-----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, LEEJ6n3NLnFBDT6xQHZO18bUhghH3ghct/pIMjhKyBPTuZO4YGbK4SGR4ufnp9QC sbmwIcXusw7wsIEgMj13wg== 0000950148-97-002138.txt : 19970815 0000950148-97-002138.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950148-97-002138 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOWSCAN ENTERTAINMENT INC CENTRAL INDEX KEY: 0000812882 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 953940004 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09710 FILM NUMBER: 97662676 BUSINESS ADDRESS: STREET 1: 3939 LANDMARK ST CITY: CULVER CITY STATE: CA ZIP: 90232 BUSINESS PHONE: 3105580150 MAIL ADDRESS: STREET 1: 3939 LANDMARK STREET CITY: CULVER CITY STATE: CA ZIP: 902322315 FORMER COMPANY: FORMER CONFORMED NAME: SHOWSCAN CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SHOWSCAN FILM CORP DATE OF NAME CHANGE: 19901116 10-Q 1 FORM 10-Q 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 June 30, 1997 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 (Address of principal executive offices) 90232 (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 August 11, 1997, the Registrant had 5,642,058 shares of Common Stock, $.001 par value, issued and outstanding. This report contains 17 consecutively numbered pages. ================================================================================ 2 SHOWSCAN ENTERTAINMENT INC. INDEX
Page ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 1997 and March 31, 1997 3 Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 1997 and 1996 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 1997 and 1996 6 Notes to the Condensed Consolidated Financial Statements 8 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 Signatures 17
2 3 PART I. - FINANCIAL INFORMATION Item 1. - Financial Statements SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Balance Sheets (Dollars in Thousands Except Share Information)
JUNE 30, MARCH 31, 1997 1997 ----------- ------ (unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 2,442 $ 2,562 Short-term investments 996 -- Accounts receivable (net of allowances) 2,533 3,600 Unbilled receivables on uncompleted film and equipment contracts 869 -- Equipment sales inventory 1,337 1,289 Prepaid expenses and other current assets 503 1,072 ------- ------- Total current assets 8,680 8,523 Film library (net of amortization) 5,884 5,520 Equipment and leasehold improvements, less accumulated depreciation and amortization 791 868 Investment in and advances to O&O theatres (Note 2) 2,045 2,123 Patents and other intellectual properties (net of amortization) 1,227 1,336 Other assets 1,038 1,558 ------- ------- Total assets $19,665 $19,928 ======= =======
Note: The balance sheet at March 31, 1997 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)
JUNE 30, MARCH 31, 1997 1997 -------- -------- (unaudited) (Note) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 813 $ 654 Customer advances on uncompleted film and equipment contracts 2,424 1,033 Accrued expenses and other current liabilities 2,114 2,308 -------- -------- Total current liabilities 5,351 3,995 -------- -------- 8% convertible notes (Note 3) 5,690 5,690 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; 5,642,058 and 5,642,058 shares issued and outstanding, respectively 6 6 Additional paid-in capital 42,567 42,567 Accumulated deficit (33,949) (32,330) -------- -------- Total stockholders' equity 8,624 10,243 -------- -------- Total liabilities and stockholders' equity $ 19,665 $ 19,928 ======== ========
Note: The balance sheet at March 31, 1997 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 June 30, 1997 1996 ------------------------- (Unaudited) Revenues: Film licensing and production services $ 939 $ 883 Equipment sales and related services 300 2,361 ------- ------- 1,239 3,244 Costs of revenues 735 2,145 ------- ------- Gross Profit 504 1,099 Costs and expenses: General and administrative expenses 1,590 1,705 Depreciation and amortization 199 264 ------- ------- 1,789 1,969 ------- ------- Operating loss (1,285) (870) Other income (expense): Equity in net operations of owned and operated theatres (162) (38) Other income, including interest of $17 (1997) and $116 (1996), respectively 18 122 Interest and other expense (190) (203) ------- ------- (334) (119) ------- ------- Net loss $(1,619) $ (989) ======= ======= Net loss per common share (Note 4) $ (.29) $ (.18) ======= =======
See accompanying notes to unaudited condensed consolidated financial statements. 5 6 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Dollars in Thousands)
THREE MONTHS ENDED JUNE 30, 1997 1996 ------- ------- (Unaudited) Cash flows from operating activities: Net loss $(1,619) $ (989) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 199 264 Amortization of film library 175 133 Equity in operations of owned and operated theatres 162 38 Accrued interest on debt 115 129 Provision for doubtful accounts 30 80 Changes in operating assets and liabilities: Accounts receivable 1,036 (1,440) Equipment sales inventory (48) (73) Unbilled receivables on uncompleted film and equipment contracts (869) (1,149) Prepaid expenses and other assets 569 (52) Investment in and advances to O&O theatres (84) 31 Accounts payable, accrued expenses and other current liabilities (150) (1,566) Customer advances on uncompleted equipment contracts 1,391 (2,249) ------- ------- Net cash provided by (used in) operating activities $ 907 $(2,345) ------- ------- Cash flows from investing activities: Redemptions/(Purchases) of short term investments (996) 1,001 Purchases of equipment and leasehold improvements (12) (38) Additions to film library (539) (1,022) Other assets 520 258 ------- ------- Net cash provided by (used in) investing activities $(1,027) $ 199 ------- -------
