-----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, DpfAdCkcg7osriaQhyanIPzyD7qX15H1TwOxK9uEjPhUyseZc4Lc4wlF/2+b8WHT v9GAg3IVv8drFwpCDz1ZFg== 0000950148-98-000310.txt : 19980218 0000950148-98-000310.hdr.sgml : 19980218 ACCESSION NUMBER: 0000950148-98-000310 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980217 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: SEC FILE NUMBER: 001-09710 FILM NUMBER: 98541913 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 December 31, 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 90232 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 558-0150 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of February 10, 1998, the Registrant had 5,642,058 shares of Common Stock, $.001 par value, issued and outstanding. ================================================================================ This report contains 37 consecutively numbered pages. 2 SHOWSCAN ENTERTAINMENT INC. INDEX
Page ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3 Condensed Consolidated Balance Sheets as of December 31, 1997 and March 31, 1997 3 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended December 31, 1997 and 1996 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 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 11 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22 Signatures 23 Exhibit Index 24
2 3 PART I. - FINANCIAL INFORMATION Item 1. - Financial Statements SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Balance Sheets (Dollars in Thousands Except Share Information)
DECEMBER 31, MARCH 31, 1997 1997 ------------ ------------ (unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 2,188 $ 2,562 Accounts receivable (net of allowances) 3,789 3,600 Unbilled receivables on uncompleted film and equipment contracts 695 -- Equipment sales inventory 1,855 1,289 Prepaid expenses and other current assets 294 1,072 ------------ ------------ Total current assets 8,821 8,523 Film library (net of amortization) 4,709 5,520 Equipment and leasehold improvements, less accumulated depreciation and amortization 633 868 Investment in and advances to O&O Theatres (Note 3) 179 2,123 Patents and other intellectual properties (net of amortization) 1,010 1,336 Other assets 686 1,558 ------------ ------------ Total assets $ 16,038 $ 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)
DECEMBER 31, MARCH 31, 1997 1997 ------------ ------------ (unaudited) (Note) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 335 $ 654 Customer advances on uncompleted film and equipment contracts 2,239 1,033 Accrued expenses and other current liabilities 2,406 2,308 11% note payable (Note 4) 1,000 -- ------------ ------------ Total current liabilities 5,980 3,995 ------------ ------------ 8% convertible notes (Note 5) 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 shares issued and outstanding 6 6 Additional paid-in capital 42,567 42,567 Accumulated deficit (38,205) (32,330) ------------ ------------ Total stockholders' equity 4,368 10,243 ------------ ------------ Total liabilities and stockholders' equity $ 16,038 $ 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 NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 -------------------- --------------------- (Unaudited) (Unaudited) Revenues: Film licensing and production services $ 791 $ 678 $ 2,922 $ 2,750 Equipment sales and related services 2,634 3,542 4,214 10,189 ------- ------- ------- ------- 3,425 4,220 7,136 12,939 Costs of revenues 3,889 3,205 6,006 9,038 ------- ------- ------- ------- Gross profit/(loss) (464) 1,015 1,130 3,901 Costs and expenses: General and administrative expenses 2,339 1,555 5,505 5,050 Depreciation and amortization 190 210 579 716 ------- ------- ------- ------- 2,529 1,765 6,084 5,766 ------- ------- ------- ------- Operating loss (2,993) (750) (4,954) (1,865) Other income (expense): Equity in net operations of O&O Theatres (104) (281) (468) (445) Other income, including interest of $21, $24, $61, and $198, respectively 23 24 64 206 Interest and other expenses (190) (175) (517) (492) ------- ------- ------- ------- (271) (432) (921) (731) ------- ------- ------- ------- Net loss $(3,264) $(1,182) $(5,875) $(2,596) ======= ======= ======= ======= Basic and diluted net loss per common share (Note 6) $ (.58) $ (.21) $ (1.04) $ (.47) ======= ======= ======= =======
See accompanying notes to unaudited condensed consolidated financial statements. 5 6 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Dollars in Thousands)
NINE MONTHS ENDED DECEMBER 31, 1997 1996 ------------------------ (Unaudited) Cash flows from operating activities: Net loss $ (5,875) $ (2,596) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 579 716 Amortization of film library 683 458 Write Down/Provision For Film Library 1,150 -- Equity in operations of owned and operated theatres 468 445 Accrued interest on debt 358 358 Provision for doubtful accounts 590 140 Changes in operating assets and liabilities: Accounts receivable (779) (141) Equipment sales inventory (566) 484 Unbilled receivables on uncompleted film and equipment contracts (695) 31 Prepaid expenses and other assets 778 (88) Investment in and advances to O&O Theatres 1,476 (145) Accounts payable, accrued expenses and other current liabilities (581) (1,913) Customer advances on uncompleted equipment contracts 1,206 (429) -------- -------- Net cash used in operating activities $ (1,208) $ (2,680) -------- -------- Cash flows from investing activities: Redemptions of short term investments -- 3,086 Purchases of equipment and leasehold improvements (16) (62) Additions to film library (1,022) (2,390) Other assets 872 (235) -------- -------- Net cash provided by (used in) investing activities $ (166) $ 399 -------- --------
(Continued) 6 7 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Continued) (Dollars in Thousands)
