-----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, OZJ6ARetgzxvhs0a5Wo4fFt8LESs48XZf4fxRjBjo93HwImI0uLxbpag/e2KHzul lfegDQkVzd3TACnwvu6YQQ== 0000950148-96-002676.txt : 19961118 0000950148-96-002676.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950148-96-002676 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09710 FILM NUMBER: 96664808 BUSINESS ADDRESS: STREET 1: 3939 LANDMARK ST CITY: CULVER CITY STATE: CA ZIP: 90232 BUSINESS PHONE: 3105580150 MAIL ADDRESS: STREET 1: 3939 LANDMARK STREET CITY: CULVER CITY STATE: CA ZIP: 902322315 FORMER COMPANY: FORMER CONFORMED NAME: SHOWSCAN CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SHOWSCAN FILM CORP DATE OF NAME CHANGE: 19901116 10-Q 1 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1996 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from_________ to __________ Commission file number 0-15939 SHOWSCAN ENTERTAINMENT INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3940004 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3939 LANDMARK STREET CULVER CITY, CALIFORNIA 90232 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 558-0150 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of November 10, 1996, the Registrant had 5,629,885 shares of Common Stock, $.001 par value, issued and outstanding. This report contains 73 consecutively numbered pages. The exhibit index is on page 17. 2 SHOWSCAN ENTERTAINMENT INC. INDEX
Page PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of September 30, 1996 and March 31, 1996 3 Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended September 30, 1996 and 1995 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 1996 and 1995 6 Notes to the Condensed Consolidated Financial Statements 8 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 Signatures 16 Exhibit Index 17
2 3 PART I. - FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Balance Sheets (Dollars in Thousands Except Share Information)
SEPTEMBER 30, MARCH 31, 1996 1996 ------------- ----------- (unaudited) (Note) ASSETS ------ Current assets: Cash and cash equivalents $ 3,249 $ 5,055 Short-term investments 997 3,086 Accounts receivable (net of allowances) 4,751 3,241 Unbilled receivables on uncompleted equipment contracts 1,535 1,122 Equipment sales inventory 1,589 1,547 Prepaid expenses and other current assets 145 122 ---------- ---------- Total current assets 12,266 14,173 Film library (net of amortization) 4,897 3,481 Equipment and leasehold improvements, less accumulated depreciation and amortization 1,087 1,313 Investment in owned and operated theatres (Note 2) 3,902 4,045 Patents and other intellectual properties (net of amortization) 1,553 1,770 Other assets, including note receivable from affiliated company 1,684 1,975 ---------- ---------- Total assets $ 25,389 $ 26,757 ========== ==========
Note: The balance sheet at March 31, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to unaudited condensed consolidated financial statements. (Continued) 3 4 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Balance Sheets (continued) (Dollars in Thousands Except Share Information)
SEPTEMBER 30, MARCH 31, 1996 1996 ------------- --------- (unaudited) (Note) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 476 $ 603 Customer advances on uncompleted equipment contracts 3,267 2,143 Accrued expenses and other current liabilities 2,476 3,351 ----------- --------- Total current liabilities 6,219 6,097 ----------- --------- 8% convertible notes (Note 3) 5,760 6,620 Stockholders' equity: Series C Convertible Preferred Stock, $.001 par value; 100,000 shares authorized; 49,000 shares issued and outstanding - - Common stock, $.001 par value; 20,000,000 shares authorized; 5,629,885 and 5,480,324 shares issued and outstanding, respectively 6 5 Additional paid-in capital 43,228 42,446 Accumulated deficit (29,824) (28,411) ----------- --------- Total stockholders' equity 13,410 14,040 ----------- --------- Total liabilities and stockholders' equity $ 25,389 $ 26,757 =========== =========
Note: The balance sheet at March 31, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to unaudited condensed consolidated financial statements. 4 5 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Operations (Dollars in Thousands Except Per Share Information)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 ------------------ ------------------ (Unaudited) (Unaudited) Revenues: Film licensing $ 1,189 $ 1,373 $ 2,072 $ 3,969 Equipment sales and related services 4,286 2,543 6,647 4,761 -------- -------- -------- -------- 5,475 3,916 8,719 8,730 Costs of revenues 3,687 2,207 5,832 4,840 -------- -------- -------- -------- Gross profit 1,788 1,709 2,887 3,890 Costs and expenses: General and administrative expenses 1,790 1,891 3,475 3,662 Depreciation and amortization 242 244 484 488 -------- -------- -------- -------- 2,032 2,135 3,959 4,150 -------- -------- -------- -------- Operating income (loss) (244) (426) (1,072) (260) Other income (expense): Equity in operations of owned and operated theatres (126) (74) (186) (113) Other income, including interest of $58, $37, $154, $58, respectively 60 69 162 98 Interest and other expenses (114) (59) (317) (95) -------- -------- -------- -------- (180) (64) (341) (110) -------- -------- -------- -------- Net income (loss) (424) $ (490) $(1,413) $ (370) ======== ======== ======== ======== Net income (loss) per common share $ (.08) $ (.09) $ (.25) $ (.07) ======== ======== ======== ======== (Note 4)
See accompanying notes to unaudited condensed consolidated financial statements. 5 6 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Dollars in Thousands)
SIX MONTHS ENDED SEPTEMBER 30, 1996 1995 -------------------------------- (Unaudited) Cash flows from operating activities: Net loss $ (1,413) $ (370) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 484 488 Amortization of film library 325 359 Equity in operations of owned and operated theatres 186 113 Accrued interest on debt 241 57 Provision for doubtful accounts 60 10 Changes in operating assets and liabilities: Accounts receivable (1,570) (433) Equipment sales inventory (42) 885 Unbilled receivables on uncompleted equipment contracts (413) 168 Prepaid expenses and other assets (23) (284) Investment in owned and operated theatres (43) (2,160) Accounts payable, accrued expenses and other current liabilities (1,243) 695 Customer advances on uncompleted equipment contracts 1,124 12 ---------- -------- Net cash used in operating activities (2,327) $ (460) ---------- -------- Cash flows from investing activities: Redemptions of short term investments 2,089 - Purchases of equipment and leasehold improvements (42) (91) Additions to film library (1,741) (525) Other assets 292 112 ---------- -------- Net cash provided by (used in) investing activities $ 598 $ (504) ---------- --------
(Continued) 6 7 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Continued) (Dollars in Thousands)
SIX MONTHS ENDED SEPTEMBER 30, 1996 1995 ---------------------------- (Unaudited) Balance forwarded $ (1,729) $ (964) ---------- ---------- Cash flows from financing activities: Payments on subordinated note payable - (3,131) Proceeds from issuance of 8% convertible notes (net of expenses) - 6,463 Proceeds from exercise of stock options - 30 Other (77) (62) ---------- ---------- Net cash provided by (used in) financing activities (77) 3,300 ---------- ---------- Net increase (decrease) in cash and cash equivalents (1,806) 2,336 Cash and cash equivalents, beginning of period 5,055 6,791 ---------- ---------- Cash and cash equivalents, end of period $ 3,249 $ 9,127 ========== ========== Supplemental disclosures of cash flow information: Interest paid (for 1995, interest paid is included in subordinated note payment above) $ 246 $ 1,567 ========== ========== Income taxes paid $ - $ - ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements. 7 8 SHOWSCAN ENTERTAINMENT INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) Note 1--Introduction: The accompanying unaudited condensed consolidated financial statements of Showscan Entertainment Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period and six-month period ended September 30, 1996 are not necessarily indicative of the results that may be expected either for any other quarter in the fiscal year ending March 31, 1997 or for the entire fiscal year ended March 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended March 31, 1996. Note 2--Owned and Operated theatres: The Company retains an ownership interest, ranging from 25% to 50%, in selected Showscan motion simulation theatre attractions ("Showscan Attractions") through various joint venture arrangements. The Company currently operates and/or has an ownership interest in Showscan Attractions at Universal CityWalk in Los Angeles (November 1993), Trocadero in London (September 1994), Framingham, Massachusetts (May 1995), Osaka, Japan (August 1995) and San Antonio, Texas (March 1996). The Company accounts for its investment in owned and operated theatres under the equity method of accounting. Note 3--8% Convertible Notes: On September 1, 1995, the Company completed a private placement of $7,000,000 in secured convertible notes through a European financial institution, Banca del Gottardo. The notes have a four-year maturity and an 8% interest rate and are convertible at the option of the holder into 1,217,391 shares of the Company's $.001 par value Common Stock (the "Common Stock") at a conversion price of $5.75 per share. Interest payments are made semi-annually commencing March 1, 1996. Through September 30, 1996, $1,240,000 of notes had been converted into 215,646 shares of Common Stock leaving an outstanding balance of $5,760,000. Note 4--Earnings per common share: Loss per common share for the three months ended September 30, 1996 and September 30, 1995 has been determined by using 5,577,447 and 5,250,637 weighted average shares of Common Stock, respectively. For the six months ended September 30, 1996 and September 30, 1995, the weighted average shares of Common Stock to determine loss per common share were 5,551,616 and 5,247,748, respectively. The impact of common stock equivalents and potentially dilutive securities, such as the assumed conversion of Series C Convertible Preferred Stock and the assumed conversion of the 8% Convertible Notes due September 1, 1999 has not been included, as such items are anti-dilutive for all periods presented. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview: Showscan Entertainment Inc. (the "Company") is a leading provider of movie-based motion simulation theatre attractions ("Showscan Attractions") to the 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 Showscan Attractions and specialty theatres; (iv) producing films using the Showscan process; and (v) operating Showscan Attractions in which the Company has an ownership interest ("O&O Theatres"). The Company is also committed to the continued recognition of the Showscan(R) brand name worldwide. The Company announced in January 1996 the new ShowMax(TM) product line, a complete 15/70 giant screen theatre package. Currently, 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. 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 the six months ended September 30, 1996 and 1995: Revenues for the six-month period ended September 30, 1996 (the "Six Month Period") of $8.7 million were only slightly less than the revenues for the six-month period ended September 30, 1995. The decrease in film licensing revenues of $1,897,000 was offset by the increase in equipment sales and related services of $1,886,000. Film licensing revenues decreased by 48% to $2.1 million for the Six Month Period. The decrease was due primarily to (a) the renewal of an agreement with the Company's major Japanese customer (Imagine Japan), which renewal changed the timing of film licensing revenue recognition such that approximately $738,000 was recognized in the prior year six month period that was not recognized in the Six Month Period, (b) the inclusion in the corresponding prior year six month period of revenues from two specific one-time license agreements, which revenues constituted all of the revenues to be received with respect to such agreements, in the amounts of $550,000 and $300,000 respectively, and (c) the early renewals in fiscal year 1996 of certain film licensing agreements, which renewals changed the timing of film licensing revenue recognition (reflected in fourth quarter fiscal 1996 rather than the Six Month Period) of approximately $750,000. After adjusting for the aforementioned items, the recurring film licensing revenues amounted to $1.6 million for the prior year six month period; therefore, recurring film licensing revenues increased 27% in the Six Month Period, when comparing the adjusted revenues to the prior year six month period. 