of all the other Members, to do any of the acts enumerated below: 5.3.1 Borrow money in the Company's name in the ordinary course of business for trade credit in an aggregate amount which exceeds $50,000 or for any purposes not in the ordinary course of business; 5.3.2 Transfer, hypothecate, compromise or release any Company claim except on payment in full; 5.3.3 Except as to operation of the Showscan Theatre in the ordinary course of business, lease, license, hypothecate or otherwise dispose of any Company property, or enter into any contract for any such purpose; 5.3.4 Knowingly suffer or cause anything to be done whereby Company property may be seized or attached; 5.3.5 Do any act in contravention of, or amend, this Agreement; 5.3.6 Do any act which would make it impossible to carry on the ordinary business of the Company; 5.3.7 Make an assignment for the benefit of creditors; 5.3.8 Contest a judgment against the Company, submit a Company claim to arbitration, commence any legal action on behalf of the Company, settle any arbitration or litigation or confess a judgment against the Company; 5.3.9 Possess Company property or assign rights to specific Company property except in the ordinary course of Company business; 5.3.10 Enter into any contract for any such purpose containing a payment obligation in excess of an aggregate of $50,000; 8 9 5.3.11 Make any expenditures or enter into any agreement obligating the Company to make any expenditures in excess of an aggregate of $50,000; 5.3.12 Loan any Company funds; 5.3.13 Guaranty or secure the obligations of any person on behalf of the Company; 5.3.14 Employ any employee or independent contractor to perform services for the Company where the aggregate compensation for such person will exceed $50,000; 5.3.15 Enter into and execute any agreements on behalf of the Company which are restricted by this Section 5.3, except in accordance with Section 5.4; 5.3.16 Except as provided in Section 6.2 below, make distributions of cash or property from the Company; or 5.3.17 Appoint or discharge the Company's independent auditors; provided that Ernst & Young are approved as the Company s independent auditors. Any Member who violates any of the terms, provisions and conditions of this Agreement, in addition to being subject to all remedies, liabilities and obligations which may imposed upon it therefor by law, shall indemnify and save harmless the other Member from any and all claims, losses and liabilities, demands and actions which may arise out of or result from such violation. 5.4 Documents. All documents of any description, type or kind, to bind the Company, shall require the signature of all Members, except those agreements not restricted by Section 5.3 above which would require only one signature. 5.5 Company Indemnification. The Company shall indemnify and hold harmless each Member and its employees, agents and assigns, from any loss or damage incurred by them or by the Company in connection with the business of the Company, including costs and reasonable attorneys' fees and any amounts expended in the settlement of any claims or loss or damage, provided that, if such loss or liability arises out of any action or inaction of each Member, the Member must have determined, in good faith, that such course of conduct was in the best interests of the Company and did not constitute negligence or willful misconduct by the Member and, 9 10 provided further, that any such indemnification shall be recoverable only from the assets of the Company and not from the assets of the Members. 5.6 Availability of Films. SHOWSCAN agrees to make available to the Company, for exhibition at the Showscan Theatre, the full use of its entire current and future library of film software unless SHOWSCAN has entered into a written agreement with respect to future films which prohibits SHOWSCAN from making a particular film available to third parties in general or in particular geographic areas. In exchange for access to SHOWSCAN's film library, the Company will pay to SHOWSCAN film rental ("Film Rental") as described below. 5.7 Other Projects. Subject to Section 5.11, each Member may, independently or with others, engage in or possess an interest in other business ventures of every nature and description. Subject to Section 5.11, the Members may engage in or have an interest in other business ventures of any kind, including businesses competing directly with the business of the Company, independently or with others. Neither the Company nor any Member shall have by virtue of this Agreement any rights in or to those independent ventures or to be offered the opportunity to participate in those ventures. 5.8 Compensation. 5.8.1 Management Fee. For its services in providing the day-to-day management of the Showscan Theatre, SHOWSCAN shall receive a management fee (the "Management Fee") equal to {text redacted} of the {text redacted} of the Company. The Management Fee shall be payable within thirty (30) days of the end of each calendar month. 5.8.2 Film Rental. In addition to the foregoing, SHOWSCAN shall be entitled to receive Film Rental for the use of SHOWSCAN owned or controlled films, in an amount equal to {text redacted} of the {text redacted} of the Showscan Theatre on the first {text redacted} and {text redacted} of such receipts, and {text redacted} thereafter. Film Rental shall be payable within thirty (30) days of the end of each calendar month. 5.8.3 Rent. The Company shall lease the Premises from MALONEY. The lease shall be pursuant to a separate lease agreement which shall provide for the lease of three thousand one hundred twenty-five (3,125) square feet of street level area, all according to terms as may be mutually agreed between the Members in such 10 11 agreement; provided however, that the {text redacted} and {text redacted} shall be contributed to the Company as provided in Section 4.2.2 above. 5.8.4 No Other Fees Unless Agreed. Except as may be otherwise agreed upon by the Members, no Member or their Affiliates shall be entitled to any salary or other compensation, however defined, directly or indirectly, from the Company, and shall only be entitled to reimbursement of ordinary and necessary expenses incurred on behalf of the Company. 5.8.5 Treatment of Fees. Payment of fees in accordance with this Section to Members or affiliates of Members shall be treated as either an I.R.S. Code Section 707(a) or 707(c) expenditure and not as a Company distribution, and accordingly will be treated as an expense deduction of the Company in arriving at net income and/or net loss. As a result, any such payment of fees will not affect the partners' capital accounts except to the extent that they impact the determination of net income or net loss of the Company. 5.9 Company Expenses; Reimbursement; Annual Budget. All Company expenses shall, to the extent practical, be billed directly to and be payable by the Company. Each Member or employees of the Company or of a Member may charge the Company and be reimbursed by it for any and all reasonable, ordinary and necessary expenses actually incurred by them in connection with the performance of their responsibilities as a Member of the Company and the operation of the Company's business. At least 90 days before commencement of each fiscal year of the Company, the Members shall unanimously agree upon an administrative budget for the Company and the capital contributions, if any, of the Members required to fund such budget. 5.10 No Rebates. No rebates or give-ups shall be made either directly or indirectly by the Company to a Member, nor shall any Member or their Affiliates receive any fee, directly or indirectly, from a third party on account of business being conducted with the Company. 5.11 Exclusivity. SHOWSCAN grants to the Company the exclusive right (except for existing locations) to operate a SHOWSCAN motion simulation Theatre in a {text redacted} of {text redacted}, as depicted on Exhibit B hereof, of the {text redacted} (the "Exclusive Zone"). The Company and Maloney grants to SHOWSCAN the exclusive right to provide any motion simulation systems installed at any location now or hereafter owned or operated by the Company or Maloney in the Exclusive Zone. The 11 12 provisions of this Section 5.11 shall expire and be of no further force or effect upon the termination or expiration of this Agreement. 5.12 Concessions and Merchandising. Concessions and merchandising revenue generated by the Showscan Theatre shall be included in the gross revenues of the Company. 5.13 Intellectual Property; Confidentiality. SHOWSCAN and MALONEY expressly recognize and agree that all uses by any party of any patents, trademarks or trade names of any other party shall be subject to the prior express written approval of the party whose patent, trademark or trade name is proposed to be used. This Agreement does not constitute any license or other right to use any patent, trademark or trade name of any party. Any such license for use of Showscan intellectual property in connection with the operation of the Showscan Theatre will be part of a separate license agreement between Showscan Entertainment Inc. and the Company. Each party agrees to treat all non- public information received from any other party during the term of this Agreement on a strictly confidential basis for use only in connection with the operation of the Showscan Theatre and the administration of this Agreement. ARTICLE 6 ALLOCATION OF NET INCOME, NET LOSS TAX CREDITS, OTHER ITEMS AND DISTRIBUTIONS 6.1 Allocation of Net Income and Net Loss. All Company Net Income and Net Loss shall be allocated on the Company books in the following manner: 6.1.1 Allocation of Net Loss. Net Loss shall be allocated in the following manner and order of priority: 6.1.1.1 First, Net Loss shall be allocated in the amount of and in the same manner as Net Income, if any, was previously allocated under subparagraph 6.1.2.2; 6.1.1.2 Second, Net Loss shall be allocated among the Members in proportion to the aggregate Net Capital Contributions made by each Member until each Member has been allocated Net Loss pursuant to this Section 6.1.1.2 equal to the amount of such Member's Net Capital Contributions. 