NINE MONTHS ENDED DECEMBER 31, 1997 1996 ---------------------- (Unaudited) Balance forwarded $(1,374) $(2,281) ------- ------- Cash flows from financing activities: 11% Short-term note payable 1,000 -- Other -- (77) ------- ------- Net cash provided by (used in) financing activities 1,000 (77) ------- ------- Net decrease in cash and cash equivalents (374) (2,358) Cash and cash equivalents, beginning of period 2,562 5,055 ------- ------- Cash and cash equivalents, end of period $ 2,188 $ 2,697 ======= ======= Supplemental disclosures of cash flow information: Interest paid $ 234 $ 251 ======= ======= 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 the nine-month period ended December 31, 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--Merger: 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"), as amended by that certain Amendment No. 1 to Agreement and Plan of Reorganization dated December 29, 1997 (the "Merger Agreement"), 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 the Company's common stock, $.001 par value (the "Common Stock"), which is outstanding immediately prior to the Merger shall be converted into .62 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 .62. The December, 1997 amendment of the Merger Agreement, among other things, reduced the exchange ratio from .85 to .62. 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 Merger and other conditions to the effectiveness thereof are more fully described in the Company's Current Reports on Form 8-K dated August 4, 1997 and December 29, 1997 on file with the Securities and Exchange Commission. The Company currently anticipates holding a stockholder meeting (and that the Merger will close) in March, 1998. On February 3, 1998, Ridefilm Corporation, a wholly-owned subsidiary of Imax Corporation, filed suit against Iwerks in the United States District Court for the Southern District of New York. This lawsuit, among other things, seeks to enjoin the Merger under various antitrust claims. Ridefilm is seeking a preliminary injunction of the Merger as well. The Company and Iwerks believe that the suit is without merit and are vigorously defending these claims and are opposing the request for preliminary injunction. 8 9 Note 3--Owned and Operated theatres: The Company retains an ownership interest 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 (opened in November 1993), the Trocadero Arcade in London (opened in September 1994), and Osaka, Japan (opened in August 1995) (collectively, the "O&O Theatres"). Generally, in each of these arrangements, the Company receives reimbursement for direct expenses, a percentage of each theatre's cash flow (equal to its ownership percentage), and receives separately annual film licensing revenues and management fees (if applicable). The Company accounts for its investment in the O&O Theatres under the equity method of accounting. The Company has ceased operation of the theatres in Framingham, Massachusetts (closed in October 1997) and in San Antonio, Texas (closed in September 1997) and has either sold or is negotiating to sell to non-affiliated third parties the equipment from each such theatre. The investment in each such closed theatre is now reflected in equipment sales inventory. The Company expects to fully realize the aggregate carrying value of the equipment retained by the Company upon completion of such sales. The Company had accepted on behalf of its joint venture (the "UA Venture") with United Artists Theatre Circuit, Inc. ("UA") the offer of the Showscan Attraction site in Austin, Texas, which acceptance was to be effective July 1, 1997. During the process of finalizing documentation relating to the acquisition of the Austin site, however, UA entered into a merger agreement with two other large theatre chains, and the circumstances surrounding the merger transaction created uncertainty with respect to the Austin site. Accordingly, the UA Venture has terminated its plans to acquire ownership of the Showscan Attraction at the Austin site. In addition, the Company was to acquire a 15% investment in a Showscan Attraction in Darling Harbour, Sydney, Australia. During the process of finalizing documentation relating to such investment, however, disputes arose regarding (i) the valuation of costs associated with the Showscan Attraction, which costs were used to calculate the price of the 15% investment and (ii) the remaining payment obligations owed to the Company by Reality Cinema Pty. Ltd., the co-investor which was to own an 85% interest in the Showscan Attraction. Accordingly, the Company has advised Reality Cinema Pty. Ltd. that the Company will not proceed with its plans to acquire any ownership of a Showscan Attraction at the Sydney site until such disputes are satisfactorily resolved. Note 4--11% Promissory Note On November 1, 1997, the Company completed a placement of a $1,000,000 promissory note through an unaffiliated third party. The note bears interest at a rate of 11 percent per annum. The principal and interest amounts are due and payable in full on November 15, 1998 or, if earlier, the date which is six months after the close of a merger involving the Company. The note is secured by accounts receivable from the distribution of the Company's film library and the proceeds thereof. Note 5--8% Convertible Notes: On September 1, 1995, the Company completed a private placement of $7,000,000 in secured convertible notes (8% 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 Common Stock at a 9 10 conversion price of $5.75 per share. Through December 31, 1997, $1,310,000 of such 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. Note 6--Loss per common share: Loss per common share for the three months ended December 31, 1997 and December 31, 1996 has been determined by using 5,642,058 and 5,631,605 weighted average shares of Common Stock, respectively. For the nine months ended December 31, 1997 and December 31, 1996, the weighted average shares of Common Stock used to determine loss per common share were 5,642,058 and 5,578,597, 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. The Company has adopted Financial Accounting Standards Board 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. 10 11 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 Showscan Attractions and specialty theatres including the equipment necessary for each (including motion bases, projectors, screens, sound systems, synchronization and show control, and theatre design packages); (iii) producing films using the Showscan process; and (iv) establishing Showscan Attractions in which the Company has an economic interest ("O&O Theatres"). The Company is also committed to the continued recognition of the Showscan(R) brand name worldwide. The principal sources of the Company's revenues are the licensing of the Showscan film library and technologies, the sale and installation of projectors, screens, sound systems and other equipment used to exhibit Showscan films, and the sale of motion bases and other equipment used in most Showscan Attractions. The Company currently derives most of its revenues from export sales. However, the Company plans to increase its domestic sales through its agreement with United Artists Theatre Circuit, Inc. The agreement calls for 24 sites, eight of which are currently installed and the remaining 16 of which are in the Company's backlog. 