9 10 Revenues from film licensing are based on new license agreements as well as renewals of existing agreements and results fluctuate from quarter to quarter, with such fluctuations being a result of the seasonality in the way that licensing agreements are entered into and how the license agreements are structured. On an annual basis, recurring film licensing revenues should increase over time as the number of operating Showscan Attractions increases. Revenues from equipment sales and related services for the Six Month Period increased 40% to $6.6 million from $4.8 million in the corresponding prior year period. The increase can be attributed to an increase in the number of Showscan Attractions ordered and recognized during the Six Month Period as compared to the corresponding prior year period. The actual number of Showscan Attractions ordered and recognized increased from seven units in the six month period ended September 30, 1995 to nine units in the Six Month Period. The Company recognizes equipment sales under the percentage-of-completion method of accounting, generally measured by the percentage that the labor hours incurred to date bears to the estimated total labor hours of each contract. This results in a disparity in the comparison of equipment sales revenues over different time periods, as the Company records revenues under this method rather than on the date that the sales agreement is signed. The actual signing of a Showscan Attraction sale precedes its delivery and installation by an average of six to seven months. Accordingly, the recognition of revenue for equipment sales during the current and future quarters is affected by (i) the timing of such sales, (ii) the schedule of the build out of the Showscan Attractions and (iii) the shipment, delivery and installation of the equipment and related services. Costs of revenues were 67% of revenues in the Six Month Period as compared to 55% in the corresponding prior year six month period. The increase was principally the result of (i) two one-time agreements which were recognized ($550,000 and $660,000 respectively) in the prior year six month period, each of which had significantly lower associated cost of revenues, and (ii) a lower gross profit percentage associated with sales to a major customer in the Six Month Period. Cost of revenues also increased as a percentage of total revenues because film licensing revenues (which traditionally have a higher gross profit margin) represented less of a percentage of total revenues than in the corresponding prior year six month period. Amortization expense of the film library remained fairly constant as the amount for the Six Month Period and the corresponding prior year six month period was $325,000 and $359,000, respectively. The Company accounts for its net ownership position in O&O Theatres using the equity method of accounting. The equity loss of $186,000 on the operations of O&O Theatres for the Six Month Period was 65% higher than the corresponding prior year six month period equity loss of $113,000 and is primarily the result of the following factors: (i) expenses incurred in connection with the acquisition and development of future O&O Theatre locations, (ii) operating losses, including start-up and marketing expenses at the Riverwalk in San Antonio, Texas, (iii) operating losses at the Trocadero in London, due to heavy construction adjacent to the theatre that directly affected all of the businesses in the area of construction, (iv) operating losses at the Framingham theatres and at CityWalk, and (v) offset by the operating profit of the O&O Theatre in Osaka. The Company earns film licensing and management fees (from some of the O&O Theatres) which are recorded separately in the accompanying condensed consolidated statements of operations, thereby inherently increasing the operating expenses at the specific O&O Theatres. At the Trocadero O&O Theatre location, the Company is currently assessing its rights in the construction matter. 10 11 The Company incurred a net loss in the Six Month Period of $1,413,000 as compared to a $370,000 loss in the corresponding prior year six month period, primarily due to the decrease in film licensing revenues and the increase in cost of revenues in the Six Month Period as compared to the prior year six month period. Comparison of the three months ended September 30, 1996 and 1995: Revenues for the three-month period ended September 30, 1996 (the "1997 Second Quarter") increased $1,559,000 or 40% from revenues for the three-month period ended September 30, 1995 (the "1996 Second Quarter") due to the increase in revenues recognized from equipment sales and related services in the 1997 Second Quarter. Film licensing revenues decreased by 13% to $1,189,000 in the 1997 Second Quarter. The decrease was due to (i) revenues of $300,000 recognized in the 1996 Second Quarter from a specific one-time license agreement, which revenues constitute all of the revenues to be received with respect to such agreement, and (ii) the renewal of the agreement with Imagine Japan, which renewal changed the timing of film licensing revenue recognition such that approximately $369,000 was recognized in the 1996 Second Quarter that was not recognized in the 1997 Second Quarter. After adjustment for the aforementioned items, recurring film licensing revenues increased 69% from $704,000 in the 1996 Second Quarter to $1,189,000 in the 1997 Second Quarter, which was primarily the result of the fact that there were additional Showscan Attractions open in the 1997 Second Quarter. Revenues from equipment sales and related services for the 1997 Second Quarter increased 69% to $4.3 million from $2.5 million in the 1996 Second Quarter. The increase in the number of Showscan Attraction orders and installations in the 1997 Second Quarter and the preceding quarter as compared to the corresponding prior year periods resulted in the increase in revenues. Costs of revenues were 67% of revenues in the 1997 Second Quarter as compared to 56% in the 1996 Second Quarter. The increase was principally the result of the recognition of a specific one-time license agreement ($300,000) in the 1996 Second Quarter which had a significantly lower associated cost of revenues. The costs related to equipment sales and related services increased to 78% in the 1997 Second Quarter from 76% in the 1996 Second Quarter. Equipment sales recorded in the 1997 Second Quarter generally had a higher cost of revenue associated with each unit sold (due to the sales at lower margins to a major customer) than sales of units in the 1996 Second Quarter. Amortization of the film library for the 1997 Second Quarter and the 1996 Second Quarter was $192,000 and $159,000, respectively. The loss on investment in Owned and Operated Theatres in the 1997 Second Quarter is primarily the result of operating losses (i) at the Framingham theatres, (ii) at the Trocadero theatre, due to heavy construction adjacent to the theatre which directly affected all of the businesses in the area of construction, and (iii) expenses incurred in connection with the acquisition and development of future O&O Theatre locations, offset by the operating profit of the O&O Theatre at Osaka. The Company's net loss decreased in the 1997 Second Quarter to $424,000 from $490,000 in the 1996 Second Quarter, due to the increase in units sold in the 1997 Second Quarter from the 1996 Second Quarter. 11 12 Liquidity and Capital Resources: At September 30, 1996, the Company's working capital decreased to $6,047,000 from $8,076,000 at March 31, 1996. The decrease in working capital was primarily due to the expenditures related to the production of two new motion simulation films and the operating loss for the Six Month Period. Cash and cash equivalents at September 30, 1996 decreased by $1,806,000 from March 31, 1996. The decrease in cash was primarily due to (i) the financing of the production of two new films in the amount of $1,741,000, and (ii) account receivables and unbilled receivables on uncompleted equipment contracts increased by a combined 44%, while accounts payable, customer advances on uncompleted equipment contracts and accrued expenses and other current liabilities increased by only 2%, offset by (iii) a $2,089,000 redemption of short-term investments. The changes to receivables, payables, advances and accrued expenses are primarily attributable to variations in the timing of Showscan Attractions sales and the specific contract terms of such sales, which terms generally affect the timing of collections, shipments, deliveries to customers, installations and the related payments to vendors. The specific contract terms of each sale also dictate when invoicing occurs. The increase in accounts receivable is primarily due to the issuance of certain large invoices just prior to September 30, 1996. 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 O&O 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 business strategy, specifically with regard to the timing of new film productions and the number of new O&O Theatres. At October 31, 1996, the Company has reserved 4,585,746 shares of Common Stock for issuance on the exercise of stock options, warrants, preferred stock and convertible notes. Furthermore, the Company's current backlog is approximately $25 million, comprising 38 screens of which 9 screens are scheduled to be open by the end of fiscal year 1997. FACTORS THAT MAY AFFECT FUTURE RESULTS Portions of this report on Form 10-Q (this "Report") may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward- looking statements. The discussion below, together with portions of the discussion elsewhere in this Report and in the Company's other reports on file with the Securities and Exchange Commission, highlight some of the more important risks identified by the management of the Company but should not be assumed to be the only things that could affect future performance. 12 13 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 Showscan 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 Showscan Attractions sold, (d) the timing of film licensing revenues from existing Showscan Attractions and the performance of those Showscan 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 (quarterly and/or annually) may not be indicative of the results for any future period. The Company's performance depends primarily upon the number of Showscan 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 Showscan Attractions. 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 political instability, changes in foreign currency exchange rates, trade protection measures, policies with respect to currency and fiscal controls, longer accounts receivable collection patterns, changes in regional or worldwide economic or political conditions, or natural disasters. Though the Company faces less direct exchange rate risks since nearly all of its contracts are denominated in United States Dollars, fluctuations in exchange rates can significantly affect the affordability of the Company's products and services overseas. Competition The Company faces intense competition in all of its product lines. In the motion simulation business, the Company's main competitor is Iwerks Entertainment, Inc. 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 Corporation 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. 13 14 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 fifteen attractions. The second concentration relates to the Company's sales backlog where United Artists Theatre Circuit, Inc. 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. 14 15 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on August 26, 1996. The matters voted upon at the meeting were (a) the election of a board of directors to serve until the next annual meeting of stockholders, and (b) the ratification of the appointment of Ernst & Young LLP as the independent auditors for the Company. The voting on each proposal was as set forth in the tables below. 1. Election of directors:
Withhold For Authority --------- --------- William D. Eberle 6,515,625 7,050 William C. Soady 6,515,825 6,850 Charles B. Moss, Jr. 6,515,825 6,850 Thomas R. DiBenedetto 6,515,825 6,850 Kurt C. Hall 6,515,625 7,050
2. Ratification of the appointment of Ernst & Young LLP as the independent auditors of the Company for the fiscal year ending March 31, 1997. For Against Abstentions --------- ------- ------------ 6,517,324 3,001 2,350
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits The exhibits listed below are filed as part of this Report.
Exhibit Number Description -------------- ----------- 10.35 Agreement, dated August 7, 1996, between the Company and William C. Soady. 10.36 Agreement, dated August 7, 1996, between the Company and Dennis Pope. 10.37 Agreement, dated August 7, 1996, between the Company and W. Tucker Lemon. 27 Financial Data Schedule.
(b) Reports on Form 8-K None. 15 16 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Culver City, State of California on the 13th day of November, 1996. Showscan Entertainment Inc. (Registrant) By \s\ DENNIS POPE -------------------------------- Dennis Pope Executive Vice President - Chief Financial Officer (Authorized Officer and Principal Financial Officer) By \s\ GREGORY W. BETZ -------------------------------- Gregory W. Betz Vice President - Director of Finance (Authorized Officer and Principal Accounting Officer) 16 17 EXHIBIT INDEX
Exhibit No. Description Page Number - ----------- ----------- ----------- 10.35 Agreement, dated August 7, 1996, between the Company and William C. Soady. 10.36 Agreement, dated August 7, 1996, between the Company and Dennis Pope. 10.37 Agreement, dated August 7, 1996, between the Company and W. Tucker Lemon. 27 Financial Data Schedule.