12 13 6.1.1.3 Third, any additional Net Loss shall be allocated among the Members in proportion to their LLC Interests. The Net Loss allocated pursuant to Sections 6.1.1.2 and 6.1.1.3 hereof shall not exceed the maximum amount of Net Loss that can be so allocated without causing any Member to have an Adjusted Capital Account Deficit at the end of any fiscal year. In the event some but not all of the Members would have Adjusted Capital Account Deficits as a consequence of an allocation of Net Loss pursuant to Sections 6.1.1.2 and 6.1.1.3, the limitation set forth in this Section shall be applied on an LLC Interest Holder basis so as to allocate the maximum permissible Net Loss to each Member under Regulations Section l.704-1(b)(2)(ii)(d). 6.1.2 Allocation of Net Income. Net Income shall be allocated in the following manner and order of priority: 6.1.2.1 First, to the extent any Net Loss has been previously allocated among the Members under Section 6.1.1.2 or 6.1.1.3 and has not been previously recouped under this Section 6.1.2.1, Net Income shall be allocated among the Members in the same ratio as the prior Net Loss was allocated. The order of recouping such Net Loss shall be first the Net Loss allocated under Section 6.1.1.3, and then Section 6.1.1.2 6.1.2.2 Second, to the Members in the ratio of their Preferred Returns, if any, until the Member(s) have been allocated an amount of Net Income under this subparagraph 6.1.2.2 equal to the Preferred Return, calculated to the last day of the current accounting period, on the Surplus Contribution of the Member; 6.1.2.3 Third, Net Income shall be allocated among the Members in proportion to their LLC Interests. 6.2 Definitional Issues Related to Allocation of Income, Gain, Loss, Deduction and Credit. Distributions attributable to a year shall be deemed to occur prior to allocations referable to such year. Each item of Company income, gain, loss, deduction and credit shall be allocated at the end of each fiscal year of the Company among the Members in accordance with their LLC Interests. 13 14 6.3 Distributions. 6.3.1 Required Tax Distributions. For each taxable year in which the Company has a positive taxable income for federal income tax purposes ("Taxable Income"), the Company shall distribute to the Members, in the manner described below, within ninety (90) days of the end of the taxable year, an amount equal to the product of (a) the aggregate amount of Taxable Income for the year and (b) the Combined Tax Rate (the "Tax Distribution"). The Tax Distribution shall be distributed among the Members in proportion to their share of taxable income allocated to each of them for the taxable year. The "Combined Tax Rate" for a given year shall be equal to (a) the greater of the highest corporate federal income tax rate or the highest individual federal tax rate (including any surtax on high income taxpayers) for such year ("Federal Rate") plus (b) the greater of the highest state corporate franchise income tax rate or the sum of (i) the highest individual state income tax rate for such year and (ii) the corporate franchise income tax on Subchapter S Corporations ("State Rate") less (c) an amount equal to the product of (i) the Federal Rate and (ii) the State Rate. For example, if the Federal Rate is 40% and the State Rate is 10%, the Combined Tax Rate is 46% [40% + 10% - (40% x 10%)]. The Tax Distributions to be made under this subparagraph 6.3.1 are mandatory. 6.3.2 Definition and Distribution of Excess Cash Flow. 6.3.2.1 Excess Cash Flow. The entire Excess Cash Flow (as defined below) of the Company during each fiscal year shall be distributed as set forth in Section 6.3.2.2 of this Agreement. The term "Excess Cash Flow" shall mean the amount by which gross cash receipts (not including capital contributions or loans, but including any amounts released from Working Capital (as defined below) of the Company during such fiscal year exceed the aggregate of (a) all costs and expenditures (whether expended or capitalized) paid during such calendar year and the payment of Tax Distributions pursuant to Section 6.3.1 hereof (without deduction of any charge for depreciation, amortization, or other expenses not paid in cash or property), but excluding costs and expenditures paid from capital contributions, loans or Working Capital; (b) the cost of debt servicing, if any, including principal and interest, paid during each fiscal year on loans; and (c) any amount which the Company shall add (except out of capital contributions or loans) to working capital or reserves ("Working Capital"). The Members agree that the Working Capital of the Company shall be an amount determined by the Members, from time to time, to be sufficient to meet the reasonably foreseeable cash operating needs of the Company. 14 15 6.3.2.2 Distributions of Excess Cash Flow shall be distributed in the following order of priority: 6.3.2.2.1 First, to the Members, in the ratio of their Preferred Return, until the Members have received an aggregate amount pursuant to this Section 6.3.2.2.1 equal to such Preferred Return; 6.3.2.2.2 Second, to the Member with a Surplus Contribution until such Member has been allocated an amount equal to the Surplus Contribution (i.e. the Capital Contributions of the Members have been equalized); 6.3.2.2.3 Third, to the Members, in the ratio of their Net Capital Contributions until the Members have received an aggregate amount pursuant to this Section 6.3.2.2.3 equal to such Net Capital Contributions; and 6.3.2.2.4 Thereafter, to the Members in accordance with their LLC Interests. 6.4 Residual Allocations. Except as otherwise provided in this Agreement, all items of income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Net Income or Net Losses, as the case may be, for the Fiscal Year. 6.5 Qualified Income Offset. If any Member unexpectedly receives any adjustments, allocation or distributions described in clauses (4), (5) or (6) of Regulations Section 1.704-1(b)(2)(ii)(d), items of income shall be specially allocated to such Member in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible. This Section is intended to constitute a "qualified income offset" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(d)(3). 6.6 Minimum Gain Chargeback. If there is a net decrease in Minimum Gain during a Fiscal Year, each Member will be allocated, before any other allocation under this Article, items of income and gain for such Fiscal Year (and if necessary, subsequent years) in proportion to and to the extent of an amount equal to such Member's share of the net decrease in Minimum Gain determined in accordance with Regulations Section 1.704-2(g)(2). This Section is intended to comply with, and shall be interpreted consistently with, the "minimum gain chargeback" provisions of Regulations Section 1.704-2(f). 15 16 6.7 Member Nonrecourse Debt Minimum Gain Chargeback. Notwithstanding any other provision of this Article, with the sole exception of the preceding Section, if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to Member Nonrecourse Debt during any Fiscal Year, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(I)(5), shall be specially allocated items of income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704- 2(I)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(I)(4). This Section is intended to comply with a minimum gain chargeback requirement of that Section of the Regulations and shall be interpreted consistently therewith. 6.8 Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated to the Member who bears (or is deemed to bear) the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(I)(2). 6.9 Special Allocations. Any special allocations of items of Net Income pursuant to the preceding Sections shall be taken into account in computing subsequent allocations of Net Income pursuant to Section 6.1, so that the net amount of any items so allocated and the gain, loss and any other item allocated to each Member pursuant to Section 6.1 shall, to the extent possible, be equal to the net amount that would have been allocated to each such Member pursuant to the provisions of this Article if such special allocations had not occurred. 6.10 Fees to Members or Affiliates. Notwithstanding the provisions of Section 6.1, in the event that any fees, interest, or other amounts paid to any Member or any Affiliate thereof pursuant to this Agreement or any other agreement between the Company and any Member or Affiliate thereof providing for the payment of such amount, and deducted by the Company in reliance on Section 707(a) and/or 707(c) of the Code, are disallowed as deductions to the Company on its federal income tax return and are treated as Company distributions, then 16 17 6.10.1 the Net Income or Net Loss, as the case may be, for the Fiscal Year in which such fees, interest, or other amounts were paid shall be increased or decreased, as the case may be, by the amount of such fees, interest, or other amounts that are treated as Company distributions; and 6.10.2 there shall be allocated to the Member to which (or to whose Affiliate) such fees, interest, or other amounts were paid, prior to the allocations pursuant to Section 6.1, an amount of gross income for the Fiscal Year equal to the amount of such fees, interest, or other amounts that are treated as Company distributions. 6.11 Section 704(c) Allocation. Any item of income, gain, loss, and deduction with respect to any property (other than cash) that has been contributed by a Member to the capital of the Company and which is required or permitted to be allocated to such Member for income tax purposes under Section 704(c) of the Code so as to take into account the variation between the tax basis of such property and its fair market value at the time of its contribution shall be allocated to such Member solely for income tax purposes in the manner so required or permitted. 