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. On August 4, 1997, the Company entered into an agreement (the "Merger Agreement") with Iwerks Entertainment, Inc. ("Iwerks") pursuant to which a subsidiary of Iwerks will be merged (the "Merger") with and into the Company. This agreement was amended on December 29, 1997 to reduce the consideration being offered. Under the terms of the amended Merger Agreement, each share of the Company's common stock, $.001 par value (the "Common Stock"), which is outstanding immediately prior to the Merger shall be converted into .62 shares of Iwerks' common stock, $.001 par value. 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 currently anticipates holding a stockholder meeting (and that the Merger will close) in March, 1998. On February 3, 1998, Ridefilm Corporation, a wholly-owned subsidiary of Imax Corporation, filed suit against Iwerks in the United States District Court for the Southern District of New York. This lawsuit, among other things, seeks to enjoin the Merger under various antitrust claims. Ridefilm is seeking a preliminary injunction of the Merger as well. The Company and Iwerks are vigorously defending these claims and are opposing the request for preliminary injunction. 11 12 Comparison of the nine months ended December 31, 1997 and 1996: Revenues for the nine-month period ended December 31, 1997 (the "Nine Month Period") decreased by $5.8 million or 45% from revenues for the nine-month period ended December 31, 1996 due to a substantial decrease in revenues recognized from equipment sales and related services. Revenues from equipment sales and related services for the Nine Month Period decreased 59% to $4.2 million from $10.2 million in the nine-month period ended December 31, 1996. The decrease is due to the decrease in the number of Showscan Attractions shipped during the Nine Month Period as compared to the corresponding prior year nine-month period. Only five Showscan Attractions were shipped (two of which were relocations of existing Showscan Attractions) in the Nine Month Period as compared to the fourteen units shipped in the nine-month period ended December 31, 1996. This decrease can be attributed to the significant slow down in new sales orders since the announcement of the Merger on August 5, 1997. The decrease in revenues was further complicated by the delay in timing of certain projects in the Asian market. The Company believes this delay is primarily due to the economic crisis currently being experienced in Asia and that the adverse impact on revenues will continue in future periods. Film licensing and production service revenues increased by 6% to $2.9 million in the Nine Month Period due to the increase in the number of operating Showscan Attractions and the addition of production service revenues from one film that were not present in the year earlier 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 five to six months. Accordingly, the recognition of revenue for equipment sales during the current and future quarters is affected by (i) the timing of such sales; (ii) the schedule of the build-out of the Showscan Attractions; and (iii) the shipment, delivery and installation of the equipment and related services. The Company presently has four Showscan Attractions in various stages of manufacturing, delivery and installation, and an additional four Showscan Attractions pending installation. Costs of revenues were 84% of revenues in the Nine Month Period as compared to 70% in the nine-month period ended December 31, 1996. Equipment cost of sales to total equipment sales increased to 81% in the Nine Month Period from 77% in the nine-month period ended December 31, 1996. Film licensing cost of sales to total film licensing sales was 88% in the Nine Month Period as compared to 45% in the nine-month period ended December 31, 1996. The increase in film licensing cost of sales is due to the increase in film amortization in the Nine Month Period from the nine-month period ended December 31, 1996. Amortization of the film library for the Nine Month Period and the nine-month period ended December 31, 1996 was $1,833,000 and $458,000, respectively. The increase in film amortization is due to a provision of $1,150,000 to adjust the carrying value of two films at their estimated realizable value and the additional amortization from new films in the Nine Month Period that were 12 13 in the production process in the nine-month period ended December 31, 1996. The Company reviews film library estimated revenues on a quarterly basis (based on the then current market conditions) and, where applicable, unamortized film costs are written down to estimated net realizable value. General and Administrative expenses increased 9% in the Nine Month Period, as the Company incurred expenses related to the Merger and recorded a $500,000 increase in the allowance for doubtful accounts to reflect conditions in the general Asian market, offset by a reduction in the Company's overhead expenses. The loss on investment in O&O Theatres increased to $468,000 in the Nine Month Period from $445,000 in the nine-month period ended December 31, 1996. The loss for the Nine Month Period is primarily the result of the following factors: (i) operating losses at the Framingham, Trocadero, San Antonio Riverwalk and Universal CityWalk theatres, (ii) offset by the operating profits of the Osaka theatre. 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 resulting from the renovation of the Trocadero building and the related access problems has been settled, wherein the Showscan subsidiary which owns the theatres was reimbursed in the Nine Month Period for a portion of its damages incurred during the renovation period. The Company has ceased operations at the Framingham (closed in October 1997) and San Antonio (closed in September 1997) theatres and has either sold or is negotiating to sell to non-affiliated third parties the equipment from each theatre location. 