(Continued) 6 7 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Continued) (Dollars in Thousands)
THREE MONTHS ENDED JUNE 30, 1997 1996 ------------------------- (Unaudited) Balance forwarded $ (120) $(2,146) ------- ------- Cash flows from financing activities: Other -- (45) ------- ------- Net cash provided by (used in) financing activities -- (45) ------- ------- Net decrease in cash and cash equivalents (120) (2,191) Cash and cash equivalents, beginning of period 2,562 5,055 ------- ------- Cash and cash equivalents, end of period $ 2,442 $ 2,864 ======= ======= Supplemental disclosures of cash flow information: Interest paid $ 2 $ -- ======= ======= 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 ended June 30, 1997 are not necessarily indicative of the results that may be expected either for any other quarter in the fiscal year ending March 31, 1998 or for the entire fiscal year ended March 31, 1998. 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, 1997. Note 2--Owned and Operated theatres: The Company retains an ownership interest, ranging from 15% 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 Universal City, California (November 1993), at the Trocadero Arcade in London (September 1994), Framingham, Massachusetts (May 1995), Osaka, Japan (August 1995), San Antonio, Texas (March 1996), Austin, Texas (July 1997) and in Darling Harbour in Sydney, Australia (July 1997). Generally, in each of these arrangements, the Company receives reimbursement for direct expenses, a percentage of each theatre's cash flow (equal to its ownership percentage), and receives separately annual film licensing revenues and management fees (if applicable). The Company accounts for its investment in owned and operated theatres under the equity method of accounting. The Company has contracted to sell to non-affiliated third parties the equipment from the Framingham theatres and the San Antonio theatre. The joint venture partners of each respective theatre have agreed to these sales. The Company expects to fully realize the aggregate carrying value of its investment in both joint ventures upon completion of such sales and the subsequent liquidation of the related joint ventures. 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 payable semi-annually 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. Through June 30, 1997, $1,310,000 of notes had been converted into 227,819 shares of Common Stock leaving an outstanding balance of $5,690,000. The notes are secured by substantially all of the assets of the Company, although the security excludes the Company's film library and the capital stock of its subsidiaries (which thereby excludes its O&O Theatres). In connection with the placement, $619,000 of debt issue costs were incurred and are being amortized over the life of the notes. 8 9 Note 4--Loss per common share: Loss per common share for the three months ended June 30, 1997 and June 30, 1996 has been determined by using 5,642,058 and 5,524,297 weighted average shares of Common Stock, 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. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and supersedes APB Opinion No. 15, "Earnings Per Share" (APB No. 15). SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes the dilutive effects, if any, of common stock equivalents, and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. SFAS No. 128 also requires dual presentation of basic EPS and diluted EPS on the face of the income statement for all periods presented. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15, with certain modifications. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Early adoption is not permitted and SFAS No. 128 requires restatement of all prior period EPS data presented after SFAS No. 128's effective date. The Company will adopt SFAS No. 128 effective with its March 31, 1998 fiscal year end. Pro forma earnings (loss) per share data calculated in accordance with SFAS No. 128 for the year ended March 31, 1997 and 1996 has not been presented as it would have been the same as the historical amounts reported. Note 5--Subsequent Event: On August 4, 1997, the Company entered into an Agreement and Plan of Reorganization by and among the Company, Iwerks Entertainment, Inc. ("Iwerks") and IWK-1 Merger Corporation ("Merger Sub") pursuant to which Merger Sub will be merged (the "Merger") with and into the Company. As a result of the Merger, (a) each share of Common Stock which is outstanding immediately prior to the Merger shall be converted into .85 shares of Iwerks' common stock, $.001 par value ("Iwerks Common Stock"), and (b) each share of Series C Convertible Preferred Stock will be converted into the right to receive shares of Iwerks Common Stock in an amount equal to the number of shares of Common Stock into which such share of Series C Convertible Preferred Stock is convertible immediately prior to the Merger multiplied by .85. As a result of the Merger, the Company will become a wholly-owned subsidiary of Iwerks and the shares of Common Stock will cease to be publicly traded. Consummation of the Merger is subject to certain conditions, including certain approvals by the stockholders of both the Company and Iwerks. The Company anticipates holding a stockholder meeting to vote on the Merger in the fourth calendar quarter of 1997. The Merger and other conditions to the effectiveness thereof are more fully described in the Company's Current Report on Form 8-K dated August 4, 1997 on file with the Securities and Exchange Commission. The Company currently anticipates that the Merger will close in the fourth calendar quarter of 1997. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview: Showscan Entertainment Inc. (the "Company") is a leading provider of movie-based motion simulation theatre attractions ("Showscan Attractions") to the rapidly expanding out-of-home entertainment market. The Company's business includes: (i) licensing and distributing the films in its library and the proprietary technologies necessary to produce and exhibit Showscan films; (ii) selling and installing motion simulation attractions and specialty theatre equipment (including motion bases, projectors, screens, sound systems, synchronization and show control and theatre design packages); (iii) producing films using the Showscan process; and (iv) establishing motion simulation attractions in which the Company has an economic interest ("O&O Theatres"). The Company is also committed to the continued recognition of the Showscan(R) brand name worldwide. The principal sources of the Company's revenues are the licensing of the Showscan film library and technologies, the sale and installation of projectors, screens, sound systems and other equipment used to exhibit Showscan films, and the sale of motion bases and other equipment used in 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 three months ended June 30, 1997 and 1996: Revenues for the three-month period ended June 30, 1997 (the "1998 First Quarter") decreased $2 million or 62% from revenues for the three-month period ended June 30, 1996 (the "1997 First Quarter") due to a substantial decrease in revenues recognized from equipment sales and related services in the 1998 First Quarter. Film licensing and production service revenues increased by 6% to $939,000 in the 1998 First Quarter. The increase is due to the increase in the number of Showscan Attractions providing film licensing revenues in the 1998 First Quarter from the 1997 First Quarter. Revenues from equipment sales and related services for the 1998 First Quarter decreased 87% to $300,000 from $2.4 million in the 1997 First Quarter. No Showscan Attractions were shipped (nor were any labor hours incurred) in the 1998 First Quarter as compared to the three units shipped in the 1997 First Quarter. The Company recognizes equipment sales under the percentage-of-completion method of accounting, generally measured by the percentage that the labor hours incurred to date bears to the estimated total labor hours of each contract. This results in a disparity in the comparison of equipment sales revenues over different time periods, as the Company records revenues under this method rather than on the date that the sales agreement is signed. The actual signing of a Showscan Attraction sale precedes its delivery and installation by an average of five to six months. Accordingly, the recognition of revenue for equipment sales during the current and future quarters 10 11 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 59% of revenues in the 1998 First Quarter as compared to 66% in the 1997 First Quarter. The decrease was principally the result of the recognition of two sales in the 1997 First Quarter, each of which had significantly higher associated costs of revenues. Equipment Cost of Sales to Total Equipment Sales increased to 83% in the 1998 First Quarter from 77% in the 1997 First Quarter. Film Licensing Cost of Sales to total Film Licensing Sales was 52% in the 1998 First Quarter as compared to 37% in the 1997 First Quarter. The increase in Film Licensing Cost of Sales is due to the additional distribution expenses associated with the new simulation films that were in initial release or pre-release during the 1998 First Quarter which did not exist in the 1997 First Quarter. Amortization of the film library for the 1998 First Quarter and the 1997 First Quarter was $175,000 and $133,000, respectively. The increase in film amortization is due to the additional amortization from new films in the 1998 First Quarter that did not exist in the 1997 First Quarter. The loss on investment in Owned and Operated Theatres in the 1998 First Quarter is primarily the result of the following factors: (i) operating losses at the Framingham, Trocadero and Universal CityWalk theatres, (ii) offset by the operating profits of the San Antonio Riverwalk and Osaka theatres. The Company earns film licensing revenues (from all O&O Theatres) and management fees (from some of the O&O Theatres) which are recorded separately in the accompanying consolidated statements of operations, thereby inherently increasing the operating expenses at the specific O&O Theatres. A formal claim that was filed with the owner of the Trocadero building to recover damages and lost revenues resulting from the renovation of the Trocadero building and the related access problems has been settled, in which the company holding that theatre will be reimbursed for a portion of the lost revenue incurred during the renovation period. The Company has contracted to sell to non-affiliated third parties the equipment from the Framingham theatres and the San Antonio theatre. The joint venture partners of each