6.12 Interim Closing of Books. If the interest of a Member in the Company changes during a fiscal year (whether by disposition of less than an entire interest, by entry of new members, or otherwise), or if any Member shall transfer its entire LLC Interest during any taxable year, the allocation of items of income, gain, loss, deduction or credit for that fiscal year shall be adjusted to take into account such Member's varying LLC Interest during that fiscal year using the interim closing of the books method. 6.13 Compliance With the Treasury Regulations. The provisions of this Article 6 shall be interpreted in accordance with the provisions of Section 1.704-1(b) of the Treasury Regulations. To the extent that this Agreement is silent as to the treatment of a particular item, or the provisions of this Agreement conflict with the requirements of Section 1.704-1(b) of the Treasury Regulations, such Treasury Regulations shall control. 6.14 Non-Cash Distributions. Property other than cash distributed by the Company, if any, shall be valued at its fair market value at the time of the distribution. 6.15 Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) 17 18 is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. 6.16 Members' Consent to Distribution and Allocation Methods. The methods hereinabove set forth by which Distributions and allocations of Net Income and Net Loss are made and apportioned are hereby expressly consented to by each Member as an express condition to becoming a Member. 6.17 Sale for Cash and Notes. Should the Company's assets be sold for a combination of cash and promissory notes, such promissory notes shall be valued at their principal amount less underlying encumbrances, if any, and pro rata individual portions thereof deemed divided and distributed among the Members as if the Company were dissolved on the date of the sale for purposes of Distributions and allocations thereafter. ARTICLE 7 MEETINGS OF MEMBERS 7.1 Place of Meetings. Meetings of the Members shall be held at the principal office of the Company, unless some other appropriate and convenient location, either within or without the state where the Articles of Organization were filed, shall be designated for that purpose from time to time by the Manager, if there be one, or if not, a Majority in Interest of the Members. 7.2 Annual Meetings of Members. An annual meeting of the Members shall be held, each year, within ninety (90) days of the anniversary of the date of this Agreement. At the annual meeting, the Members shall transact such business as may be properly brought before the meeting. 7.3 Special Meetings. Special meetings of the Members may be called at any time by the Manager, if there be one, or by one or more Members holding in the aggregate more than ten percent (10%) of the LLC Interests. Upon receipt of a written 18 19 request, which request may be mailed or delivered personally to the Manager, if there be one, or if not, then to all of the Members, by any Person entitled to call a special meeting of Members, the Manager, or the Member calling the meeting, as the case may be, shall cause notice to be given to the Members that a meeting will be held at a time requested by the Person or Persons calling the meeting, which time for the meeting shall be not less than ten (10) nor more than sixty (60) days after the receipt of such request. If such notice is not given within twenty (20) days after receipt of such request, the Persons calling the meeting may give notice thereof in the manner provided by this Agreement. 7.4 Notice of Meetings. Except as provided for in Section 7.3 for special meetings, notice of meetings shall be given to the Members in writing not less than ten (10) nor more than sixty (60) days before the date of the meeting. Notices for regular and special meetings shall be given personally, by mail, or by facsimile, and shall be sent to each Member's last known business address appearing on the books of the Company. Such notice shall be deemed given at the time it is delivered personally, or deposited in the mail, or sent by facsimile. Notice of any meeting of Members shall specify the place, the day and the hour of the meeting, and (a) in case of a special meeting, the general nature of the business to be transacted, or (b) in the case of an annual meeting, those matters which the Manager, if there be one, or if not, the Member transmitting the notice of meeting, at the date of mailing, intends to present for action by the Members. 7.5 Validation of Members' Meetings. The transactions of a meeting of Members which was not called or noticed pursuant to the provisions of Section 7.3 or 7.4 shall be valid as though transacted at a meeting duly held after regular call and notice, if Members holding in the aggregate fifty-one percent (51%) or more of the LLC Interests are present, and if, either before or after the meeting, each of the Members entitled to vote but not present (whether in person or by proxy, as that term is used in the Act) at the meeting signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the records of the Company. Attendance shall constitute a waiver of notice, unless objection shall be made. 7.6 Actions Without a Meeting. Any action which may be taken at any annual or special meeting of Members may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by Members holding in the aggregate the number of votes equal to or greater than the Vote, unless a lesser vote is provided for by this Agreement or the Act; provided, however, that any 19 20 action which by the terms of this Agreement or by the Act is required to be taken pursuant to a greater vote of the Members may only be taken by a written consent which has been signed by Members holding the requisite number of votes. 7.7 Quorum and Effect of Vote. Each Member shall have a vote equal to the LLC Interest held by such Member, provided that if, pursuant to the Act or the terms of this Agreement, a Member is not entitled to vote on a specific matter, then such Member's number of votes and LLC Interest shall not be considered for purposes of determining whether a quorum is present, or whether approval by Vote of the Members has been obtained, in respect of such specific matter. Members holding an aggregate of fifty-one percent (51%) or more of the LLC Interests shall constitute a quorum at all meetings of the Members for the transaction of business, and the Vote of Members shall be `required to approve any action, unless a greater vote is required or a lesser vote is provided for by this Agreement or by the Act. ARTICLE 8 RESTRICTIONS ON TRANSFER OR CONVERSION OF LLC INTERESTS; ADMISSION OF NEW MEMBERS 8.1 Transfer or Assignment of Member's LLC Interest. The LLC Interest of each Member and the Economic Interest of a Person who is not a Member constitutes personal property of the Member or Economic Interest holder. Each Member and each Economic Interest holder has no interest in the assets or property of the Company. 8.1.1 A Member's LLC Interest or an Economic Interest may be transferred or assigned only as provided in this Agreement. 8.1.2 No transfer, hypothecation, encumbrance or assignment ("Transfer") of a Member's LLC Interest, or any part thereof, in the Company will be valid without the consent of a Majority in Interest of the Members, other than the Member proposing to dispose of its LLC Interest. 8.1.3 A Transfer of an Economic Interest may be done without the consent of the other Members. Any holder of an Economic Interest shall have no right to participate in the management of the business and affairs of the Company or to become a Member thereof. 20 21 8.2 Void Transfers. Any Transfer of an LLC Interest which does not satisfy the requirement of Section 8.1.2 shall only effect a Transfer of an Economic Interest, and the transferring Member shall continue to be obligated under each and every provision of this Agreement. 8.3 Permitted Transfers/Right of First Refusal. A Member may Transfer its LLC Interest to another or substitute another in its place or stead (such assignee or substitute shall be known as a permitted transferee) only to any other Member or to any other person only after (a) obtaining the consent described in Section 8.1.2 above, (b) in the case of a Transfer for consideration, offering such LLC Interests to the Company and the other Members at the same terms and conditions as a bona fide third party offer (the "Right of First Refusal"), and then only in accordance with this Article and (c) in the case of a Transfer for no consideration, offering such LLC Interests to the Company and the other Members at the fair market value of such LLC Interests. The selling Member shall make the Right of First Refusal to the Company in writing. If, within ten (10) days of receipt of the Right of First Refusal, the Company does not notify the selling Member that it intends to acquire such interest then such interest shall be offered to the remaining Members, pari passu, on the same terms and conditions as the Right of First Refusal. If within twenty (20) days of the original notice to the Company of the selling Member's desire to sell, neither the Company nor the Members have purchased the selling Member's LLC Interest, then such selling Member may sell its interest to a third party but only upon such terms and conditions which have previously been offered to the Company and the Members pursuant to this Section 8.3. 8.4 Prohibition on Assignments Changing Company's Tax Status. Notwithstanding anything to the contrary in this Agreement, in no event shall any transfer of an LLC Interest (including the transfer or assignment of any Economic Interest) be permitted if such transfer is a result of "public trading" as defined in Code Section 7704(b)(1) and (2). Both the Members and the Non-Manager Members shall refuse to recognize any trades that occur as a result of such "public trading" as determined in the sole subjective discretion of the Members, and they shall take such actions as are necessary to assure that such trades are not, in fact, recognized. 8.5 Admission of New Members. A new Member may be admitted into the Company only upon the consent of a Majority in Interest of the Members. 