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's net loss increased in the Nine Month Period to $5,875,000 from $2,596,000 in the nine-month period ended December 31, 1996, due to (i) the decrease in equipment sales revenues, (ii) the performance of the O&O Theatres, (iii) the provision of $1,150,000 to adjust the carrying value of certain films to their estimated realizable value, and (iv) the increase in general and administrative expenses caused by expenses related to the proposed Merger and the $500,000 increase in the allowance for doubtful accounts, as discussed above. The Company does not believe that these results necessarily represent a recurring trend. Comparison of the three months ended December 31, 1997 and 1996: Revenues for the three-month period ended December 31, 1997 (the "1998 Third Quarter") decreased $795,000 or 19% from revenues for the three-month period ended December 31, 1996 (the "1997 Third Quarter") due to a decrease in revenues recognized from equipment sales and related services in the 1998 Third Quarter. Revenues from equipment sales and related services for the 1998 Third Quarter decreased 26% to $2.6 million from $3.5 million in the 1997 Third Quarter. Three Showscan Attractions were shipped (two of which were relocations of existing Showscan Attractions) in the 1998 Third Quarter as compared to the five units shipped in the 1997 Third Quarter. This decrease can be attributed to 13 14 the significant slow down in new sales orders since the announcement of the Merger on August 5, 1997. The decrease in revenues was further complicated by the delay in timing of certain projects in the Asian market. The Company believes this delay is primarily due to the economic crisis currently being experienced in Asia and that the adverse impact on revenues will continue into future periods. Film licensing and production service revenues increased 17% when comparing the 1998 Third Quarter to the 1997 Third Quarter due to the increase in the number of operating Showscan Attractions and the addition of production service revenues from one film that were not present in the year earlier 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 five to six months. Accordingly, the recognition of revenue for equipment sales during the current and future quarters is affected by (i) the timing of such sales; (ii) the schedule of the build-out of the Showscan Attractions; and (iii) the shipment, delivery and installation of the equipment and related services. The Company presently has four Showscan Attractions in various stages of manufacturing, delivery and installation and an additional four Showscan Attractions pending installation. Costs of revenues were 114% of revenues in the 1998 Third Quarter as compared to 76% in the 1997 Third Quarter. Equipment cost of sales to total equipment sales increased to 87% in the 1998 Third Quarter from 74% in the 1997 Third Quarter. The increase was principally the result of the recognition of two relocations of existing Showscan Attractions that provided lower profit margins in the 1998 Third Quarter when compared to equipment sales in the 1997 Third Quarter. These relocations, though they lower profit margins on sales, are beneficial to the Company in that they provide continued operations and film rental from the theatres rather than closures. Film licensing cost of sales to total film licensing sales was 202% in the 1998 Third Quarter as compared to 84% in the 1997 Third Quarter. The increase in film licensing cost of sales is due to the increase in film amortization in the 1998 Third Quarter from the 1997 Third Quarter. Amortization of the film library for the 1998 Third Quarter and the 1997 Third Quarter was $1,585,000 and $266,000, respectively. The increase in film amortization is due to a provision of $1,150,000 to adjust the carrying value of two films to their estimated realizable value and the additional amortization from new films in the 1998 Third Quarter that were in the production process in the 1997 Third Quarter. The Company reviews film library estimated revenues on a quarterly basis (based on the then current market conditions) and, where applicable, unamortized film costs are written down to estimated net realizable value. General and Administrative expenses increased 51% in the 1998 Third Quarter, as the Company incurred expenses related to the Merger and recorded a $500,000 increase in the allowance for doubtful accounts to reflect conditions in the general Asian market, offset by a reduction in the Company's overhead expenses. 14 15 The loss on investment in O&O Theatres in the 1998 Third Quarter decreased 63% to $104,000 from the 1997 Third Quarter and was primarily the result of the following factors: (i) operating losses at the Trocadero and Universal CityWalk theatres, (ii) offset by the operating profits of the Osaka theatre. 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. The Company's net loss increased in the 1998 Third Quarter to $3,264,000 from $1,182,000 in the 1997 Third Quarter, due to (i) the decrease in equipment sales revenues, (ii) the performance of the O&O Theatres, (iii) the increase in general and administrative expenses caused by expenses related to the proposed Merger and the $500,000 increase in the allowance for doubtful accounts (as discussed above), and (iv) the increase in film amortization including the provision of $1,150,000 to adjust the carrying value of certain films to their estimated realizable value. The Company does not believe that these results necessarily represent a recurring trend. Liquidity and Capital Resources: At December 31, 1997, the Company's working capital decreased to $2,841,000 from $4,528,000 at March 31, 1997. The decrease in working capital was primarily due to the increase in deferred revenues (net of the associated unbilled receivables) on uncompleted equipment contracts, the addition of films to the film library and the operating loss of the Company offset by the increase in equipment sales inventory (from two of the three closed O&O Theatres which are being held for sale). Cash and cash equivalents at December 31, 1997 decreased by $374,000 from March 31, 1997, which was the result of $1,208,000 used in operating