respective theatre have agreed to these sales. The Company expects to fully realize the aggregate carrying value of its investment in both joint ventures upon completion of such sales and the subsequent liquidation of the related joint ventures. The Company recently invested in two new O&O Theatres: a 50% ownership interest through the Showscan/United Artists Theatres Joint Venture in a theatre in Austin, Texas and a 15% ownership interest through an investment in Reality Cinema Pty Ltd. in a theatre in Darling Harbour in Australia. The Company's net loss increased in the 1998 First Quarter to $1,619,000 from $989,000 in the 1997 First Quarter, due to (i) the decrease in equipment sales revenues, and (ii) the decrease in performance of the O&O Theatres. The Company does not believe that these results necessarily represent a recurring trend. Liquidity and Capital Resources: At June 30, 1997, the Company's working capital decreased to $3,329,000 from $4,528,000 at March 31, 1997. The decrease in working capital was primarily due to the expenditures related to the production of one new motion simulation film and the operating loss in the 1998 First Quarter. 11 12 Cash and cash equivalents at June 30, 1997 decreased by $120,000 from March 31, 1997, which was the result of $907,000 provided by operating activities and $1,027,000 used in investing activities. Net cash provided by operating activities was primarily due to (i) unbilled receivables on uncompleted equipment contracts increasing by $869,000, (ii) a 35% decrease in accounts receivable, prepaid expenses and other current assets, (iii) offset by the net loss in the 1998 First Quarter of $1,619,000. The changes to receivables, payables, prepaids and other assets 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. Net cash used in investing activities was primarily due to the $996,000 in net purchases of short-term investments. The Company's business strategy includes a significant increase in the installed base of Showscan Attractions, new film productions or the securing of distribution rights to motion simulation films produced by other companies, new product development and new product lines, enhancement of existing product lines and possible investments in O&O Theatres and the reduction of overhead (which was implemented in the prior fiscal year). Following this business strategy, the Company recently invested in two new O&O Theatres: a 50% ownership interest through the Showscan/United Artists Theatre Joint Venture in a theatre in Austin, Texas and a 15% ownership interest through an investment in Reality Cinema Pty Ltd. in a theatre in Darling Harbour in Australia. The Company also recently obtained certain distribution rights through May 1, 2002 to two films produced by another company. If the Merger with Iwerks should not occur, the Company intends to finance the foregoing business strategy by utilizing its current working capital resources, the proceeds to be received from its existing backlog and anticipated future product sales and film licensing agreements, together with proceeds derived from one or more of the following financing alternatives: the sale of securities, the obtaining of a line of credit from a banking institution, and/or the formation of strategic alliances, joint ventures or off-balance sheet financing. There can be no assurance that the Company will be able to obtain any of the aforementioned financing alternatives and the Company has agreed in the Merger Agreement with Iwerks to not incur additional indebtedness in excess of $1,000,000. If the Merger with Iwerks should not occur and the Company is unable to generate sufficient funds from operations or is unable to raise additional capital through any of the aforementioned alternatives, the Company will need to curtail its business strategy, specifically with regard to new film productions and investments in O&O Theatres. The Company believes that, given its various business alternatives, its working capital will be sufficient to fund the cost of its operations for the next twelve months. At July 1, 1997, the Company has reserved 4,573,573 shares of Common Stock for issuance on the exercise of stock options, warrants, preferred stock and convertible notes. FACTORS THAT MAY AFFECT FUTURE RESULTS Portions of this report 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 12 13 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. Period to Period Fluctuations The Company's operating results may fluctuate from period to period for a number of reasons, including (i) the timing of sales of the Company's motion simulation attractions, (ii) 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, (iii) the size, type and configuration of the attractions sold, (iv) the timing of film rental payments from existing attractions and the performance of those attractions that pay film rental based on a percentage of box office, and (v) the timing of sales and marketing efforts and related expenditures. Accordingly, the Company's revenues and earnings in any particular period may not be indicative of the results for any future period. The seasonal fluctuations also cause gyrations in the Company's stock price. The Company's performance depends primarily upon the number of motion simulation attractions that it can sell and install. This dependence has been lessening as the percentage of the Company's revenues derived from recurring film licensing revenues has increased though there can be no assurance that