8.5.1 The amount of Capital Contribution which must be made by a new Member shall be determined by the vote of all existing Members. 21 22 8.5.2 A new Member shall not be deemed admitted into the Company until the Capital Contribution required of such Person shall have been made and such Person has become a party to this Agreement. ARTICLE 9 BOOKS, RECORDS, ACCOUNTINGS AND REPORTS 9.1 Maintenance of Books and Records. The Company shall cause books and records of the Company to be maintained in accordance with United States generally accepted accounting principles, and shall give reports to the Members in accordance with prudent business practices and the Act. There shall be kept at the principal office of the Company, as well as at the office of record of the Company specified in Section 2.3, if different, all records required to be maintained by the Company pursuant to the Act. 9.2 Inspection and Audit Rights. Each Member and each holder of an Economic Interest in the Company who is not a Member has the right upon reasonable request, for purposes reasonably related to the interest of that Person, to inspect and copy during normal business hours any of the Company books and records required to be maintained in accordance with this Article. Such right may be exercised by the Person or by that Person's agent or attorney. Any Member may require that the Company issue annual reviewed and/or audited financial statements, all at the Company s expense. 9.3 Rights of Members and Non-Members. Upon the request of a Member or a holder of an Economic Interest who is not a Member, for purposes reasonably related to the interest of that Person, the Manager, if there be one, or if not, the other Members, shall promptly deliver to the Member or holder of an Economic Interest, at the expense of the Company, a copy of this Agreement and a copy of the information required to be maintained and made available to Members pursuant to the Act. 9.4 Method of Accounting. All decisions as to accounting elections with respect to the keeping of accounts, books, and records of the Company shall be made by unanimous consent of the Members. The Company shall use the accrual method of accounting ("accrual method") to the extent permissible, and the books and records shall be kept using 22 23 United States generally accepted accounting principles applied in a consistent manner by the Company and shall reflect all Company transactions and be appropriate and adequate for the Company's business. 9.5 Fiscal Year. The fiscal year of the Company shall be the year ending March 31. If the Company shall terminate for any reasons as provided herein, the period commencing on the date following the last day of the fiscal year of the Company next preceding the period in which such termination shall occur and ending on such date of termination shall also be deemed to be a fiscal year of the Company, provided such expenses are included in the administrative budget described in Section 5.9 or are otherwise unanimously approved by the Members. 9.6 Reports and Tax Returns. The Company accounts and books shall be closed at the end of each fiscal year of the Company. Financial statements and tax returns shall be prepared by the accountants chosen by the Members, and there shall be delivered to the Members, within ninety (90) days of the end of such fiscal year, federal and state income tax informational returns and financial statements of the Company prepared by said accountants. 9.7 Banking. All funds of the Company shall be deposited in the name of the Company in such bank account or accounts as shall be determined by the Members. All withdrawals therefrom shall be made upon checks signed on behalf of the Company by the Manager or by such persons as may be authorized by the Manager to sign checks on behalf of the Company. 9.8 Costs. All reasonable costs, expenses and fees incurred by the Company in maintaining the accounts, books and records of the Company and otherwise carrying out the provisions of this Article shall be Company expenses charged to and paid by the Company. 9.9 Tax Matters. SHOWSCAN shall be designated as "Tax Matters Partner" (as defined in Code section 6231), to represent the Company (at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including resulting judicial and administrative proceedings, and to expend LLC funds for professional services and costs associated therewith. In its capacity as "Tax Matters Partner," the designated Person shall oversee the Company tax affairs in the overall best interests of the Company. 23 24 ARTICLE 10 DISSOLUTION, WINDING UP AND TERMINATION OF THE COMPANY 10.1 Dissolution. The Company shall be dissolved upon the occurrence of any of the following events: 10.1.1 When the Term of the Company expires; 10.1.2 The written approval by a Majority In Interest of the Members to dissolve the Company; 10.1.3 The withdrawal, resignation, expulsion, bankruptcy or dissolution of a Member or the occurrence of any other event which terminates the Member's continued membership in the Company, unless the business of the Company is continued by the unanimous vote of all remaining Members within ninety (90) days of the happening of that event. 10.1.4 The election by a Member to dissolve the Company after the occurrence of a Deadlock (as hereinafter defined) and after the expiration of the Resolution Notice (as hereinafter defined). As used herein, "Deadlock" shall mean the bona fide inability of all Members to reach unanimous agreement for the sale or license (more than $50,000 consideration) of Company Property or any matter described in Section 5.3 where the aggregate consideration is more than $50,000. In the event of the occurrence of such Deadlock, any Member may deliver written notice ("Resolution Notice") to the other Member stating that if such Deadlock is not resolved to the satisfaction of such Member within fourteen (14) days after the date of the notice, such Member shall after the expiration of such fourteen day period have the power at its option, for a period of five (5) days ("Dissolution Option Period") to cause a dissolution of the Company. Failure of any Member to deliver such Resolution Notice shall prevent such Member from dissolving the Company pursuant to this Section. The withdrawal of any Resolution Notice shall in no way prevent any Member from giving any other Resolution Notice pursuant to this Section, at any time, in connection with any Deadlock and subsequently dissolving the Company. Failure of any Member after the expiration of the Dissolution Option Period to cause the dissolution of the Company shall prevent such Member from dissolving the Company pursuant to this Section until the occurrence of a Deadlock and the delivery of a new Resolution Notice. 24 25 10.2 Statement of Intent to Dissolve. As soon as possible after the occurrence of any of the events specified in Section 10.1 above, the Company shall execute a Statement of Intent to Dissolve in such form as prescribed by the Secretary of State. 10.3 Conduct of Business. Upon the filing of the Statement of Intent to Dissolve with the Secretary of State, the Company shall cease to carry on its business, except insofar as may be necessary for the winding up of its business, but the Company's separate existence shall continue until the Articles of Dissolution have been filed with the Secretary of State or until a decree dissolving the Company has been entered by a court of competent jurisdiction. 10.4 Distribution of Net Proceeds. The Members shall continue to divide Net Income and Losses and Available Cash Flow during the winding-up period in the same manner and the same priorities as provided for in Article 6. The proceeds from the liquidation of Property shall be applied in the following order: 10.4.1 To the payment of creditors, in the order of priority as provided by law, except to Members on account of their contributions; 10.4.2 To the payment of loans or advances that may have been made by any of the Members for working capital or other requirements of the Company; 10.4.3 To the Members in accordance with the positive balances in their Capital Accounts after adjustments for all allocations of Net Income and Net Loss, until the Capital Accounts have been reduced to zero; 10.4.4 To the Members in accordance with their LLC Interests Where the distribution pursuant to this Section 10.4 consists both of cash (or cash equivalents) and non-cash assets, the cash (or cash equivalents) shall first be distributed, in a descending order, to fully satisfy each category starting with the most preferred category above. In the case of noncash assets, the distribution values are to be based on the fair market value thereof as determined in good faith by the liquidator, and the shortest maturity portion of such non-cash assets (e.g., notes or other indebtedness) shall, to the extent such non-cash assets are readily divisible, be distributed, in a descending order, to fully satisfy each category above, starting with the most preferred category. 25 26 The foregoing notwithstanding, if, after all allocations for the period through dissolution and termination have been made, any Member shall have a negative balance in its Capital Account, such Member shall not be obligated to restore his negative capital account balance. Upon completion of the dissolution and winding up of the Company, the Company shall terminate. 10.5 Continued Existence. Subject to Section 10.1, the merger, acquisition, bankruptcy, or insolvency of any Member shall not cause the dissolution of the Company but the Company shall continue in existence and the interest of such Member shall be held by its legal representatives, receivers or trustees in bankruptcy or successors in interest as the case may be. In such event, the legal representatives, or receivers or trustees in bankruptcy or successors in interest, as the case may be, of such Member shall be entitled to vote its Company interest and shall be entitled to receive allocations of net income, net losses and cash available for distribution and shall be bound by the same terms and provisions of this Agreement as if it were such Member, including the provisions of this Article. 