activities, $166,000 used in investing activities, and $1,000,000 provided by financing activities. Net cash used in operating activities was primarily due to (i) the 30% increase in accounts receivable, unbilled receivables and equipment sales inventory, and (ii) a 49% decrease in accounts payable. The changes are primarily attributable to variations in the timing of Showscan Attractions sales and the specific contract terms of such sales, which terms generally affect the timing of collections, shipments, deliveries to customers, installations and the related payments to vendors. Net cash used in investing activities was primarily due to (i) expenditures for the production and acquisition of fourteen motion simulation films, partially offset by (ii) a decrease in other assets. Net cash provided by financing activities was due to a $1,000,000 ($900,000 net of expenses) promissory note from a private institution on November 1, 1997. The note has a one year maturity and bears interest at 11 percent per annum, with principal and interest due and payable in full on November 15, 1998, or if earlier, the date which is six months after the close of a merger involving the Company. The note is secured by accounts receivable from the distribution of the Company's film library and the proceeds thereof. As Showscan derives 60-70% of its business from export sales, its liquidity may be adversely affected by changes in worldwide economic or political conditions. Such factors as changes in 15 16 foreign currency exchange rates (which can significantly affect the affordability of Showscan's products and services), trade protection measures, and policies with respect to currency and fiscal controls may negatively affect liquidity. The current Asian economic crisis has already caused the delay of certain projects and the Company believes that it will have an adverse impact on revenues in future periods. The Company's business strategy includes a significant increase in the installed base of Showscan Attractions, new film productions, the securing of distribution rights to motion simulation films produced by other companies, new product development and new product lines, enhancement of existing product lines, possible investments in O&O Theatres and the reduction of overhead by 30%. The Company has already achieved much of the overhead reduction. The Company recently obtained certain distribution rights through May 1, 2002 to two films produced by another company. On December 10, 1997 the Company announced the acquisition of certain distribution rights to another eleven 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 or another type of institution, and/or the formation of strategic alliances, joint ventures or off-balance sheet financing. There can be no assurance that the Company will be able to obtain any of the aforementioned financing alternatives. If the Merger with Iwerks should not occur and if the Company is unable to generate sufficient funds from operations or is unable to raise additional capital through any of the aforementioned alternatives, the Company will need to curtail its business strategy, specifically with regard to new film productions and investments in O&O Theatres, and its overhead expense. 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 though the $1 million loan due in November 1998 would have to be refinanced. At February 1, 1998, 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. Management of the Company has reviewed the provisions of SFAS 130 and 131 and determined that the ultimate adoption of these accounting standards will not have an impact on the Company's financial statements and related disclosures. Impact of the Year 2000: Some of the Company's older computer software systems were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This software could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed an assessment of its existing software systems and after reviewing various factors, one of which being the year 2000 issue, has determined which systems 16 17 would need to be replaced or upgraded if the Merger with Iwerks did not occur. The necessary upgrades would cost approximately $25,000. If necessary, these upgrades would be completed not later than June 30, 1999, which is prior to any anticipated impact on the operating systems. The Company believes that with conversions to new software, the year 2000 issue will not pose significant operational problems for its computer systems. The costs of the project and the date on which the Company believes it will complete the conversion are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. 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. 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 Showscan 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 Showscan 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 half of the fiscal year, reflecting the buying patterns of the Company's customers for new Showscan Attractions. 17 18 Business Strategy Management of the Company has adopted a business strategy that includes substantial investments in the installed base of Showscan Attractions, new film productions, the securing of distribution rights to motion simulation films produced by other companies, new product development and new product lines, enhancement of existing product lines, possible investments in O&O Theatres and the reduction of overhead. This strategy carries with it a number of risks, including reaching a level of operating expenses that may not be adequately covered by increased sales, film licensing revenues or by additional financing (due to unfavorable 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 (until the Merger is completed) and Imax Corporation ("Imax"), have significantly more capital than the Company, the Company has had to rely more on its suppliers and other third parties to improve the Company's existing products and to develop new ones. The inability of the Company to develop new products and to respond to technological developments of its competitors could have a materially adverse effect on the Company's business, operations and financial condition. International Operations A significant portion of the Company's sales and film licensing are made to customers located outside of the United States, primarily in the Far East and Europe. During fiscal 1995, 1996 and 