17 EX-10.35 2 EXHIBIT 10.35 1 SHOWSCAN ENTERTAINMENT INC. 3939 LANDMARK STREET CULVER CITY, CALIFORNIA 90232-2315 August 7, 1996 William C. Soady President, Chief Executive Officer and Director Showscan Entertainment Inc. 3939 Landmark Street Culver City, California 90232-2315 Dear Mr. Soady: Showscan Entertainment Inc. (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection with this, the Corporation's Board of Directors (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Corporation may exist and that such possibility, and that such uncertainty and questions that it may raise among management, could result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders. The Board has decided to reinforce and encourage the continued attention and dedication of members of the Corporation's management, including yourself, to their assigned duties without distraction arising from the possibility of a change in control of the Corporation. In order to induce you to remain in its employ, the Corporation hereby agrees that after this letter agreement (this "Agreement") has been fully executed, you shall receive the severance and other benefits set forth in this Agreement. If an employment agreement between you and the Corporation also entitles you to benefits upon a change in control (as defined in such employment agreement), you shall be required to choose between the benefits upon a change in control provided by any such employment agreement and the benefits upon a Change in Control provided by this Agreement. Unless otherwise defined herein, all capitalized terms used herein shall have the meanings assigned to such terms in Appendix A attached hereto. 2 William C. Soady August 7, 1996 Page 2 1. Term of Agreement. This Agreement shall commence on August 7, 1996, and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000, and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Corporation shall have given notice that it does not wish to extend this Agreement; provided, that if a Change in Control or Potential Change in Control, occurs during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the month in which such Change in Control or Potential Change in Control occurred. Notwithstanding anything to the contrary contained in this Agreement, in no event shall the term of this Agreement extend beyond the end of the calendar month in which your 65th birthday occurs. 2. Change in Control and Potential Change in Control. No benefits shall be payable hereunder until there has been a Change in Control. You agree that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control, you shall remain in the employ of the Corporation until the date of occurrence of a Change in Control, unless you terminate your employment before then for Good Reason or by reason of death, Disability or retirement, or the Corporation terminates your employment for any reason. 3. Termination Following Change in Control or Potential Change in Control. (a) General. If any of the events constituting a Change in Control shall have occurred, you shall be entitled to the benefits provided in Section 4(b) upon the subsequent termination of your employment during the term of this Agreement, if such termination is (i) by the Corporation other than for Cause within twenty-four (24) months after a Change in Control, (ii) by you for Good Reason within twenty-four (24) months after a Change in Control, (iii) by you in the case of your voluntary termination of employment for any reason, if you continue in the employ of the Corporation for a period of six (6) months after a Change in Control (the "Transition Employment Period"), and the termination of your employment occurs within thirty (30) days immediately following the end of the Transition Employment Period, as provided in Section 3(b), or (iv) because of your death, Disability (as defined in Section 3(c)) or retirement, as long as such termination occurs within twenty-four (24) months after a Change in Control. You shall not be entitled to the benefits provided in Section 4(b) if the termination of your employment occurs more than twenty-four (24) months after a Change in Control. Furthermore, you shall not be entitled to the benefits provided in Section 4(b) if, upon termination of your employment, you fail to comply with the Corporation's standard termination procedures, including execution of a copy of the separation agreement, a form of which is attached hereto as Exhibit 1. In the event your employment with the Corporation is terminated for any reason and subsequently a Potential Change in Control or a Change in Control occurs, you shall not be entitled to any 3 William C. Soady August 7, 1996 Page 3 benefits hereunder. Notwithstanding anything in this Agreement to the contrary, if your employment is terminated within one (1) year immediately prior to the Change in Control, but following a Potential Change in Control, such termination shall be deemed to have occurred on the date immediately following a Change in Control and to have been (A) by the Corporation without Cause, if your employment is terminated without Cause, or (B) by you with Good Reason, if you terminate your employment with Good Reason and the act (or failure to act) which constitutes Good Reason occurs following such Potential Change in Control, or (C) by you because of your death, Disability or retirement, if you terminate your employment because of your death, Disability or retirement and your death, Disability or retirement occurs following such Potential Change in Control. (b) Voluntary Termination Within 30 Days Immediately Following the End of the Transition Employment Period. Notwithstanding any other provision in this Agreement, if you voluntarily terminate your employment for any reason, and the Date of Termination and/or Notice of Termination occurs within the first thirty (30) days immediately following the end of the Transition Employment Period, you shall be entitled to the benefits provided in Section 4(b). (c) Disability. If you are unable to perform your duties of employment for in excess of ninety (90) consecutive days or an aggregate of one hundred and twenty (120) days in any twelve (12) month period during the term of your employment as a result of a physical or mental condition, as determined in good faith by the Board of Directors, your employment may be terminated for "Disability." (d) Good Reason. Your right to terminate your employment for Good Reason shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (e) Notice of Termination. Any purported termination of your employment by the Corporation or by you (other than termination due to death which shall terminate your employment automatically) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7. 4. Compensation Upon Termination or During Disability. Following a Change in Control, you shall be entitled to the benefits described below during a period of disability, or upon termination of your employment, as the case may be, provided that such period or termination occurs during the term of this Agreement. The benefits to which you are entitled, subject to the terms and conditions of this Agreement, are: (a) If your employment shall be terminated by the Corporation for Cause, or by the Corporation without Cause and more than twenty-four (24) months after a 4 William C. Soady August 7, 1996 Page 4 Change in Control, or by you other than for Good Reason either before, or more than thirty (30) days after, the end of the Transition Employment Period, or by you for Good Reason and more than twenty-four (24) months after a Change in Control, the Corporation shall pay you your full base salary, when due, through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Corporation at the time such payments are due, and the Corporation shall have no further obligations to you under this Agreement. (b) If your employment by the Corporation shall be terminated by you for Good Reason within twenty-four (24) months after a Change in Control or by the Corporation other than for Cause within twenty-four (24) months after a Change in Control or by you for any reason within thirty (30) days immediately following the end of your Transition Employment Period or by you because of your death, Disability or retirement within twenty-four (24) months after a Change in Control, then you shall be entitled to the benefits provided below: (i) the Corporation shall pay to you your full base salary, when due, through the Date of Termination at the rate in effect at the time Notice of Termination is given, at the time specified in Section 4(d), plus all other amounts to which you are entitled under any compensation plan of the Corporation at the time such payments are due; (ii) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Corporation shall pay as severance pay to you, at the time specified in Section 4(d), a lump sum severance payment (the "Severance Payments") equal to 300% of the average of your salary with respect to the three (3) fiscal years (or your total years of employment with the Corporation, if less than three (3)) preceding the Date of Termination or immediately prior to the Change in Control, whichever is greater, and 300% of the average of the annual bonuses awarded to you pursuant to the Corporation's bonus plan for executive officers, or any successor bonus plan thereto, with respect to the three (3) fiscal years (or your total years of employment with the Corporation, if less than three (3)) preceding the Date of Termination or immediately prior to the Change in Control, whichever is greater; (iii) the Corporation shall pay to you all legal fees and legal expenses incurred by you as a result of such termination (including all such reasonable legal fees and legal expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement (as set forth in Section 11 of this Agreement) or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code, to any payment or benefit provided hereunder); and 5 William C. Soady August 7, 1996 Page 5 (iv) for a twenty-four (24) month period after the Date of Termination, the Corporation shall arrange to provide you with life, disability, accident and group health insurance benefits substantially similar to those that you were receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(b)(iv) shall be reduced to the extent comparable benefits are actually received by you during the twenty-four (24) month period following the Date of Termination, and any such benefits actually received by you shall be reported to the Corporation. (c) You shall bear all expense of, and be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder, including, without limitation, any excise tax imposed by Section 4999 of the Code; provided, however, that any payment or benefit received or to be received by you in connection with a Change in Control or the termination of your employment (whether payable pursuant to the terms of this Agreement ("Contract Payments") or any other plan, arrangements or agreement with the Corporation or an Affiliate (collectively with the Contract Payments, the "Total Payments")) that would constitute a "parachute payment" within the meaning of Section 280G of the Code, shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit received by you shall exceed the net after-tax benefit received by you if no such reduction was made. For purposes of this Section 4(c), "net after-tax benefit" shall mean (i) the Total Payments which you receive or are then entitled to receive from the Corporation that would constitute "parachute payments" within the meaning of Section 280G of the Code, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to you (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the Code. The foregoing determination will be made by a nationally recognized accounting firm (the "Accounting Firm") selected by you and reasonably acceptable to the Corporation (which may be, but will not be required to be, the Corporation's independent auditors). You will direct the Accounting Firm to submit its determination and detailed supporting calculations to both you and the Corporation within fifteen (15) days after the Date of Termination. If the Accounting Firm determines that such reduction is required by this Section 4(c), you, in your sole and absolute discretion, may determine which Total Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, and the Corporation shall pay such reduced amount to you. You and the Corporation will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of you or the Corporation, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 6 William C. Soady August 7, 1996 Page 6 4(c). The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4(c) will be borne by the Corporation. (d) The payments provided for in Section 4(b)(i) shall be made not later than the Date of Termination. The payments provided for in Section 4(b)(ii) shall be made not later than the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Corporation shall pay to you on such day an estimate, as determined in good faith by the Corporation, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to you, payable on the demand by the Corporation (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). (e) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise nor, except as provided in Section 4(b)(iv), shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer or self-employment, by retirement benefits, by offset against any amount claimed to be owed by you to the Corporation, or otherwise. 5. Vesting of Stock Options Upon Change in Control. Notwithstanding any other provision of this Agreement or of any stock option plan or agreement, upon the occurrence of a Change in Control, all of your stock options, if any, granted under any of the Corporation's stock option plans or agreements shall become vested and exercisable effective as of the day immediately prior to the date of the Change in Control. 6. Successors; Binding Agreement. (a) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to terminate your employment and receive compensation from the Corporation in the same amount and on the same terms to which you would be entitled hereunder if you terminate your employment for Good Reason within twenty-four (24) months after a Change in Control, except that for purposes of implementing the foregoing, the day before the date on which any such succession becomes effective shall be deemed the Date of Termination. Where the context 7 William C. Soady August 7, 1996 Page 7 requires, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 7. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Corporation shall be directed to the attention of the Board with a copy to the Secretary of the Corporation, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Corporation under Section 4 shall survive the expiration of the term of this Agreement. The section headings contained in this Agreement are for convenience only, and shall not affect the interpretation of this Agreement. 9. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 8 William C. Soady August 7, 1996 Page 8 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 11. Arbitration; Dispute Resolution. (a) Arbitration Procedure. Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation of this Agreement or any arrangements relating to this Agreement or contemplated in this Agreement or the breach, termination or invalidity thereof shall be settled by arbitration in accordance with the Commercial Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") (except as otherwise provided in this Agreement) in Los Angeles, California. The arbitral tribunal shall consist of one arbitrator. In making any decision, the arbitrator shall apply and follow the substantive law of California without reference to the conflicts of law provisions thereof. The parties to the arbitration jointly shall directly appoint such arbitrator within thirty (30) days of initiation of arbitration. If the parties shall fail to appoint such arbitrator as provided above, such arbitrator shall be appointed by the AAA as provided in the Arbitration Rules. You and the Corporation agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction thereof. The Corporation shall pay all fees and expenses of the Arbitrator regardless of the result and shall provide all witnesses and evidence reasonably required by you to present your case. The Corporation shall pay to you all reasonable arbitration expenses and legal fees incurred by you as a result of a termination of your employment in seeking to obtain or enforce any right or benefit provided by this Agreement (whether or not you are successful in obtaining or enforcing such right or benefit). Such payments shall be made within five (5) days after your request for payment accompanied with such evidence of fees and expenses incurred as the Corporation reasonably may require. (b) Compensation During Dispute. Your compensation during any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation of this Agreement shall be as follows: (i) If a purported termination by you for Good Reason within twenty-four (24) months after a Change in Control occurs or is deemed to occur following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 7 of Appendix A and Section 11(a) of this Agreement, the Corporation shall continue to pay you the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 9 William C. Soady August 7, 1996 Page 9 11(a). Amounts paid under this Section 11(b)(i) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. You agree to remain in the employ of the Corporation during the resolution of the dispute and to continue to provide services unless your employment is terminated earlier by death, Disability or retirement, or by action of the Corporation. If the dispute is resolved by a determination that you did not have Good Reason, this Agreement, in accordance with its terms, shall continue to apply to the circumstances of your employment by the Corporation and any termination thereof. (ii) If there is a termination by the Corporation followed by a dispute as to whether you are entitled to the payments and other benefits provided under this Agreement, then, during the period of that dispute the Corporation shall pay you 100% of the amount specified in Section 4(b)(i) hereof and 50% of the amount specified in Section 4(b)(ii) hereof, and the Corporation shall provide you with the other benefits provided in Section 4(b) of this Agreement, if, but only if, you agree in writing that if the dispute is resolved against you, you shall promptly refund to the Corporation all payments you receive under Section 4(b)(ii) of this Agreement plus interest at the rate provided in Section 1274(d) of the Code, compounded quarterly. If the dispute is resolved in your favor, promptly after resolution of the dispute the Corporation shall pay you the sum that was withheld during the period of the dispute plus interest at the rate provided in Section 1274(d) of the Code, compounded quarterly. 12. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of your benefits upon a Change in Control and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto related to the subject of your benefits upon a Change in Control; and any prior agreement of the parties hereto in respect of your benefits upon a Change in Control, is hereby terminated and cancelled. Notwithstanding the foregoing, this Agreement shall not supersede any employment agreement between you and the Corporation, except that if the provisions and definitions of such an employment agreement in respect of your benefits upon a change in control (as defined in such employment agreement), if any, differ from the provisions and definitions of this Agreement in respect of your benefits upon a Change in Control, you, in your sole and absolute discretion, may choose whether the provisions and definitions of such employment agreement or this Agreement shall govern all matters relating to your benefits upon a change in control. 13. No Employment Right Created. Nothing in this Agreement shall confer on you any right to continue in the employ of the Corporation or shall interfere with or restrict in any way the rights of the Corporation, which are hereby expressly reserved, to 10 William C. Soady August 7, 1996 Page 10 discharge you at any time for any reason whatsoever, with or without good cause, except as may be otherwise provided in any written employment agreement between you and the Corporation. This Agreement shall not constitute an agreement for employment. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Corporation the enclosed copy of this letter, which shall then constitute our agreement on this subject. Sincerely, SHOWSCAN ENTERTAINMENT INC. By /s/ DENNIS POPE -------------------------- Name: Dennis Pope Title: Executive Vice President Agreed to this 12th day of August 1996. /s/ WILLIAM C. SOADY - ------------------------- 11 William C. Soady August 7, 1996 Page 11 APPENDIX A DEFINITIONS For purposes of this Agreement, the following terms have the meanings indicated: 1. "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 20% or more of the Common Shares of the Corporation then outstanding, but shall not include (i) the Corporation; (ii) any Subsidiary of the Corporation; or (iii) any employee benefit plan of the Corporation or any Subsidiary of the Corporation, or any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Corporation which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 20% or more of the Common Shares of the Corporation then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 20% or more of the Common Shares of the Corporation then outstanding by reason of share purchases by the Corporation and shall, after such share purchases by the Corporation, become the Beneficial Owner of any additional Common Shares of the Corporation, then such Person shall be deemed to be an "Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of the Corporation determines in good faith that a Person who would otherwise be an "Acquiring Person," has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an "Acquiring Person," then such Person shall not be deemed to be an "Acquiring Person" for any purposes of this Agreement. 2. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement. 3. A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (a) which such Person or any of such Person's Affiliates or Associates beneficially owns, within the meaning of Rule 13d-3(a) under the Exchange Act, directly or indirectly; (b) which such Person or any of such Person's Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or 12 William C. Soady August 7, 1996 Page 12 understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (ii) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (B) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (c) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting or disposing of any securities of the Corporation. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to (and for purposes of determining the percentage of) a Person's Beneficial Ownership of securities of the Corporation, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person (including such Person's Affiliates and Associates but not including any other Person) would be deemed to own beneficially hereunder. 4. Termination by the Corporation of your employment for "Cause" shall mean termination (a) upon your willful and continued failure to substantially perform your duties with the Corporation (other than any such failure resulting from your incapacity due to physical or mental illness) or any such actual or anticipated failure after your issuance of a Notice of Termination, after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, (b) upon your willful participation in conduct which is demonstrably and materially injurious to the Corporation, monetarily or otherwise, or (c) upon your conviction of a felony involving moral turpitude after all appeals are final. For purposes of this definition, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you in bad faith. 13 William C. Soady August 7, 1996 Page 13 Notwithstanding the foregoing, you shall not be deemed terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the Board's good faith opinion you were guilty of conduct set forth above in this definition and specifying the particulars thereof in reasonable detail. 5. A "Change in Control" shall be deemed to occur if: (a) any Person shall have become an Acquiring Person; (b) any Person is or becomes the Beneficial Owner, directly or indirectly, of Common Shares of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding Common Shares; (c) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in Sections (a), (b), (d) or (e) of this definition) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds ( 2/3) of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (d) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation (or other entity), other than a merger or consolidation which would result in the Common Shares of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Common Shares of the surviving entity) more than 66- 2/3% of the combined voting power of the Common Shares of the Corporation or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no Person acquires more than 20% of the combined voting power of the Corporation's then outstanding Common Shares shall not constitute a Change in Control; or 14 William C. Soady August 7, 1996 Page 14 (e) the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. 6. "Common Shares" when used with reference to the Corporation shall mean the shares of common stock, par value $.001 per share, of the Corporation; and in addition shall include all Common Shares issuable upon exercise or conversion of outstanding Common Share Equivalents, which Common Shares are deemed to be "outstanding" and the holder of which shall be deemed to be a "record holder" of such Common Shares for purposes of this Agreement. "Common Share Equivalents" shall mean all outstanding shares of Series C Preferred Stock of the Corporation and of 8% Convertible Notes Due September 1, 1999, and such other classes or series of capital stock and/or debt of the Corporation as the Board of Directors of the Corporation shall expressly designate as Common Share Equivalents within the meaning of this Agreement. "Common Shares" when used to refer to shares issued by any Person other than the Corporation shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. 7. "Date of Termination" shall mean (a) if your employment is terminated due to your death, the date of your death; (b) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30)-day period), and (c) if your employment is terminated for Cause or Good Reason or for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than thirty (30) days from the date such Notice of Termination is given, and in the case of a termination for Good Reason or a voluntary termination shall not be less than fifteen (15) nor more than sixty (60) days from the date such Notice of Termination is given). Except for cases of voluntary termination, notwithstanding anything to the contrary contained in this definition, if within fifteen (15) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or as set forth in Section 11 of the Agreement; provided, however, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 8. "Good Reason" shall mean, without your express written consent, the occurrence after a Change in Control of any of the following circumstances unless, in the case of Sections (a), (e), (f), (g) or (h) of this definition, such circumstances are fully 15 William C. Soady August 7, 1996 Page 15 corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (a) the assignment to you of any duties inconsistent with the position in the Corporation that you held immediately prior to the Change in Control, or a significant adverse alteration in the nature or status of your responsibilities or the conditions of your employment from those in effect immediately prior to such Change in Control, or a significant adverse alteration in the level or authority of your position in the overall corporate structure from that in effect immediately prior to such Change in Control; (b) the Corporation's reduction of your annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Corporation and all management personnel of any Person in control of the Corporation; (c) the relocation of the Corporation's offices at which you are principally employed immediately prior to the date of the Change in Control to a location that is more than fifteen (15) miles further from your primary residence on the date of the Change in Control than the location of the Corporation's offices at which you are principally employed immediately prior to the date of the Change in Control, or the Corporation's requiring you to be based anywhere other than the Corporation's offices at such location except for required travel on the Corporation's business to an extent substantially consistent with your present business travel obligations; (d) the Corporation's failure to pay to you any portion of your current compensation or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Corporation within seven (7) days of the date such compensation is due; (e) the Corporation's failure to continue in effect any material compensation or benefit plan in which you participate immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the Corporation's failure to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change in Control; 16 William C. Soady August 7, 1996 Page 16 (f) the Corporation's failure to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Corporation's life insurance, medical, health and accident, or disability plans in which you were participating at the time of the Change in Control, the taking of any action by the Corporation which would directly or indirectly materially reduce any of such benefits, or the failure by the Corporation to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Corporation in accordance with the Corporation's normal vacation policy in effect at the time of the Change in Control; (g) the Corporation's failure to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 6 of the Agreement; or (h) any purported termination of your employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9 of this Appendix (and, if applicable, the requirements of termination for Cause), which purported termination shall not be effective for purposes of this Agreement. 9. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. 10. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. 