10.6 Withdrawal or Admission of a Member. The withdrawal of a Member or an admission of a new Member shall not cause the dissolution of the Company. 26 27 ARTICLE 11 MISCELLANEOUS 11.1 Waiver. No consent or waiver, express or implied, by any Member to or of any breach or default by any other Member in the performance by the other of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such other Members of the same or any other obligations of such Member hereunder. 11.2 Further Assurances. Each Member hereto agrees to execute and deliver all such other and additional instruments and documents and do all such other acts and things as may be necessary to more fully effectuate this Agreement and carry on the business contemplated herein. 11.3 Attorney Fees. If the Company or any Member is a party to any action or proceeding to enforce any of the terms of this Agreement or any action or proceeding in any other way pertaining to Company affairs or this Agreement, the prevailing party in such action or proceeding (as determined by the judge or presiding official therein) shall be entitled to receive from the opposing party or parties the prevailing party's costs and reasonable accountants', experts' and attorneys' fees incurred in prosecuting, defending or appearing in such action or proceeding. 11.4 Remedies Cumulative. Each right, power and remedy provided for herein or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for herein or now or hereafter existing at law, in equity, by statute or otherwise, and the exercise or beginning of the exercise or the forbearance of exercise by any party of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by such party of any or all of such other rights, powers or remedies. 11.5 Article and Section Headings. The Article and Section headings in no way define, limit, extend or interpret the scope of this Agreement or of any particular Article or Section. 11.6 Binding. This Agreement shall inure to and bind all the parties, their estates, heirs, successors in interest, personal representatives and permitted assigns. 27 28 11.7 Construction. This Agreement shall be deemed a contract made under and shall be construed and enforced and the legality and validity of each term and condition shall be determined in accordance with the internal, local laws of the state of Texas applicable to contracts fully executed and to be performed therein. 11.8 Integrated Agreement. This Agreement constitutes the entire Agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, representations, warranties, statements, promises, information, arrangements and understandings, either oral or written, express or implied with respect to the subject matter hereof all of which are specifically incorporated into this Agreement. No party hereto shall be bound by or charged with any oral or written agreements, representations, warranties, statements, promises, information, arrangements or understandings not specifically set forth herein. The parties hereto further acknowledge and agree that in entering into this Agreement they have not in any way relied and will not in any way rely on any oral or written agreements, representations, warranties, statements, promises, information, arrangements or understandings not specifically set forth herein. 11.9 Arbitration. Any controversy or dispute arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration. Arbitrators will be selected as hereinafter provided. Arbitration shall be conducted in accordance with the rules existing at the date thereof of the American Arbitration Association. The dispute shall be submitted to three arbitrators, with each party choosing one of the arbitrators, the third to be selected and appointed by the two arbitrators appointed (or the third selected by the American Arbitration Association). Should either party to this Agreement fail to appoint an arbitrator as required by this Section within 30 days after any notification of any demand for arbitration hereunder, the arbitrator appointed by the other party shall be binding and conclusive on both parties to this Agreement (or, such arbitrator shall be chosen by the American Arbitration Association). The meetings of the arbitrators shall be held at such place or places as may be agreed upon by the arbitrators. The cost and expense and fees of the arbitrators shall be borne by the parties hereto equally or may be assessed by the arbitrators, in whole or in part, against either party to this Agreement. 11.10 Pronouns. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person, persons, entity or entities may require. 28 29 11.11 Exhibits. Each and every Exhibit attached hereto is incorporated herein by this reference as if set forth in full. 11.12 Severability. Every provision of this Agreement is severable. If any term or provision hereof is held to be illegal or invalid for any reason by any duly constituted court, agency or tribunal, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. 11.13 Notices. All notices, approvals, requests or demands ("Notices") which any party is required or may desire to give to the other hereunder shall be in writing, unless otherwise specified, and shall be addressed to the address provided for herein. All Notices shall be given in one of the following ways: (a) by delivery to the address set forth below for such party; or (b) by mail, registered or certified (return receipt requested), postage prepaid, airmail (if available); or (c) by transmittal by any electronic means whether now known or hereafter developed, including but not limited to, telex, telecopier, or laser transmissions, able to be received by the party intended to receive notice. Each Notice shall, except as herein expressly provided, be conclusively deemed to be effective when received. The addresses of the parties shall be those of which the other party actually receives written Notice and until further notice are: Showscan: Showscan Entertainment Inc. 3939 Landmark Street Culver City, CA 90232-2315 Attention: Chuck Allen With a copy to: W. Tucker Lemon and Dennis Pope Tel: 310-558-0150 Fax: 310-280-0476 Maloney: Maloney Development Partnership, Ltd. The Maloney Building 239 East Commerce Street San Antonio, Texas 78205 Tel: 210-226-8888 Fax: 210-222-8477 11.14 Force Majeure. Notwithstanding any other provision of this Agreement neither party shall be liable to the other in damages or otherwise because of any failure 29 30 to perform its obligations hereunder, except for any obligation for the payment of money, caused by fire, earthquake, flood, epidemic, catastrophic accident, explosion, casualty, strike, lock-out, riot, civil disturbance, act of public enemy, embargo, war, act of God, by any municipal, state or federal ordinance or law, by any legally constituted authority, whether municipal, state or federal, or by the issuance of any executive or judicial order. 11.15 Right to Rely upon the Authority of Members. No person dealing with a Member shall be required to determine its authority to make any commitment or undertaking on behalf of the Company, nor to determine any fact or circumstance bearing upon the existence of its authority. In addition, no purchaser of any asset owned by the Company shall be required to determine the sole and exclusive authority of a Member to sign and deliver on behalf of the Company any instrument of transfer with respect to such asset, or to ensure the proper application or distribution of revenues or proceeds paid or credited in connection therewith. 11.16 No Right to Withdraw and Waiver of Action for Partition. No Member shall be permitted to withdraw from the Company. Each of the Members hereby irrevocably waives, during the term of this Company and during the period of its liquidation following any dissolution, any right that such Member might have to maintain any action for partition with respect to any of the assets of the Company. 11.17 Rights of Nonrecourse Creditors. No nonrecourse creditor of the Company shall have or acquire, at any time as a result of making any loan or advance, any direct or indirect interest in the profits, capital or property of the Company other than as a secured creditor limited to the particular asset which is the subject of recourse. 11.18 Mutual Indemnification. Each Member (in this capacity referred to as "Indemnitor") does hereby and shall at all times indemnify and hold harmless the Company and the other Member and its Affiliates, and all officers, directors, agents, attorneys, and employees of the foregoing (in this capacity individually referred to as an "Indemnitee") from and against any and all costs, claims, charges, recoveries, losses, expenses (including but not limited to attorneys' fees and disbursements), liabilities, damages, judgments, settlements, injunctions, compromises, penalties, decrees or any other loss of any kind or nature whatsoever (all referred to herein as "Loss") which may be made, asserted, maintained or secured against, or suffered by, any Indemnitee caused by or arising out of (a) any breach by Indemnitor of any of its representations, warranties, agreements or undertakings herein, including without 30 31 limitation any consequential or special damages proximately caused by the foregoing; or (b) any acts prohibited by this Agreement. Indemnitees agree to give Indemnitor Notice of any claim, demand or action which is or may be subject to this Section ("Claim") promptly after obtaining knowledge thereof and shall on request make available to Indemnitor all documents relating to the Claim, but failure to give Notice shall not affect the right of any Indemnitee to indemnification herein if the Indemnitee can establish that Indemnitor is not prejudiced by such failure. Promptly upon receipt of such Notice or upon obtaining knowledge of any Claim, Indemnitor agrees to assume the defense of the Claim on behalf of itself and Indemnitees at the sole cost of Indemnitor. Indemnitees or each of them shall have the right to participate in the defense of any Claim through counsel of their choice at their own expense. If Indemnitor fails to promptly assume the defense of any Claim, Indemnitees or any of them may do so and Indemnitor shall promptly reimburse Indemnitees for all costs and expenses (including but not limited to attorneys' fees and disbursements) incurred in connection therewith as such are incurred; in such case, Indemnitees shall not settle or compromise any Claim without the Consent of Indemnitor, such Consent not to be unreasonably withheld. If Indemnitor shall fail to reimburse Indemnitees, then, without waiving their rights otherwise to enforce such reimbursement, the Company shall, on behalf of Indemnitees, have the right to deduct the said amount of such payments, costs and expenses, or any part thereof, from any sums accruing to or for the account of Indemnitor under this Agreement and pay the same to the Indemnitee(s). 