1997, 69%, 61% and 62% of the Company's revenues, respectively, were derived from sales outside the United States. During fiscal 1997, the Japanese market was the only foreign market with over 10% of the Company's revenues, with a share of 17.6%. International operations and sales of the Company may be subject to political and economic risks, including political instability, currency controls, exchange rate fluctuations (which, in the event of a decrease in value of foreign currency to the dollar, can significantly affect the affordability of the Company's products overseas such as is currently occurring in many Asian countries), changes in import/export regulations, tariff and freight rates, longer accounts receivable collection patterns, changes in regional or worldwide economic or political conditions and natural disasters. In addition, various forms of protectionist trade legislation have been proposed in the United States and certain other countries. Any resulting changes in current tariff structures or other trade and monetary policies could adversely affect the Company's international operations. Political and economic factors have been identified by the Company with respect to Asia and certain other markets in which it competes. Regions such as Asia have recently experienced economic problems and these problems are expected to continue through 1998. This economic crisis was a contributing factor to the delay in the timing of certain of the Company's projects in the past nine months and will likely have an impact on new sales and film license renewals in future periods. There can be no assurance that these factors will not result in customers of the Company defaulting on payments due to it, or in the reduction of potential purchases of its products. The Company has not engaged in any currency hedging programs. 18 19 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. Intense Competition; Unpredictability of Consumer Tastes Competition in each of the markets in which the Company competes is intense. The principal direct competition for customers comes from manufacturers of competing movie-based attractions, and in the case of amusement and theme parks, manufacturers of traditional amusement park attractions. In addition to direct competitors, there is also competition from systems integrators and some amusement and theme parks developing and constructing their own attractions. Many of the Company's competitors have better name recognition, and substantially greater financial and other resources than the Company. In the motion simulation business, the Company's main competitor (until the Merger is completed) is Iwerks. Imax and a number of smaller competitors are growing competitors of the Company in the ride simulation business and have dedicated substantial resources to entering into 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 perforation 70 millimeter 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. Additionally, the out-of-home entertainment industry in general is undergoing significant changes, primarily due to technological developments as well as changing consumer tastes. Numerous companies are developing and are expected to develop new entertainment products or concepts for the out-of-home entertainment industry in response to these developments that are or may be directly competitive with existing products. There is severe competition for financial, creative and technological resources in the industry and there can be no assurance that existing products will continue to compete effectively or that products under development will ever be competitive. Further, the commercial success of products is ultimately dependent upon audience reaction. Audience reaction will to a large extent be influenced by the audience's perception of how the Company's products compare with other available entertainment options out of the home. There can be no assurance that new developments in out-of-home entertainment will not result in changes in consumer tastes that will make the Company's products less competitive. 19 20 Business Disruption The Company's corporate headquarters, including its research and development operations, are located in Los Angeles, California, a region known for seismic activity. Operating results could be materially affected by a significant earthquake or other natural disaster. Dependence on Major Customers The Company's motion simulation business has two significant concentrations. The first concentration involves ongoing film licenses and is located in Japan where a single customer, Imagine Japan, presently operates or is otherwise responsible for fifteen Showscan 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. The Company's agreement with United Artists Theatre Circuit, Inc. calls for a build out period extending through August 1999 while that with King's Entertainment Co., Ltd. extends through May 2002. Each site opened under each agreement shall have an initial film license period of at least three years. In the fiscal year ended March 31, 1997, the Company earned revenues from Imagine Japan and United Artists Theatre Circuit, Inc. in the amounts of $3,117,000 and $5,405,000, respectively. 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. Volatility of Stock Price The Company's stock price has been, and could continue to be, highly volatile. The market price of the Company's Common Stock has fluctuated substantially in recent periods. During the 12 months prior to December 31, 1997, the Company's market price has ranged from a low of $1 per share to a high of $5 3/8 per share. Any future announcements concerning the Company or its competitors, quarterly variations in operating results, introductions of new products or changes in product pricing policies by the Company or its competitors or the acquisition or loss of significant customers that affect or are perceived to affect the Company's operations, could cause the market price of the Common Stock to fluctuate substantially. In addition, stock markets have experienced 20 21 extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Common Stock. Environmental Matters and Other Governmental Regulations Under various Federal, state and local environmental laws and regulations, a current or previous owner or occupant of real property may become liable for the costs of removal or remediation of hazardous substances at such real property. Such laws and regulations often impose liability without regard to fault. The Company leases its corporate headquarters and the Company could be held liable for the costs of remedial actions with respect to hazardous substances on such property under the terms of the governing lease and/or governing law. Although the Company has not been notified of, nor is otherwise aware of, any current environmental liability, claim or non-compliance, there can be no assurance that the Company will not be required to incur remediation or other costs in the future in connection with the leased property. In addition, the Company's subcontractors and other third parties, with which it has contractual relations, are similarly subject to such laws. The Company believes it is in compliance with all applicable Federal, state and local environmental laws and regulations. 