11. A "Potential Change in Control" shall be deemed to occur if: (a) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (b) any Person (including the Corporation) publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (c) any Person who, on the effective date of this Agreement, is not a Beneficial Owner directly or indirectly of Common Shares of the Corporation representing 10% or more of the combined voting power of the Corporation's then outstanding Common Shares, becomes, at any time after the effective date of this Agreement, the Beneficial Owner directly or indirectly, of Common Shares of the 17 William C. Soady August 7, 1996 Page 17 Corporation representing 10% or more of the combined voting power of the Corporation's then outstanding Common Shares; (d) any Person who, on the effective date of this Agreement, is a Beneficial Owner directly or indirectly of Common Shares of the Corporation representing 10% or more of the combined voting power of the Corporation's then outstanding Common Shares, increases such Person's beneficial ownership of such Common Shares, at any time after the effective date of this Agreement, by 5% or more over the percentage so owned by such Person on the date hereof; or (e) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 12. "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, at the time of determination, directly or indirectly, by such Person. EX-10.36 3 EXHIBIT 10.36 1 SHOWSCAN ENTERTAINMENT INC. 3939 LANDMARK STREET CULVER CITY, CALIFORNIA 90232-2315 August 7, 1996 Dennis Pope Executive Vice President and Chief Financial Officer Showscan Entertainment Inc. 3939 Landmark Street Culver City, California 90232-2315 Dear Mr. Pope: Showscan Entertainment Inc. (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection with this, the Corporation's Board of Directors (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Corporation may exist and that such possibility, and that such uncertainty and questions that it may raise among management, could result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders. The Board has decided to reinforce and encourage the continued attention and dedication of members of the Corporation's management, including yourself, to their assigned duties without distraction arising from the possibility of a change in control of the Corporation. In order to induce you to remain in its employ, the Corporation hereby agrees that after this letter agreement (this "Agreement") has been fully executed, you shall receive the severance and other benefits set forth in this Agreement. If an employment agreement between you and the Corporation also entitles you to benefits upon a change in control (as defined in such employment agreement), you shall be required to choose between the benefits upon a change in control provided by any such employment agreement and the benefits upon a Change in Control provided by this Agreement. Unless otherwise defined herein, all capitalized terms used herein shall have the meanings assigned to such terms in Appendix A attached hereto. 2 Dennis Pope August 7, 1996 Page 2 1. Term of Agreement. This Agreement shall commence on August 7, 1996, and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000, and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Corporation shall have given notice that it does not wish to extend this Agreement; provided, that if a Change in Control or Potential Change in Control, occurs during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the month in which such Change in Control or Potential Change in Control occurred. Notwithstanding anything to the contrary contained in this Agreement, in no event shall the term of this Agreement extend beyond the end of the calendar month in which your 65th birthday occurs. 2. Change in Control and Potential Change in Control. No benefits shall be payable hereunder until there has been a Change in Control. You agree that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control, you shall remain in the employ of the Corporation until the date of occurrence of a Change in Control, unless you terminate your employment before then for Good Reason or by reason of death, Disability or retirement, or the Corporation terminates your employment for any reason. 3. Termination Following Change in Control or Potential Change in Control. (a) General. If any of the events constituting a Change in Control shall have occurred, you shall be entitled to the benefits provided in Section 4(b) upon the subsequent termination of your employment during the term of this Agreement, if such termination is (i) by the Corporation other than for Cause within twenty-four (24) months after a Change in Control, (ii) by you for Good Reason within twenty-four (24) months after a Change in Control, (iii) by you in the case of your voluntary termination of employment for any reason, if you continue in the employ of the Corporation for a period of six (6) months after a Change in Control (the "Transition Employment Period"), and the termination of your employment occurs within thirty (30) days immediately following the end of the Transition Employment Period, as provided in Section 3(b), or (iv) because of your death, Disability (as defined in Section 3(c)) or retirement, as long as such termination occurs within twenty-four (24) months after a Change in Control. You shall not be entitled to the benefits provided in Section 4(b) if the termination of your employment occurs more than twenty-four (24) months after a Change in Control. Furthermore, you shall not be entitled to the benefits provided in Section 4(b) if, upon termination of your employment, you fail to comply with the Corporation's standard termination procedures, including execution of a copy of the separation agreement, a form of which is attached hereto as Exhibit 1. In the event your employment with the Corporation is terminated for any reason and subsequently a Potential Change in Control or a Change in Control occurs, you shall not be entitled to any 3 Dennis Pope August 7, 1996 Page 3 benefits hereunder. Notwithstanding anything in this Agreement to the contrary, if your employment is terminated within one (1) year immediately prior to the Change in Control, but following a Potential Change in Control, such termination shall be deemed to have occurred on the date immediately following a Change in Control and to have been (A) by the Corporation without Cause, if your employment is terminated without Cause, or (B) by you with Good Reason, if you terminate your employment with Good Reason and the act (or failure to act) which constitutes Good Reason occurs following such Potential Change in Control, or (C) by you because of your death, Disability or retirement, if you terminate your employment because of your death, Disability or retirement and your death, Disability or retirement occurs following such Potential Change in Control. (b) Voluntary Termination Within 30 Days Immediately Following the End of the Transition Employment Period. Notwithstanding any other provision in this Agreement, if you voluntarily terminate your employment for any reason, and the Date of Termination and/or Notice of Termination occurs within the first thirty (30) days immediately following the end of the Transition Employment Period, you shall be entitled to the benefits provided in Section 4(b). (c) Disability. If you are unable to perform your duties of employment for in excess of ninety (90) consecutive days or an aggregate of one hundred and twenty (120) days in any twelve (12) month period during the term of your employment as a result of a physical or mental condition, as determined in good faith by the Board of Directors, your employment may be terminated for "Disability." (d) Good Reason. Your right to terminate your employment for Good Reason shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (e) Notice of Termination. Any purported termination of your employment by the Corporation or by you (other than termination due to death which shall terminate your employment automatically) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7. 4. Compensation Upon Termination or During Disability. Following a Change in Control, you shall be entitled to the benefits described below during a period of disability, or upon termination of your employment, as the case may be, provided that such period or termination occurs during the term of this Agreement. The benefits to which you are entitled, subject to the terms and conditions of this Agreement, are: (a) If your employment shall be terminated by the Corporation for Cause, or by the Corporation without Cause and more than twenty-four (24) months after a 4 Dennis Pope August 7, 1996 Page 4 Change in Control, or by you other than for Good Reason either before, or more than thirty (30) days after, the end of the Transition Employment Period, or by you for Good Reason and more than twenty-four (24) months after a Change in Control, the Corporation shall pay you your full base salary, when due, through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Corporation at the time such payments are due, and the Corporation shall have no further obligations to you under this Agreement. (b) If your employment by the Corporation shall be terminated by you for Good Reason within twenty-four (24) months after a Change in Control or by the Corporation other than for Cause within twenty-four (24) months after a Change in Control or by you for any reason within thirty (30) days immediately following the end of your Transition Employment Period or by you because of your death, Disability or retirement within twenty-four (24) months after a Change in Control, then you shall be entitled to the benefits provided below: (i) the Corporation shall pay to you your full base salary, when due, through the Date of Termination at the rate in effect at the time Notice of Termination is given, at the time specified in Section 4(d), plus all other amounts to which you are entitled under any compensation plan of the Corporation at the time such payments are due; (ii) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Corporation shall pay as severance pay to you, at the time specified in Section 4(d), a lump sum severance payment (the "Severance Payments") equal to 200% of the average of your salary with respect to the three (3) fiscal years (or your total years of employment with the Corporation, if less than three (3)) preceding the Date of Termination or immediately prior to the Change in Control, whichever is greater, and 200% of the average of the annual bonuses awarded to you pursuant to the Corporation's bonus plan for executive officers, or any successor bonus plan thereto, with respect to the three (3) fiscal years (or your total years of employment with the Corporation, if less than three (3)) preceding the Date of Termination or immediately prior to the Change in Control, whichever is greater; (iii) the Corporation shall pay to you all legal fees and legal expenses incurred by you as a result of such termination (including all such reasonable legal fees and legal expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement (as set forth in Section 11 of this Agreement) or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code, to any payment or benefit provided hereunder); and 5 Dennis Pope August 7, 1996 Page 5 (iv) for a twenty-four (24) month period after the Date of Termination, the Corporation shall arrange to provide you with life, disability, accident and group health insurance benefits substantially similar to those that you were receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(b)(iv) shall be reduced to the extent comparable benefits are actually received by you during the twenty-four (24) month period following the Date of Termination, and any such benefits actually received by you shall be reported to the Corporation. (c) If by reason of section 280G of the Code any payment or benefit received or to be received by you in connection with a Change in Control or the termination of your employment (whether payable pursuant to the terms of this Agreement ("Contract Payments") or any other plan, arrangements or agreement with the Corporation or an Affiliate (collectively with the Contract Payments, the "Total Payments") would not be deductible (in whole or part) by the Corporation, an Affiliate or other person making such payment or providing such benefit, then the Severance Payments shall be reduced (to zero if necessary) and, if Severance Payments are reduced to zero, other Contract Payments shall be reduced (to zero if necessary) and, if Contract Payments are reduced to zero, other Total Payments shall be reduced (to zero if necessary) until no portion of the Total Payments is not deductible by reason of section 280G of the Code. For purposes of this limitation, (i) no portion of the Total Payments the receipt or enjoyment of which you shall have effectively waived in writing prior to the date of payment of the Severance Payments shall be taken into account; (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Corporation's independent auditors and acceptable to you does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code (without regard to subsection (A)(ii) thereof); (iii) the Severance Payments (and, thereafter, other Contract Payments and other Total Payments) shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) and (ii) of Section 4(b)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code, in the opinion of the tax counsel referred to in clause (ii), and (iv) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Corporation's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of this Section 4(c), the term "Affiliate" means the Corporation's successors, any Person whose actions result in a Change in Control or any corporation affiliated (or which, as a result of the completion of the transactions causing a Change in Control shall become affiliated) with the Corporation within the meaning of section 1504 of the Code. (d) The payments provided for in Section 4(b)(i) shall be made not later than the Date of Termination. The payments provided for in Section 4(b)(ii) shall be made not later than the Date of Termination; provided, however, that if the amounts of such 6 Dennis Pope August 7, 1996 Page 6 payments cannot be finally determined on or before such day, the Corporation shall pay to you on such day an estimate, as determined in good faith by the Corporation, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to you, payable on the demand by the Corporation (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). (e) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise nor, except as provided in Section 4(b)(iv), shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer or self-employment, by retirement benefits, by offset against any amount claimed to be owed by you to the Corporation, or otherwise. 5. Vesting of Stock Options Upon Change in Control. Notwithstanding any other provision of this Agreement or of any stock option plan or agreement, upon the occurrence of a Change in Control, all of your stock options, if any, granted under any of the Corporation's stock option plans or agreements shall become vested and exercisable effective as of the day immediately prior to the date of the Change in Control. 6. Successors; Binding Agreement. (a) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to terminate your employment and receive compensation from the Corporation in the same amount and on the same terms to which you would be entitled hereunder if you terminate your employment for Good Reason within twenty-four (24) months after a Change in Control, except that for purposes of implementing the foregoing, the day before the date on which any such succession becomes effective shall be deemed the Date of Termination. Where the context requires, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be 7 Dennis Pope August 7, 1996 Page 7 payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 7. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Corporation shall be directed to the attention of the Board with a copy to the Secretary of the Corporation, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Corporation under Section 4 shall survive the expiration of the term of this Agreement. The section headings contained in this Agreement are for convenience only, and shall not affect the interpretation of this Agreement. 9. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 8 Dennis Pope August 7, 1996 Page 8 11. Arbitration; Dispute Resolution. (a) Arbitration Procedure. Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation of this Agreement or any arrangements relating to this Agreement or contemplated in this Agreement or the breach, termination or invalidity thereof shall be settled by arbitration in accordance with the Commercial Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") (except as otherwise provided in this Agreement) in Los Angeles, California. The arbitral tribunal shall consist of one arbitrator. In making any decision, the arbitrator shall apply and follow the substantive law of California without reference to the conflicts of law provisions thereof. The parties to the arbitration jointly shall directly appoint such arbitrator within thirty (30) days of initiation of arbitration. If the parties shall fail to appoint such arbitrator as provided above, such arbitrator shall be appointed by the AAA as provided in the Arbitration Rules. You and the Corporation agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction thereof. The Corporation shall pay all fees and expenses of the Arbitrator regardless of the result and shall provide all witnesses and evidence reasonably required by you to present your case. The Corporation shall pay to you all reasonable arbitration expenses and legal fees incurred by you as a result of a termination of your employment in seeking to obtain or enforce any right or benefit provided by this Agreement (whether or not you are successful in obtaining or enforcing such right or benefit). Such payments shall be made within five (5) days after your request for payment accompanied with such evidence of fees and expenses incurred as the Corporation reasonably may require. (b) Compensation During Dispute. Your compensation during any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation of this Agreement shall be as follows: (i) If a purported termination by you for Good Reason within twenty-four (24) months after a Change in Control occurs or is deemed to occur following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 7 of Appendix A and Section 11(a) of this Agreement, the Corporation shall continue to pay you the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 11(a). Amounts paid under this Section 11(b)(i) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. You agree to remain in the employ of the Corporation during the resolution of the dispute and to continue to provide services unless your 9 Dennis Pope August 7, 1996 Page 9 employment is terminated earlier by death, Disability or retirement, or by action of the Corporation. If the dispute is resolved by a determination that you did not have Good Reason, this Agreement, in accordance with its terms, shall continue to apply to the circumstances of your employment by the Corporation and any termination thereof. (ii) If there is a termination by the Corporation followed by a dispute as to whether you are entitled to the payments and other benefits provided under this Agreement, then, during the period of that dispute the Corporation shall pay you 100% of the amount specified in Section 4(b)(i) hereof and 50% of the amount specified in Section 4(b)(ii) hereof, and the Corporation shall provide you with the other benefits provided in Section 4(b) of this Agreement, if, but only if, you agree in writing that if the dispute is resolved against you, you shall promptly refund to the Corporation all payments you receive under Section 4(b)(ii) of this Agreement plus interest at the rate provided in Section 1274(d) of the Code, compounded quarterly. If the dispute is resolved in your favor, promptly after resolution of the dispute the Corporation shall pay you the sum that was withheld during the period of the dispute plus interest at the rate provided in Section 1274(d) of the Code, compounded quarterly. 12. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of your benefits upon a Change in Control and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto related to the subject of your benefits upon a Change in Control; and any prior agreement of the parties hereto in respect of your benefits upon a Change in Control, is hereby terminated and cancelled. Notwithstanding the foregoing, this Agreement shall not supersede any employment agreement between you and the Corporation, except that if the provisions and definitions of such an employment agreement in respect of your benefits upon a change in control (as defined in such employment agreement), if any, differ from the provisions and definitions of this Agreement in respect of your benefits upon a Change in Control, you, in your sole and absolute discretion, may choose whether the provisions and definitions of such employment agreement or this Agreement shall govern all matters relating to your benefits upon a change in control. 13. No Employment Right Created. Nothing in this Agreement shall confer on you any right to continue in the employ of the Corporation or shall interfere with or restrict in any way the rights of the Corporation, which are hereby expressly reserved, to discharge you at any time for any reason whatsoever, with or without good cause, except as may be otherwise provided in any written employment agreement between you and the Corporation. This Agreement shall not constitute an agreement for employment. 10 Dennis Pope August 7, 1996 Page 10 If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Corporation the enclosed copy of this letter, which shall then constitute our agreement on this subject. Sincerely, SHOWSCAN ENTERTAINMENT INC. By /s/ WILLIAM C. SOADY ---------------------------- Name: William C. Soady Title: President and CEO Agreed to this 7th day of August 1996. /s/ DENNIS POPE - ------------------------ Dennis Pope 11 Dennis Pope August 7, 1996 Page 11 APPENDIX A DEFINITIONS For purposes of this Agreement, the following terms have the meanings indicated: 1. "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 20% or more of the Common Shares of the Corporation then outstanding, but shall not include (i) the Corporation; (ii) any Subsidiary of the Corporation; or (iii) any employee benefit plan of the Corporation or any Subsidiary of the Corporation, or any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Corporation which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 20% or more of the Common Shares of the Corporation then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 20% or more of the Common Shares of the Corporation then outstanding by reason of share purchases by the Corporation and shall, after such share purchases by the Corporation, become the Beneficial Owner of any additional Common Shares of the Corporation, then such Person shall be deemed to be an "Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of the Corporation determines in good faith that a Person who would otherwise be an "Acquiring Person," has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an "Acquiring Person," then such Person shall not be deemed to be an "Acquiring Person" for any purposes of this Agreement. 2. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement. 3. A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (a) which such Person or any of such Person's Affiliates or Associates beneficially owns, within the meaning of Rule 13d-3(a) under the Exchange Act, directly or indirectly; (b) which such Person or any of such Person's Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or 12 Dennis Pope August 7, 1996 Page 12 understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (ii) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (B) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (c) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting or disposing of any securities of the Corporation. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to (and for purposes of determining the percentage of) a Person's Beneficial Ownership of securities of the Corporation, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person (including such Person's Affiliates and Associates but not including any other Person) would be deemed to own beneficially hereunder. 4. Termination by the Corporation of your employment for "Cause" shall mean termination (a) upon your willful and continued failure to substantially perform your duties with the Corporation (other than any such failure resulting from your incapacity due to physical or mental illness) or any such actual or anticipated failure after your issuance of a Notice of Termination, after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, (b) upon your willful participation in conduct which is demonstrably and materially injurious to the Corporation, monetarily or otherwise, or (c) upon your conviction of a felony involving moral turpitude after all appeals are final. For purposes of this definition, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you in bad faith. 13 Dennis Pope August 7, 1996 Page 13 Notwithstanding the foregoing, you shall not be deemed terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the Board's good faith opinion you were guilty of conduct set forth above in this definition and specifying the particulars thereof in reasonable detail. 5. A "Change in Control" shall be deemed to occur if: (a) any Person shall have become an Acquiring Person; (b) any Person is or becomes the Beneficial Owner, directly or indirectly, of Common Shares of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding Common Shares; (c) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in Sections (a), (b), (d) or (e) of this definition) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (d) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation (or other entity), other than a merger or consolidation which would result in the Common Shares of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Common Shares of the surviving entity) more than 66-2/3% of the combined voting power of the Common Shares of the Corporation or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no Person acquires more than 20% of the combined voting power of the Corporation's then outstanding Common Shares shall not constitute a Change in Control; or 14 Dennis Pope August 7, 1996 Page 14 (e) the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. 6. "Common Shares" when used with reference to the Corporation shall mean the shares of common stock, par value $.001 per share, of the Corporation; and in addition shall include all Common Shares issuable upon exercise or conversion of outstanding Common Share Equivalents, which Common Shares are deemed to be "outstanding" and the holder of which shall be deemed to be a "record holder" of such Common Shares for purposes of this Agreement. "Common Share Equivalents" shall mean all outstanding shares of Series C Preferred Stock of the Corporation and of 8% Convertible Notes Due September 1, 1999, and such other classes or series of capital stock and/or debt of the Corporation as the Board of Directors of the Corporation shall expressly designate as Common Share Equivalents within the meaning of this Agreement. "Common Shares" when used to refer to shares issued by any Person other than the Corporation shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. 7. "Date of Termination" shall mean (a) if your employment is terminated due to your death, the date of your death; (b) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30)-day period), and (c) if your employment is terminated for Cause or Good Reason or for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than thirty (30) days from the date such Notice of Termination is given, and in the case of a termination for Good Reason or a voluntary termination shall not be less than fifteen (15) nor more than sixty (60) days from the date such Notice of Termination is given). Except for cases of voluntary termination, notwithstanding anything to the contrary contained in this definition, if within fifteen (15) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or as set forth in Section 11 of the Agreement; provided, however, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 8. "Good Reason" shall mean, without your express written consent, the occurrence after a Change in Control of any of the following circumstances unless, in the case of Sections (a), (e), (f), (g) or (h) of this definition, such circumstances are fully 15 Dennis Pope August 7, 1996 Page 15 corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (a) the assignment to you of any duties inconsistent with the position in the Corporation that you held immediately prior to the Change in Control, or a significant adverse alteration in the nature or status of your responsibilities or the conditions of your employment from those in effect immediately prior to such Change in Control, or a significant adverse alteration in the level or authority of your position in the overall corporate structure from that in effect immediately prior to such Change in Control; (b) the Corporation's reduction of your annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Corporation and all management personnel of any Person in control of the Corporation; (c) the relocation of the Corporation's offices at which you are principally employed immediately prior to the date of the Change in Control to a location that is more than fifteen (15) miles further from your primary residence on the date of the Change in Control than the location of the Corporation's offices at which you are principally employed immediately prior to the date of the Change in Control, or the Corporation's requiring you to be based anywhere other than the Corporation's offices at such location except for required travel on the Corporation's business to an extent substantially consistent with your present business travel obligations; (d) the Corporation's failure to pay to you any portion of your current compensation or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Corporation within seven (7) days of the date such compensation is due; (e) the Corporation's failure to continue in effect any material compensation or benefit plan in which you participate immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the Corporation's failure to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change in Control; 16 Dennis Pope August 7, 1996 Page 16 (f) the Corporation's failure to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Corporation's life insurance, medical, health and accident, or disability plans in which you were participating at the time of the Change in Control, the taking of any action by the Corporation which would directly or indirectly materially reduce any of such benefits, or the failure by the Corporation to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Corporation in accordance with the Corporation's normal vacation policy in effect at the time of the Change in Control; (g) the Corporation's failure to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 6 of the Agreement; or (h) any purported termination of your employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9 of this Appendix (and, if applicable, the requirements of termination for Cause), which purported termination shall not be effective for purposes of this Agreement. 9. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. 10. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. 11. A "Potential Change in Control" shall be deemed to occur if: (a) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (b) any Person (including the Corporation) publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (c) any Person who, on the effective date of this Agreement, is not a Beneficial Owner directly or indirectly of Common Shares of the Corporation representing 10% or more of the combined voting power of the Corporation's then outstanding Common Shares, becomes, at any time after the effective date of this Agreement, the Beneficial Owner directly or indirectly, of Common Shares of the 17 Dennis Pope August 7, 1996 Page 17 Corporation representing 10% or more of the combined voting power of the Corporation's then outstanding Common Shares; (d) any Person who, on the effective date of this Agreement, is a Beneficial Owner directly or indirectly of Common Shares of the Corporation representing 10% or more of the combined voting power of the Corporation's then outstanding Common Shares, increases such Person's beneficial ownership of such Common Shares, at any time after the effective date of this Agreement, by 5% or more over the percentage so owned by such Person on the date hereof; or (e) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 12. "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, at the time of determination, directly or indirectly, by such Person. EX-10.37 4 EXHIBIT 10.37 1 SHOWSCAN ENTERTAINMENT INC. 3939 LANDMARK STREET CULVER CITY, CALIFORNIA 90232-2315 August 7, 1996 W. Tucker Lemon Vice President, General Counsel and Secretary Showscan Entertainment Inc. 3939 Landmark Street Culver City, California 90232-2315 Dear Mr. Lemon: Showscan Entertainment Inc. (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection with this, the Corporation's Board of Directors (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Corporation may exist and that such possibility, and that such uncertainty and questions that it may raise among management, could result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders. The Board has decided to reinforce and encourage the continued attention and dedication of members of the Corporation's management, including yourself, to their assigned duties without distraction arising from the possibility of a change in control of the Corporation. In order to induce you to remain in its employ, the Corporation hereby agrees that after this letter agreement (this "Agreement") has been fully executed, you shall receive the severance and other benefits set forth in this Agreement. If an employment agreement between you and the Corporation also entitles you to benefits upon a change in control (as defined in such employment agreement), you shall be required to choose between the benefits upon a change in control provided by any such employment agreement and the benefits upon a Change in Control provided by this Agreement. Unless otherwise defined herein, all capitalized terms used herein shall have the meanings assigned to such terms in Appendix A attached hereto. 