11.19 Counterparts. This Agreement may be executed in counterparts and all so executed shall constitute one Agreement, binding on all of the parties hereto, notwithstanding the fact that all the parties are not signatory to the original or the same counterpart. 11.20 Amendment of Operating Agreement; Amendment of Articles of Organization. This Agreement may be adopted, altered, amended, or repealed and a new operating agreement may be adopted by a Majority In Interest of the Members. Notwithstanding any provision to the contrary in the Articles of Organization or this Agreement, in no event shall the Articles of Organization be amended without the vote of Members representing a Majority In Interest of the Members. 31 32 IN WITNESS WHEREOF, this Agreement is executed by each of the parties hereto as of the day and year first above written. "SHOWSCAN" SHOWSCAN ENTERTAINMENT INC. By: /s/ CHUCK ALLEN -------------------------- Authorized Officer "MALONEY" MALONEY DEVELOPMENT PARTNERSHIP, LTD. By: /s/ PAT MALONEY, JR. --------------------------- Authorized Officer 32 33 EXHIBIT A Definitions The following terms used in this Agreement shall (unless expressly provided herein or unless the context otherwise requires) have the following respective meanings: A.1 "Act" means the Texas Limited Liability Company Act of the State of Texas, or any corresponding Act or provision or provisions of any succeeding law. A.2 "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: A.2.1 increase such Capital Account by any amounts which such Member is obligated to contribute to the Company (pursuant to the terms of this Agreement or otherwise) or is deemed to be obligated to contribute to the Company pursuant to Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and A.2.2 reduce such Capital Account by the amount of the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). A.3 "Affiliate" shall mean with respect to any Person: (a) any Person who directly or indirectly controls or is controlled by or is under common control with such Person; (b) any Person who owns or controls 10% or more of the outstanding voting securities or beneficial interests of such Person; (c) any officer, director, general partner, trustee or person acting in a substantially similar capacity of such Person; and (d) if such Person is an officer, director, Member or trustee of any entity, the entity for which such Person acts in such capacity. A.4 "Agreement" means this Operating Agreement of Showscan Maloney, LLC, as originally executed and as amended from time to time, as the context requires. Words such as "herein", "hereinafter", "hereto", "hereby" and "hereunder", when used with reference to this Agreement, refer to this Agreement as a whole, unless the context otherwise requires. A.5 "{text redacted}" means, with respect to each Fiscal Year, the total {text redacted} derived by the Company from the {text redacted} of {text redacted} to the 33 34 Showscan Theatre. {text redacted} does not include any {text redacted} from {text redacted}, {text redacted}, or any other source. A.6 "Articles of Organization" shall mean the instruments, and any amendments thereto, required by law to be executed and filed in the office of the Secretary of State of the State of Texas, and in the appropriate public offices of other states in which the Company may do business, in order to create and preserve the limited liability of the Members provided for in this Agreement and available pursuant to the Act and the applicable laws of other states. A.7 "Assignee" shall mean a person who has acquired a beneficial interest in an LLC Interest, but who is neither a Substituted Member nor an Assignee of Record. A.8 "Assignee of Record" shall mean a Person who has been assigned the Economic Interest in one or more LLC Interests, or fraction thereof, by a Member pursuant to this Agreement, and whose ownership of the Economic Interest in the assigned LLC Interests (a) has been recorded on the books of the Company and (b) is the subject of a written instrument of assignment, the effective date of which assignment has passed. A.9 "Available Cash Flow" means, with respect to any Fiscal Year or other period, the sum of all cash receipts of the Company from any and all sources, less all cash disbursements (including loan repayments, capital improvements and replacements) and a reasonable allowance for Reserves, contingencies and anticipated obligations as determined by the Manager, if there be one, or if not, a Majority in Interest of the Members. A.10 "Business Day" shall mean any day other than a Saturday, Sunday or holiday scheduled by law for commercial banking institutions to be open for business in the United States. A.11 "Capital Account" means, with respect to any Member, the Capital Account maintained for such Member in accordance with the following provisions: A.11.1 to each Member's Capital Account there shall be credited such Member's Capital Contributions, such Member's distributive share of Domestic Net Income, Foreign Net Income, and Other Net Income, and the amount of any Company liabilities assumed by such Member or which are secured by any Property distributed to such Member; 34 35 A.11.2 to each Member's Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Property distributed to such Member pursuant to any provision of this Agreement, such Member's distributive share of Domestic Net Loss, Foreign Net Loss and Other Net Loss, and the amount of any liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company; A.11.3 in the event all or a portion of an LLC Interest is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest; and A.11.4 in determining the amount of any liability for purposes of this Section there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the Members shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Company or Members), are computed in order to comply with such Regulations, the Members may make such modification, provided that it is not likely to have any effect on the amounts distributable to any Person pursuant to Section 6.2 hereof. A.12 "Capital Contributions" means, with respect to any Member, the amount of money and the initial Gross Asset Value of any property (other than money) as and when actually contributed to the Company with respect to the LLC Interest held by such Member. A.13 "Code" shall mean the Internal Revenue Code of 1986, as amended, or corresponding provisions of subsequent tax laws. A.14 "Company" means the limited liability company created by the filing of the Articles of Organization and pursuant to this Agreement, known as Showscan Maloney, LLC. A.15 "Deadlock" shall have the definition assigned to it in Section 10.1.4. 35 36 A.16 "Depreciation" means, for each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Members. A.17 "Distribution" shall mean any cash or other property distributed to some or all of the Members with respect to their interests in the Company. A.18 "Dollars" or "$" shall mean the legal currency of the United States. A.19 "Economic Interest" means a Person's right to share in the Net Income, Net Loss or similar items of, and to receive distributions from, the Company, but does not include any other rights of a Member including, without limitation, the right to vote or to participate in the management of the Company, or, except as provided in Section 9.4, any right to information concerning the business and affairs of the Company. A.20 "Exclusive Zone" shall have the definition assigned to it in Section 5.11. A.21 "Film Rental" means the license fee payable to SHOWSCAN for use of its library of films, which license fee is to be calculated and paid in accordance with Section 5.8.2. A.22 "Fiscal Year" means the period of January 1 to and including March 31. A.23 "Gross Asset Value" means, with respect to any asset, the adjusted basis of such asset for federal income tax purposes, except as follows: A.23.1 the initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the contributing Member and the Company; A.23.2 the Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values, as determined by the Members, as of the following times: (a) the acquisition of an additional LLC Interest by 36 37 any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of Property as consideration for an LLC Interest; and (c) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the Members reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company; A.23.3 the Gross Asset Value of any Company asset distributed to any Member shall be the gross fair market value of such asset on the date of distribution; and A.23.4 the Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this subsection to the extent the Members determine that an adjustment pursuant to subsection A.23.2 above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subsection. If the Gross Asset value of an asset has been determined or adjusted pursuant to subsection A.23.1, 2 or 3 hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Income and Net Loss. A.24 "{text redacted} Receipts" means, with respect to each Fiscal Year, the total {text redacted} derived by the Company from any source, including but not limited to {text redacted}, {text redacted} and {text redacted}. A.25 "Interest" means interest on the amount advanced