this trend will necessarily continue. The Company's results have followed a seasonal pattern, with revenues tending to be stronger in the second and fourth fiscal quarters, reflecting the buying patterns of the Company's customers for new motion simulation attractions. Business Strategy Management of the Company has adopted a business strategy that includes substantial investments in its sales and marketing organizations, the creation of new research and development programs and increased funding of existing programs. This strategy carries with it a number of risks, including a level of operating expenses that may not be adequately covered by increased sales or additional financing may not be available on favorable terms. This strategy will have to be curtailed if adequate funds are not available. New Product Development The Company operates in a technology driven segment of the entertainment business. As such, the Company must continually improve its products to increase their entertainment value while also facing pressure to continually reduce the price of its products to respond to competitive pressures. Since the Company's main competitors, Iwerks Entertainment, Inc. (until the Merger is completed) and Imax Corporation, have significantly more capital than the Company, the Company has had to rely more on its suppliers and other third-parties to improve the Company's existing products and to develop new ones. The inability of the Company to develop new products and to respond to technological developments of its competitors could have a materially-adverse effect on the Company's business, operations and financial condition. 13 14 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. Intellectual Property The Company has several United States patents on various processes and elements related to film projection and motion simulation. The most important of these patents expire in October 2001. Though the Company's patents have never been challenged and the Company believes that they are valid, third parties could still challenge the patents and a court could determine that one or more of them are invalid. Declarations of invalidity, particularly of the Company's key patents, could adversely affect the marketability of the Company's products and services. In addition, the Company always faces the risk that new technologies could be discovered that are superior to the Company's patents. Competition The Company faces intense competition in all of its product lines. In the motion simulation business, the Company's main competitor (until the Merger is completed) 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 film 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 will be adversely affected until sales can be made. Business Disruption The Company's corporate headquarters, including its research and development operations, are located in Los Angeles, California, a region known for seismic activity. Operating results could be materially affected by a significant earthquake or other natural disaster. 14 15 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, Imagine Japan, presently operates or is otherwise responsible for fifteen simulation 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. In the fiscal year ended March 31, 1997, the Company earned revenues from Imagine Japan and United Artists Theatre Circuit, Inc. in the amount of $8,522,000. The Company's short and long term performance could be adversely impacted if disruptions were to occur in any of these areas of concentration such as order cancellations, license terminations or payment problems. Ability to Produce Additional Films One of the primary factors considered by potential purchasers of motion simulation attractions is the quality and extent of the films available to be shown at the attraction. The Company believes that a large portion of its competitive advantage resides in its popular and extensive library of ride films. To maintain this competitive edge, the Company must produce or acquire the distribution rights to several new films each year. Film production is expensive and requires the investment of Company funds (to the extent that investors cannot be located) with no assurance that the films produced will be popular. Iwerks and Imax have each indicated that they are devoting substantial portions of their assets to the production of new motion simulation films. Both the short and long term financial performance of the Company will be adversely affected if the perceived quality and popularity of the Company's film library declines either alone or in comparison to the films of the Company's competitors. 15 16 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits None (b) Reports on Form 8-K None. 16 17 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 12th day of August, 1997. Showscan Entertainment Inc. --------------------------- (Registrant) By /s/ DENNIS POPE ------------------------------------ Dennis Pope President - Chief Executive Officer (Authorized Officer and Principal Executive Officer) By /s/ GREGORY W. BETZ ------------------------------------ Gregory W. Betz Vice President - Director of Finance (Authorized Officer and Principal Accounting Officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1998 APR-01-1997 JUN-30-1997 3,438 0 2,988 455 1,339 1,372 6,170 5,379 19,665 5,351 5,690 0 0 6 8,618 19,665 300 1,239 250 735 1,933 0 190 (1,619) 0 (1,619) 0 0 0 (1,619) (.29) 0
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