2 W. Tucker Lemon August 7, 1996 Page 2 1. Term of Agreement. This Agreement shall commence on August 7, 1996, and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000, and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Corporation shall have given notice that it does not wish to extend this Agreement; provided, that if a Change in Control or Potential Change in Control, occurs during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the month in which such Change in Control or Potential Change in Control occurred. Notwithstanding anything to the contrary contained in this Agreement, in no event shall the term of this Agreement extend beyond the end of the calendar month in which your 65th birthday occurs. 2. Change in Control and Potential Change in Control. No benefits shall be payable hereunder until there has been a Change in Control. You agree that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control, you shall remain in the employ of the Corporation until the date of occurrence of a Change in Control, unless you terminate your employment before then for Good Reason or by reason of death, Disability or retirement, or the Corporation terminates your employment for any reason. 3. Termination Following Change in Control or Potential Change in Control. (a) General. If any of the events constituting a Change in Control shall have occurred, you shall be entitled to the benefits provided in Section 4(b) upon the subsequent termination of your employment during the term of this Agreement, if such termination is (i) by the Corporation other than for Cause within twenty-four (24) months after a Change in Control, (ii) by you for Good Reason within twenty-four (24) months after a Change in Control, (iii) by you in the case of your voluntary termination of employment for any reason, if you continue in the employ of the Corporation for a period of six (6) months after a Change in Control (the "Transition Employment Period"), and the termination of your employment occurs within thirty (30) days immediately following the end of the Transition Employment Period, as provided in Section 3(b), or (iv) because of your death, Disability (as defined in Section 3(c)) or retirement, as long as such termination occurs within twenty-four (24) months after a Change in Control. You shall not be entitled to the benefits provided in Section 4(b) if the termination of your employment occurs more than twenty-four (24) months after a Change in Control. Furthermore, you shall not be entitled to the benefits provided in Section 4(b) if, upon termination of your employment, you fail to comply with the Corporation's standard termination procedures, including execution of a copy of the separation agreement, a form of which is attached hereto as Exhibit 1. In the event your employment with the Corporation is terminated for any reason and subsequently a Potential Change in Control or a Change in Control occurs, you shall not be entitled to any 3 W. Tucker Lemon August 7, 1996 Page 3 benefits hereunder. Notwithstanding anything in this Agreement to the contrary, if your employment is terminated within one (1) year immediately prior to the Change in Control, but following a Potential Change in Control, such termination shall be deemed to have occurred on the date immediately following a Change in Control and to have been (A) by the Corporation without Cause, if your employment is terminated without Cause, or (B) by you with Good Reason, if you terminate your employment with Good Reason and the act (or failure to act) which constitutes Good Reason occurs following such Potential Change in Control, or (C) by you because of your death, Disability or retirement, if you terminate your employment because of your death, Disability or retirement and your death, Disability or retirement occurs following such Potential Change in Control. (b) Voluntary Termination Within 30 Days Immediately Following the End of the Transition Employment Period. Notwithstanding any other provision in this Agreement, if you voluntarily terminate your employment for any reason, and the Date of Termination and/or Notice of Termination occurs within the first thirty (30) days immediately following the end of the Transition Employment Period, you shall be entitled to the benefits provided in Section 4(b). (c) Disability. If you are unable to perform your duties of employment for in excess of ninety (90) consecutive days or an aggregate of one hundred and twenty (120) days in any twelve (12) month period during the term of your employment as a result of a physical or mental condition, as determined in good faith by the Board of Directors, your employment may be terminated for "Disability." (d) Good Reason. Your right to terminate your employment for Good Reason shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (e) Notice of Termination. Any purported termination of your employment by the Corporation or by you (other than termination due to death which shall terminate your employment automatically) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7. 4. Compensation Upon Termination or During Disability. Following a Change in Control, you shall be entitled to the benefits described below during a period of disability, or upon termination of your employment, as the case may be, provided that such period or termination occurs during the term of this Agreement. The benefits to which you are entitled, subject to the terms and conditions of this Agreement, are: (a) If your employment shall be terminated by the Corporation for Cause, or by the Corporation without Cause and more than twenty-four (24) months after a 4 W. Tucker Lemon August 7, 1996 Page 4 Change in Control, or by you other than for Good Reason either before, or more than thirty (30) days after, the end of the Transition Employment Period, or by you for Good Reason and more than twenty-four (24) months after a Change in Control, the Corporation shall pay you your full base salary, when due, through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Corporation at the time such payments are due, and the Corporation shall have no further obligations to you under this Agreement. (b) If your employment by the Corporation shall be terminated by you for Good Reason within twenty-four (24) months after a Change in Control or by the Corporation other than for Cause within twenty-four (24) months after a Change in Control or by you for any reason within thirty (30) days immediately following the end of your Transition Employment Period or by you because of your death, Disability or retirement within twenty-four (24) months after a Change in Control, then you shall be entitled to the benefits provided below: (i) the Corporation shall pay to you your full base salary, when due, through the Date of Termination at the rate in effect at the time Notice of Termination is given, at the time specified in Section 4(d), plus all other amounts to which you are entitled under any compensation plan of the Corporation at the time such payments are due; (ii) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Corporation shall pay as severance pay to you, at the time specified in Section 4(d), a lump sum severance payment (the "Severance Payments") equal to 150% of the average of your salary with respect to the three (3) fiscal years (or your total years of employment with the Corporation, if less than three (3)) preceding the Date of Termination or immediately prior to the Change in Control, whichever is greater, and 150% of the average of the annual bonuses awarded to you pursuant to the Corporation's bonus plan for executive officers, or any successor bonus plan thereto, with respect to the three (3) fiscal years (or your total years of employment with the Corporation, if less than three (3)) preceding the Date of Termination or immediately prior to the Change in Control, whichever is greater; (iii) the Corporation shall pay to you all legal fees and legal expenses incurred by you as a result of such termination (including all such reasonable legal fees and legal expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement (as set forth in Section 11 of this Agreement) or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code, to any payment or benefit provided hereunder); and 5 W. Tucker Lemon August 7, 1996 Page 5 (iv) for a twenty-four (24) month period after the Date of Termination, the Corporation shall arrange to provide you with life, disability, accident and group health insurance benefits substantially similar to those that you were receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(b)(iv) shall be reduced to the extent comparable benefits are actually received by you during the twenty-four (24) month period following the Date of Termination, and any such benefits actually received by you shall be reported to the Corporation. (c) If by reason of section 280G of the Code any payment or benefit received or to be received by you in connection with a Change in Control or the termination of your employment (whether payable pursuant to the terms of this Agreement ("Contract Payments") or any other plan, arrangements or agreement with the Corporation or an Affiliate (collectively with the Contract Payments, the "Total Payments") would not be deductible (in whole or part) by the Corporation, an Affiliate or other person making such payment or providing such benefit, then the Severance Payments shall be reduced (to zero if necessary) and, if Severance Payments are reduced to zero, other Contract Payments shall be reduced (to zero if necessary) and, if Contract Payments are reduced to zero, other Total Payments shall be reduced (to zero if necessary) until no portion of the Total Payments is not deductible by reason of section 280G of the Code. For purposes of this limitation, (i) no portion of the Total Payments the receipt or enjoyment of which you shall have effectively waived in writing prior to the date of payment of the Severance Payments shall be taken into account; (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Corporation's independent auditors and acceptable to you does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code (without regard to subsection (A)(ii) thereof); (iii) the Severance Payments (and, thereafter, other Contract Payments and other Total Payments) shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) and (ii) of Section 4(b)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code, in the opinion of the tax counsel referred to in clause (ii), and (iv) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Corporation's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of this Section 4(c), the term "Affiliate" means the Corporation's successors, any Person whose actions result in a Change in Control or any corporation affiliated (or which, as a result of the completion of the transactions causing a Change in Control shall become affiliated) with the Corporation within the meaning of section 1504 of the Code. (d) The payments provided for in Section 4(b)(i) shall be made not later than the Date of Termination. The payments provided for in Section 4(b)(ii) shall be made not later than the Date of Termination; provided, however, that if the amounts of such 6 W. Tucker Lemon August 7, 1996 Page 6 payments cannot be finally determined on or before such day, the Corporation shall pay to you on such day an estimate, as determined in good faith by the Corporation, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to you, payable on the demand by the Corporation (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). (e) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise nor, except as provided in Section 4(b)(iv), shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer or self-employment, by retirement benefits, by offset against any amount claimed to be owed by you to the Corporation, or otherwise. 5. Vesting of Stock Options Upon Change in Control. Notwithstanding any other provision of this Agreement or of any stock option plan or agreement, upon the occurrence of a Change in Control, all of your stock options, if any, granted under any of the Corporation's stock option plans or agreements shall become vested and exercisable effective as of the day immediately prior to the date of the Change in Control. 6. Successors; Binding Agreement. (a) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to terminate your employment and receive compensation from the Corporation in the same amount and on the same terms to which you would be entitled hereunder if you terminate your employment for Good Reason within twenty-four (24) months after a Change in Control, except that for purposes of implementing the foregoing, the day before the date on which any such succession becomes effective shall be deemed the Date of Termination. Where the context requires, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be 7 W. Tucker Lemon August 7, 1996 Page 7 payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 7. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Corporation shall be directed to the attention of the Board with a copy to the Secretary of the Corporation, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Corporation under Section 4 shall survive the expiration of the term of this Agreement. The section headings contained in this Agreement are for convenience only, and shall not affect the interpretation of this Agreement. 9. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 8 W. Tucker Lemon August 7, 1996 Page 8 11. Arbitration; Dispute Resolution. (a) Arbitration Procedure. Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation of this Agreement or any arrangements relating to this Agreement or contemplated in this Agreement or the breach, termination or invalidity thereof shall be settled by arbitration in accordance with the Commercial Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") (except as otherwise provided in this Agreement) in Los Angeles, California. The arbitral tribunal shall consist of one arbitrator. In making any decision, the arbitrator shall apply and follow the substantive law of California without reference to the conflicts of law provisions thereof. The parties to the arbitration jointly shall directly appoint such arbitrator within thirty (30) days of initiation of arbitration. If the parties shall fail to appoint such arbitrator as provided above, such arbitrator shall be appointed by the AAA as provided in the Arbitration Rules. You and the Corporation agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction thereof. The Corporation shall pay all fees and expenses of the Arbitrator regardless of the result and shall provide all witnesses and evidence reasonably required by you to present your case. The Corporation shall pay to you all reasonable arbitration expenses and legal fees incurred by you as a result of a termination of your employment in seeking to obtain or enforce any right or benefit provided by this Agreement (whether or not you are successful in obtaining or enforcing such right or benefit). Such payments shall be made within five (5) days after your request for payment accompanied with such evidence of fees and expenses incurred as the Corporation reasonably may require. (b) Compensation During Dispute. Your compensation during any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation of this Agreement shall be as follows: (i) If a purported termination by you for Good Reason within twenty-four (24) months after a Change in Control occurs or is deemed to occur following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 7 of Appendix A and Section 11(a) of this Agreement, the Corporation shall continue to pay you the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 11(a). Amounts paid under this Section 11(b)(i) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. You agree to remain in the employ of the Corporation during the resolution of the dispute and to continue to provide services unless your 9 W. Tucker Lemon August 7, 1996 Page 9 employment is terminated earlier by death, Disability or retirement, or by action of the Corporation. If the dispute is resolved by a determination that you did not have Good Reason, this Agreement, in accordance with its terms, shall continue to apply to the circumstances of your employment by the Corporation and any termination thereof. (ii) If there is a termination by the Corporation followed by a dispute as to whether you are entitled to the payments and other benefits provided under this Agreement, then, during the period of that dispute the Corporation shall pay you 100% of the amount specified in Section 4(b)(i) hereof and 50% of the amount specified in Section 4(b)(ii) hereof, and the Corporation shall provide you with the other benefits provided in Section 4(b) of this Agreement, if, but only if, you agree in writing that if the dispute is resolved against you, you shall promptly refund to the Corporation all payments you receive under Section 4(b)(ii) of this Agreement plus interest at the rate provided in Section 1274(d) of the Code, compounded quarterly. If the dispute is resolved in your favor, promptly after resolution of the dispute the Corporation shall pay you the sum that was withheld during the period of the dispute plus interest at the rate provided in Section 1274(d) of the Code, compounded quarterly. 12. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of your benefits upon a Change in Control and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto related to the subject of your benefits upon a Change in Control; and any prior agreement of the parties hereto in respect of your benefits upon a Change in Control, is hereby terminated and cancelled. Notwithstanding the foregoing, this Agreement shall not supersede any employment agreement between you and the Corporation, except that if the provisions and definitions of such an employment agreement in respect of your benefits upon a change in control (as defined in such employment agreement), if any, differ from the provisions and definitions of this Agreement in respect of your benefits upon a Change in Control, you, in your sole and absolute discretion, may choose whether the provisions and definitions of such employment agreement or this Agreement shall govern all matters relating to your benefits upon a change in control. 13. No Employment Right Created. Nothing in this Agreement shall confer on you any right to continue in the employ of the Corporation or shall interfere with or restrict in any way the rights of the Corporation, which are hereby expressly reserved, to discharge you at any time for any reason whatsoever, with or without good cause, except as may be otherwise provided in any written employment agreement between you and the Corporation. This Agreement shall not constitute an agreement for employment. 10 W. Tucker Lemon August 7, 1996 Page 10 If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Corporation the enclosed copy of this letter, which shall then constitute our agreement on this subject. Sincerely, SHOWSCAN ENTERTAINMENT INC. By /s/ WILLIAM C. SOADY ------------------------- Name: William C. Soady Title:President and CEO Agreed to this 8th day of August 1996. /s/ W. TUCKER LEMON - ----------------------------- W. Tucker Lemon 11 W. Tucker Lemon August 7, 1996 Page 11 APPENDIX A DEFINITIONS For purposes of this Agreement, the following terms have the meanings indicated: 1. "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 20% or more of the Common Shares of the Corporation then outstanding, but shall not include (i) the Corporation; (ii) any Subsidiary of the Corporation; or (iii) any employee benefit plan of the Corporation or any Subsidiary of the Corporation, or any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Corporation which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 20% or more of the Common Shares of the Corporation then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 20% or more of the Common Shares of the Corporation then outstanding by reason of share purchases by the Corporation and shall, after such share purchases by the Corporation, become the Beneficial Owner of any additional Common Shares of the Corporation, then such Person shall be deemed to be an "Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of the Corporation determines in good faith that a Person who would otherwise be an "Acquiring Person," has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an "Acquiring Person," then such Person shall not be deemed to be an "Acquiring Person" for any purposes of this Agreement. 2. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement. 3. A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (a) which such Person or any of such Person's Affiliates or Associates beneficially owns, within the meaning of Rule 13d-3(a) under the Exchange Act, directly or indirectly; (b) which such Person or any of such Person's Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or 12 W. Tucker Lemon August 7, 1996 Page 12 understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (ii) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (B) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (c) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting or disposing of any securities of the Corporation. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to (and for purposes of determining the percentage of) a Person's Beneficial Ownership of securities of the Corporation, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person (including such Person's Affiliates and Associates but not including any other Person) would be deemed to own beneficially hereunder. 4. Termination by the Corporation of your employment for "Cause" shall mean termination (a) upon your willful and continued failure to substantially perform your duties with the Corporation (other than any such failure resulting from your incapacity due to physical or mental illness) or any such actual or anticipated failure after your issuance of a Notice of Termination, after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, (b) upon your willful participation in conduct which is demonstrably and materially injurious to the Corporation, monetarily or otherwise, or (c) upon your conviction of a felony involving moral turpitude after all appeals are final. For purposes of this definition, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you in bad faith. 13 W. Tucker Lemon August 7, 1996 Page 13 Notwithstanding the foregoing, you shall not be deemed terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the Board's good faith opinion you were guilty of conduct set forth above in this definition and specifying the particulars thereof in reasonable detail. 5. A "Change in Control" shall be deemed to occur if: (a) any Person shall have become an Acquiring Person; (b) any Person is or becomes the Beneficial Owner, directly or indirectly, of Common Shares of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding Common Shares; (c) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in Sections (a), (b), (d) or (e) of this definition) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds ( 2/3) of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (d) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation (or other entity), other than a merger or consolidation which would result in the Common Shares of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Common Shares of the surviving entity) more than 66- 2/3% of the combined voting power of the Common Shares of the Corporation or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no Person acquires more than 20% of the combined voting power of the Corporation's then outstanding Common Shares shall not constitute a Change in Control; or 14 W. Tucker Lemon August 7, 1996 Page 14 (e) the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. 6. "Common Shares" when used with reference to the Corporation shall mean the shares of common stock, par value $.001 per share, of the Corporation; and in addition shall include all Common Shares issuable upon exercise or conversion of outstanding Common Share Equivalents, which Common Shares are deemed to be "outstanding" and the holder of which shall be deemed to be a "record holder" of such Common Shares for purposes of this Agreement. "Common Share Equivalents" shall mean all outstanding shares of Series C Preferred Stock of the Corporation and of 8% Convertible Notes Due September 1, 1999, and such other classes or series of capital stock and/or debt of the Corporation as the Board of Directors of the Corporation shall expressly designate as Common Share Equivalents within the meaning of this Agreement. "Common Shares" when used to refer to shares issued by any Person other than the Corporation shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. 7. "Date of Termination" shall mean (a) if your employment is terminated due to your death, the date of your death; (b) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30)-day period), and (c) if your employment is terminated for Cause or Good Reason or for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than thirty (30) days from the date such Notice of Termination is given, and in the case of a termination for Good Reason or a voluntary termination shall not be less than fifteen (15) nor more than sixty (60) days from the date such Notice of Termination is given). Except for cases of voluntary termination, notwithstanding anything to the contrary contained in this definition, if within fifteen (15) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or as set forth in Section 11 of the Agreement; provided, however, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 8. "Good Reason" shall mean, without your express written consent, the occurrence after a Change in Control of any of the following circumstances unless, in the case of Sections (a), (e), (f), (g) or (h) of this definition, such circumstances are fully 15 W. Tucker Lemon August 7, 1996 Page 15 corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (a) the assignment to you of any duties inconsistent with the position in the Corporation that you held immediately prior to the Change in Control, or a significant adverse alteration in the nature or status of your responsibilities or the conditions of your employment from those in effect immediately prior to such Change in Control, or a significant adverse alteration in the level or authority of your position in the overall corporate structure from that in effect immediately prior to such Change in Control; (b) the Corporation's reduction of your annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Corporation and all management personnel of any Person in control of the Corporation; (c) the relocation of the Corporation's offices at which you are principally employed immediately prior to the date of the Change in Control to a location that is more than fifteen (15) miles further from your primary residence on the date of the Change in Control than the location of the Corporation's offices at which you are principally employed immediately prior to the date of the Change in Control, or the Corporation's requiring you to be based anywhere other than the Corporation's offices at such location except for required travel on the Corporation's business to an extent substantially consistent with your present business travel obligations; (d) the Corporation's failure to pay to you any portion of your current compensation or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Corporation within seven (7) days of the date such compensation is due; (e) the Corporation's failure to continue in effect any material compensation or benefit plan in which you participate immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the Corporation's failure to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change in Control; 16 W. Tucker Lemon August 7, 1996 Page 16 (f) the Corporation's failure to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Corporation's life insurance, medical, health and accident, or disability plans in which you were participating at the time of the Change in Control, the taking of any action by the Corporation which would directly or indirectly materially reduce any of such benefits, or the failure by the Corporation to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Corporation in accordance with the Corporation's normal vacation policy in effect at the time of the Change in Control; (g) the Corporation's failure to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 6 of the Agreement; or (h) any purported termination of your employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9 of this Appendix (and, if applicable, the requirements of termination for Cause), which purported termination shall not be effective for purposes of this Agreement. 9. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. 10. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. 11. A "Potential Change in Control" shall be deemed to occur if: (a) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (b) any Person (including the Corporation) publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (c) any Person who, on the effective date of this Agreement, is not a Beneficial Owner directly or indirectly of Common Shares of the Corporation representing 10% or more of the combined voting power of the Corporation's then outstanding Common Shares, becomes, at any time after the effective date of this Agreement, the Beneficial Owner directly or indirectly, of Common Shares of the 17 W. Tucker Lemon August 7, 1996 Page 17 Corporation representing 10% or more of the combined voting power of the Corporation's then outstanding Common Shares; (d) any Person who, on the effective date of this Agreement, is a Beneficial Owner directly or indirectly of Common Shares of the Corporation representing 10% or more of the combined voting power of the Corporation's then outstanding Common Shares, increases such Person's beneficial ownership of such Common Shares, at any time after the effective date of this Agreement, by 5% or more over the percentage so owned by such Person on the date hereof; or (e) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 12. "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, at the time of determination, directly or indirectly, by such Person. EX-27 5 FINANCIAL DATA SCHEDULE
5 3-MOS MAR-31-1997 JUL-01-1996 SEP-30-1996 3,249 997 6,352 216 1,589 12,266 6,297 5,209 25,389 6,219 5,760 0 0 6 13,404 25,389 4,286 5,475 3,342 2,032 66 0 114 (424) 0 (424) 0 0 0 (424) (.25) 0
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