at the rate of ten percent (10%) per annum, calculated from the time of advance until payment in full. A.26 "Law" means any present or future statute or ordinance, whether municipal, state, national or territorial, any executive, administrative or judicial regulation, order, judgment or decree, any treaty or international convention, any rule or principle of common law or equity or any requirement, custom or practice with equivalent force of law. 37 38 A.27 "LLC Interest" means an ownership interest in the Company, which includes the Economic Interest, the right to vote or participate in the management of the Company, and the right to information concerning the business and affairs of the Company, as provided in this Agreement and under the Act. A.28 "Majority in Interest of the Members," unless otherwise provided in the Agreement, means more than fifty percent (50%) of the interests of the Members in the current profits of the Company. A.29 "Management Fee" means the fee payable to SHOWSCAN for providing day-to-day management of the Company, which fee is to be calculated and paid in accordance with Section 5.8.1. A.30 "Manager" means, if there is any Non-Manager Member, the Person(s) elected to manage the Company pursuant to this Agreement. At any time that the Members shall have elected to have more than one Manager, all such Persons so elected shall be referred to as the "Managers." If all of the Members are acting as Mangers, as defined in the Act, then any reference to Manger in this Agreement shall apply to any and all of the Members. A.31 "Manager Member" means, any Member who has the authority to act as a Manager pursuant to the Act and this Agreement. A.32 "Member" means a Person who: A.32.1 Has been admitted to the Company as a member in accordance with the Articles of Organization or this Agreement, or an assignee of an LLC Interest, other than an Economic Interest, who has become a Member pursuant to this Agreement. A.32.2 Has not resigned, withdrawn or been expelled as a Member or, if other than an individual, been dissolved. Reference to a "Member" shall be to any one of the Members. Reference to an "Initial Member" shall be to any one of the Members. A.33 "Member Nonrecourse Debt" has the meaning set forth in Regulations Section 1.704-2(b)(4). A.34 "Member Nonrecourse Debt Minimum Gain" means an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that 38 39 would result if such Member Nonrecourse Debt were treated as a nonrecourse liability of the Company, determined in accordance with Regulations Sections 1.704-2(i)(2) and (3). A.35 "Member Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(i)(2). The amount of Member Nonrecourse Deductions with respect to a Member Nonrecourse Debt for a Fiscal Year of the Company equals the excess (if any) of the net increase (if any) in the amount of Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt during that Fiscal Year over the aggregate amount of any distributions during that Fiscal Year to the Member that bears (or is deemed to bear) the economic loss for such Member Nonrecourse Debt to the extent such distributions are from the proceeds of such Member Nonrecourse Debt and are allocable to an increase in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(2). A.36 "Minimum Gain" or "LLC Minimum Gain" has the meaning set forth in Regulations Sections 1.704-2(d) and 1.704-2(d). For purposes of the Regulations Section 1.704, Company shall mean partnership where the context of such regulation require. A.37 "Net Capital Contributions" with respect to a Member is an amount equal to the excess of (a) aggregate Capital Contributions of the Member over (b) the aggregate amount of any liabilities of such Member assumed by the Company in connection with the Capital Contributions or which are secured by any property contributed by such Member to the Company. A.38 "Net Income" and "Net Loss" means, for each fiscal year or other period, an amount equal to the Company's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: A.38.1 any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Net Income or Net Loss pursuant to this Section shall be added to such taxable income or loss; A.38.2 any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in 39 40 computing Net Income or Net Loss pursuant to this Section shall be subtracted from such taxable income or loss; A.38.3 in the event the Gross Asset Value of any Company asset is adjusted pursuant to Section A.17.2 or .4 of this Exhibit A, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Income or Net Loss; A.38.4 gain or loss from any disposition of Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; and A.38.5 in lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with the Depreciation computed in Section A.7, above, of this Exhibit A. A.39 "Non-Manager Members" shall mean all Members who are not entitled to be Managers. A.40 "Notice" shall mean a written notice served on a party hereto in accordance with the Agreement. A.41 "Notice Date" shall mean the date of either party's receipt of a Notice as set forth in the Agreement. A.42 "Person" shall mean any entity, corporation, company, association, partnership, joint venture, joint stock company, unincorporated organization, trust, individual (including personal representatives, executors and heirs of a deceased individual), nation, state, government (including governmental agencies, departments, bureaus, boards, divisions and instrumentalities thereof), trustee, receiver or liquidator. A.43 "Preferred Return" shall mean an amount equal to Interest on the Surplus Contribution of a Member, as such exists from time to time. A.44 "Property" means all assets of the Company, both tangible and intangible, or any portion thereof. A.45 "Regulations" means the federal income tax regulations promulgated by the Treasury Department under the Code, as such regulations may be amended from 40 41 time to time. All references herein to a specific section of the Regulations shall be deemed also to refer to any corresponding provisions of succeeding Regulations. A.46 "Reserves or Working Capital" means funds set aside from Capital Contributions or gross cash revenues as reserves. Such Reserves shall be maintained in amounts reasonably deemed sufficient by the Manager, if there be one, or if not, a Majority in Interest of the Members, for working capital and the payment of taxes, insurance, debt service, repairs, replacements renewals, or other costs or expenses incident to the Business of the Company, or in the alternative, the Dissolution of the Company. A.47 "Showscan Equipment" shall have the definition assigned to it in Section 4.2.1. A.48 "Showscan Theatre" shall have the definition assigned to it in Section 3.2. A.49 "Surplus Contribution" shall mean, at any given time, an amount equal to the excess of (a) the aggregate amount of total Capital Contributions of the Member with the greatest aggregate total Capital Contributions over (b) the aggregate amount of total Capital Contributions of the other Member. A.50 "Transfer" shall have the definition assigned to it in Section 8.1.2. A.51 "Vote" means, except where superseded by another Section of this Agreement, or required by the terms of the Act, Code or applicable Regulations thereunder, all decisions made by the Company shall be approved by fifty-one percent (51%) of the votes of the Members, wherein each Member casts a number of votes equal to the Member's LLC Interest in the Company. 41 42 EXHIBIT B {REDACTED} EX-10.34 8 2ND AMENDMENT TO THEATER RIGHTS AGREEMENT 1 EXHIBIT 10.34 SECOND AMENDMENT TO THEATER RIGHTS AGREEMENT This Second Amendment to Theater Rights Agreement (this "Amendment") is made as of December 31, 1995 by and among Showscan Entertainment Inc., a Delaware corporation formerly known as Showscan Corporation ("Showscan"), Showscan/United Artists Theatres Joint Venture, a Colorado general partnership (the "Joint Venture"), and United Artists Theatre Circuit, Inc., a Maryland corporation ("United Artists"). RECITALS A. Showscan, the Joint Venture and United Artists are currently party to that certain Theater Rights Agreement, dated as of August 19, 1994, as amended by that certain First Amendment to Theater Rights Agreement, dated as of March 30, 1995 (as so amended, the "Agreement"). Capitalized terms used in this Amendment without definition shall have the meanings given thereto in the Agreement. B. Showscan, the Joint Venture and United Artists now desire to modify and amend the Agreement in the manner and on the terms and conditions set forth in this Amendment. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Amendment of Sections 3.2(a) and (b). Sections 3.2 (a) and (b) of the Agreement shall be amended in their entirety to read as follows: "(a) During the period from the date of this Agreement until the fifth anniversary of the date of this Agreement (the "Offer Period"), United Artists agrees (i) to offer to the Joint Venture the opportunity to Install Simulator Theater Units in an aggregate of 24 sites designated by United Artists, and (ii) to Install a total of 24 Simulator Theater Units with an aggregate of 576 seats in the sites offered to the Joint Venture which are rejected by the Joint Venture (which Simulator Theater Units may be Owned or co-Owned by United Artists but which do not include Simulator Theater Units owned by Showscan or the Joint Venture). The Joint Venture agrees to accept during the Offer Period at least one of the sites offered to it by United Artists pursuant to Section 2.10 or clause (a)(i) above. If by the end of the Offer Period, the Joint Venture has not satisfied its obligations pursuant to the immediately preceding sentence, then Showscan shall pay to United Artists liquidated damages in an amount equal to {text redacted}. (b) If by the end of the Offer Period United Artists has not either (i) satisfied its obligations pursuant to clause (a)(ii) above either directly or by satisfaction of its obligations pursuant to clause (a)(i) above, or (ii) actually paid to Showscan at least {text redacted} in the aggregate for (A) Equipment Installed 2 or to be Installed in Simulator Theater Units pursuant to Section 3.2(a)(ii) above, and any labor, shipping and related expenses (other than travel, hotel, per diem, and other reimbursement items) with respect to the Installation of such Equipment, and (B) equipment, labor, shipping and related expenses (other than travel, hotel, per diem and other reimbursement items) (collectively, the "{text redacted} Cost") with respect to the sale of {text redacted} theater systems (a "{text redacted} System") to United Artists pursuant to Section 2.7 hereof, provided, however, that for the purposes of this Section 3.2(b)(ii)(B) only {text redacted} of the {text redacted} Cost of each of the first {text redacted} Systems ordered by United Artists shall be counted and only if, in the case of the second {text redacted} System only, such {text redacted} System is ordered on or before {text redacted}, then United Artists will pay to Showscan liquidated damages in the amount of {text redacted} for each Simulator Theater Unit which has not been Installed as required by 3.2(a) above, and United Artists will be deemed to have Installed one Simulator Theater Unit with an aggregate of 24 seats each time such damages are paid. If United Artists has Installed 24 Simulator Theater Units in 24 locations but all locations in which it has Installed such Units collectively have fewer than 576 seats, United Artists will pay to Showscan liquidated damages in an amount equal to the number of seats which have not been Installed multiplied by {text redacted}. The parties agree that such liquidated damages reflect a reasonable estimate of the damages which Showscan would incur based on the parties' current estimate of the economic detriment to Showscan from the loss of profits it otherwise could have expected from the Installation of such Simulator Theater Units, and that such liquidated damages will be Showscan's sole remedy for any failure by United Artists to satisfy its obligations pursuant to clause (a)(ii) above, either directly or by satisfaction of its obligations pursuant to clause (a)(i) above, by the end of the Offer Period. Notwithstanding any other provision of this Section 3.2, the time periods for United Artists' performance of an obligation pursuant to Section 3.2(a) will be extended by any period during which a Force Majeure Event exists or an act or failure to act by Showscan materially impairs United Artists' ability to comply with its obligations, and liquidated damages will be payable to Showscan pursuant to this paragraph only if United Artists does not comply with its obligations within such extended period of time." 2. Amendment of Section 3.3(f). Section 3.3(f) of the Agreement shall be amended in its entirety to read as follows: "(f) In any case where United Artists presents to the Joint Venture a proposal relating to a Potential Site, the proposal will include a proposed development fee that would be payable to United Artists pursuant to the Development Agreements of the lesser of (a) {text redacted} of the {text redacted} of such development (as more particularly described in the Development Agreements), or (b) an amount not more than (i) if the Potential Site would involve new construction of a stand-alone Theater, {text redacted} for the first {text redacted} such Potential Sites that the Joint Venture participates in during the Offer Period and {text redacted} for each such Potential Site thereafter, or (ii) if the Potential Site would involve new construction of an integrated Theater or the renovation of an integrated or stand-alone Theater, {text redacted} for the first 2 3 {text redacted} such Potential Sites that the Joint Venture participates in during the Offer Period and {text redacted} for each such Potential Site thereafter." 3. Amendment of Section 3.7. Section 3.7 of the Agreement shall be amended in its entirety to read as follows: "Section 3.7 [This Section intentionally left blank]" 4. Amendment of Section 3.8. Section 3.8 of the Agreement shall be amended in its entirety to read as follows: "Section 3.8 [This Section intentionally left blank]" 5. Receivable/Payable. In connection with this Amendment, United Artists hereby promises to pay to Showscan Six Hundred Sixty Thousand Dollars ($660,000) (the "Payable") in the manner and with the interest set forth below. Interest shall accrue on the unpaid balance outstanding of the Payable from January 1, 1996 until paid in full at a rate per annum equal to seven and one-half percent (7.5%). Accrued and unpaid interest shall compound annually and be added to the balance of the Payable. The outstanding balance of the Payable and all accrued and unpaid interest thereon shall be paid in full on or before December 31, 1996 (the "Maturity Date"); provided, however, that if on or prior to the Maturity Date the Joint Venture has not yet accepted (the "Joint Venture Acceptance Date") at least one of the sites offered to it by United Artists pursuant to Section 2.10 or Section 3.2(a)(i) of the Agreement, then the Maturity Date shall be extended to the day which is thirty (30) days after the Joint Venture Acceptance Date, but in no event shall it be extended later than August 19, 1999. Showscan, at its election, may accelerate the Maturity Date if United Artists shall breach and fail to cure for a period of 15 days any provision of the Agreement as amended by this Amendment. 6. Malaysia/Asia Territory. If at any time or from time to time during the Offer Period Showscan shall sell to a third party (e.g., not to Showscan, United Artists, the Joint Venture or any affiliate of the foregoing) a Simulator Theater Unit which will be Installed in the state of Malaysia or in the Asia Territory as set forth on Exhibit 3.7 to the Agreement, then Showscan shall pay to United Artists an amount equal to {text redacted} of the {text redacted} of the {text redacted} to such {text redacted} during the Offer Period. Showscan shall make the payments called for by this Section 6 within fifteen (15) days of receipt of payment in full for such Equipment. Showscan shall have no further obligations under this Section 6 once the aggregate payments made hereunder equal {text redacted}. 7. ShowMax Pricing. If at any time during the Offer Period UATC shall purchase from Showscan one or more ShowMax Systems, then for the first {text redacted} such ShowMax Systems purchased, Showscan shall establish the ShowMax Cost for each such ShowMax System by reducing by {text redacted} the then {text redacted} that Showscan has provided a similarly configured ShowMax System. 8. No Other Modifications. Except as expressly set forth in this Amendment, the Agreement shall remain unmodified and in full force and effect. 9. Equality of Consideration. Each of Showscan, the Joint Venture and UATC acknowledge and agree that the value of the rights under the Agreement relinquished by UATC 3 4 pursuant to the terms of this Amendment equal or exceed the value of the rights under the Agreement relinquished by Showscan pursuant to the terms of this Amendment, including, without limitation, the right to require the construction of certain Simulation Theater Units by a certain date or receive liquidated damages therefore. 10. Miscellaneous. 10.1 Further Assurances. Each party agrees to perform all such acts, including without limitation, the execution of documents, as may reasonably be requested by any party in order to more fully effectuate the purposes of this Amendment. 10.2 Successors and Assigns. Except as otherwise expressly provided in this Amendment, all covenants and agreements contained in this Amendment by or on behalf of any of the parties will bind and inure to the benefit of the respective successors and assigns of the parties whether so expressed or not. 10.3 Severability. Whenever possible, each provision of this Amendment will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Amendment. 10.4 Counterparts. This Amendment may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 10.5 Choice of Law. This Amendment shall be interpreted in accordance with the substantive law of the State of Colorado without regard to its choice of law provisions. 4 5 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. UNITED ARTISTS THEATRE CIRCUIT, INC. By: /s/ JOHN R. NEAL - ------------------------------- Title: Senior Vice President SHOWSCAN ENTERTAINMENT INC. By: /s/ DENNIS POPE - ------------------------------------------ Title: Executive Vice President and Chief Financial Officer SHOWSCAN/UNITED ARTISTS THEATRES JOINT VENTURE By: Showscan Entertainment Inc. as Managing Partner By: /s/ DENNIS POPE - --------------------------------------- Title: Executive Vice President and Chief Financial Officer 5 EX-21.1 9 LIST OF SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF THE COMPANY 1. Showscan Productions, Inc., a wholly-owned subsidiary, incorporated under the laws of the State of Delaware. 2. Showscan CityWalk, Inc., a wholly-owned subsidiary, incorporated under the laws of the State of California. 3. Showscan Attractions, Inc., a wholly-owned subsidiary, incorporated under the laws of the State of California. 4. Showscan Framingham, Inc., a wholly-owned subsidiary, incorporated under the laws of the State of Delaware. 5. Cinemania (U.K.) Limited, a private limited company, incorporated under the laws of the United Kingdom. Showscan Attractions, Inc., a wholly-owned subsidiary of the Company, owns 50% of the outstanding capital stock of Cinemania (U.K.) Limited. 6. Showscan Entertainment B.V., a wholly-owned subsidiary, incorporated under the laws of The Netherlands. EX-23.1 10 CONSENT OF ERNST & YOUNG LLP 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 5, 1996, 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, 1996. Ernst & Young LLP Los Angeles, California June 28, 1996 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1000 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 8141 0 3456 215 1547 14173 6255 4942 26757 6097 6620 0 0 5 14035 26757 8426 17465 5749 8399 8406 0 555 105 4 101 0 0 0 101 .02 .02
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