21 22 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits The exhibits listed below are filed as part of this Report. Exhibit Number Description -------------- ----------- 10.37 Credit Agreement, dated as of November 1, 1997, by and between Showscan Entertainment Inc. and Eldee Foundation. 27.1 Financial Data Schedule (b) Reports on Form 8-K Current Report on Form 8-K dated December 29, 1997. Item 5. Other Events Announcement of the execution of Amendment No. 1 to Agreement and Plan of Reorganization By and Among Iwerks Entertainment Inc., IWK-1 Merger Corporation and Showscan Entertainment Inc., December 29, 1997. No financial statements were filed with the foregoing Report. 22 23 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 February, 1998. 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) 23 24 EXHIBIT INDEX
Exhibit No. Description Page Number ----------- ----------- ----------- 10.37 Credit Agreement, dated as of November 25 1, 1997, by and between Showscan Entertainment Inc. and Eldee Foundation. 27.1 Financial Data Schedule 35
24 EX-10.37 2 EXHIBIT 10.37 1 EXHIBIT 10.37 CREDIT AGREEMENT THIS CREDIT AGREEMENT (as it may be amended, supplemented or otherwise modified from time to time, this "Agreement") is entered into as of the 1st day of November, 1997, by and between Showscan Entertainment Inc., a Delaware corporation ("Borrower"), and Eldee Foundation, a Canadian non-profit charitable foundation ("Lender"). RECITAL Borrower has requested from Lender the loan described below and Lender has agreed to provide the loan to Borrower on the terms and conditions contained herein. AGREEMENT NOW, THEREFORE, Lender and Borrower hereby agree as follows: ARTICLE I SECTION 1.1. TERM LOAN. (a) TERM LOAN. Subject to the terms and conditions of this Agreement, Lender hereby agrees to make a loan to Borrower in the principal amount of One Million United States Dollars (USD$1,000,000) (the "Term Loan"), the proceeds of which shall be used for general corporate purposes as determined by Borrower. Borrower's obligation to repay the Term Loan shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto (as it may be amended, the "Note"), all terms of which are incorporated herein by this reference. (b) REPAYMENT. The principal amount of the Term Loan shall be due and payable in full on November 15, 1998. Upon twenty (20) days prior written notice to Borrower, Lender may demand payment in full of the Term Loan at any time at least six months after the closing of a merger of Borrower with another entity. (c) PREPAYMENT. Borrower may prepay principal on the Term Loan at any time, and from time to time, in any amount and without penalty. 2 SECTION 1.2. INTEREST/FEES. (a) INTEREST. Subject to Section 1.2(b), the outstanding principal balance of the Term Loan shall bear interest at a rate per annum equal to eleven percent (11%). (b) DEFAULT INTEREST. At all times when an Event of Default has occurred and is continuing, the outstanding principal balance of the Term Loan shall bear interest at a rate per annum equal to thirteen percent (13%)(the "Default Rate"). In addition, to the extent permitted by applicable law, any interest payments, fees or other amounts owed hereunder and not paid when due, in each case whether at stated maturity, by notice of prepayment, by acceleration or otherwise, shall bear interest at the Default Rate. Payment or acceptance of the Default Rate is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Lender. (c) COMPUTATION AND PAYMENT. Interest on the principal amount outstanding under the Term Loan shall be computed on the basis of a 365-day year, actual days elapsed and shall be payable at maturity so long as any principal under the Term Loan is unpaid. If Borrower shall prepay any of the principal balance of the Term Loan or if Lender shall demand prepayment of the Term Loan in accordance with Section 1.1(b) hereof, then Borrower shall also pay at such time the accrued and unpaid interest with respect to the portion of the principal prepaid. (d) CLOSING FEE. Borrower shall pay to Lender a non-refundable commitment fee of USD$70,000, which commitment fee shall be due and payable in full on closing. Borrower shall also pay to Hugi Bank AG a non-refundable finders fee of USD$30,000, which finders fee shall be due and payable in full on closing. SECTION 1.3. COLLATERAL. In order to secure the payment and performance by Borrower of all of its obligations under this Agreement and the Note, Borrower hereby grants to Lender a security interest in all of Borrower's right, title and interest in and to, in each case whether now existing or hereafter acquired and wherever located, all of the following but in each case only to the extent that each item is derived from or relates to the films, motions pictures or videos developed (or in development), 26 3 produced, distributed or obtained for distribution by Borrower (directly or indirectly) for release in any medium (the "Collateral"): accounts, accounts receivable and other rights to payment of money, chattel paper, contract rights, documents, instruments, cash, and all other personal property and all proceeds arising therefrom. Borrower shall execute and deliver any financing or continuation statements and such other instruments or notices as may be reasonably necessary in order to perfect and preserve the security interest granted hereby. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Lender, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Lender subject to this Agreement. SECTION 2.1. LEGAL STATUS; ORGANIZATIONAL DOCUMENTS. Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is qualified or licensed to do business, and is in good standing as a foreign corporation, if applicable, in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Note, and each other document, contract and instrument required by or at any time delivered to Lender in connection with this Agreement (with all of the foregoing referred to herein collectively as the "Loan Documents") have been duly authorized by Borrower, and upon their execution and delivery in accordance with the provisions hereof will constitute legally valid and binding agreements and obligations of Borrower, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents to which it is a party do not violate any provision of any law or regulation, or contravene any provision of Borrower's Articles of 27 4 Incorporation or Bylaws or result in a breach of or constitute a default under any material contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower or any of its properties may be bound. ARTICLE III NEGATIVE COVENANTS Borrower covenants that if (a) the merger between Borrower and Iwerks Entertainment, Inc. has not occurred, and (b) Borrower's (in each case as audited and reported in its Annual Report on Form 10-K)(i) gross revenues for its fiscal year ending March 31, 1998 do not equal or exceed USD$15,000,000, or (ii) net profit for the six month period ending March 31, 1998 does not equal or exceed USD$1,500,000, then until payment in full of the Term Loan, Borrower will not without the prior written consent of Bank: SECTION 3.1. CASH INVESTMENT IN OWNED AND OPERATED THEATRES. Make any cash investments in new motion simulation theatre attractions for its own account, provided, however, that the foregoing shall not prohibit the sale by lease, installment or other financing method of a theatre system or the renovation or improvement of any existing owned and operated theatre, nor shall it prevent the periodic provision of working capital to one or more of such existing theatres. SECTION 3.2. FILM EXPENDITURES. Incur new obligations for the production, pick up or acquisition of distribution rights to, any motion picture, where such obligations would require cash aggregate payments prior to the maturity date of the Term Loan in excess of USD$1,000,000. ARTICLE IV EVENTS OF DEFAULT SECTION 4.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay within ten (10) days of the date due any principal, interest, fees or other amounts payable under any of the Loan Documents. 28 5 (b) Any representation or warranty made or deemed made by Borrower hereunder shall prove to be false, incorrect or incomplete in any material respect when furnished, made or deemed made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein (other than those referred to in Sections 4.1(a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue without cure for a period of thirty (30) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under any of the Loan Documents other than this Agreement, and with respect to any such default which by its nature can be cured, such default shall continue without cure for a period of thirty (30) days from its occurrence. (e) Borrower shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time or any successor statute ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to said Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower, or Borrower shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower shall be adjudicated a bankrupt, or an order for relief shall be entered by any court of competent jurisdiction under said Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. 29 6 SECTION 4.2. REMEDIES. If an Event of Default shall have occurred and be continuing, (a) any indebtedness of Borrower under any of the Loan Documents, any term thereof to the contrary notwithstanding, shall (automatically and without further action, in the case of an Event of Default under Section 4.1(e) and, in all other cases, at Lender's option and without notice) become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by Borrower; (b) the obligation, if any, of Lender to permit further borrowings hereunder shall immediately cease and terminate; and (c) Lender shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any of the Credits and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Lender in connection with each of the Loan Documents may be exercised at any time by Lender and from time to time after the occurrence and during the continuance of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE V MISCELLANEOUS SECTION 5.1. NO WAIVER. No delay, failure or discontinuance of Lender in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Lender of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent expressly set forth in such writing. SECTION 5.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: 30 7 BORROWER: Showscan Entertainment Inc. 3939 Landmark Street Culver City, California, USA Telecopier Number: 310-559-7984 Attn: President and Chief Executive Officer LENDER: Eldee Foundation 1080 Beaver Hall Hill Suite 1720 Montreal, Quebec, H2Z 1S8 Telecopier Number: 514-871-9261 Attn: ____________________ or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 5.3. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding on and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without the prior written consent of Lender. SECTION 5.4. ENTIRE AGREEMENT; COUNTERPARTS; AMENDMENT. This Agreement and each of the other Loan Documents constitute the entire agreement between Borrower and Lender with respect to the Term Loan and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be executed in any number of counterparts and may be amended or modified only by a written instrument executed by each party hereto. SECTION 5.5. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or 31 8 claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 5.6. TIME IS OF THE ESSENCE. Time is of the essence of each and every provision of this Agreement and each of the other Loan Documents. SECTION 5.7. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 5.8. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. ELDEE FOUNDATION By: \s\ HARRY BLOOMFIELD ----------------------------- Harry Bloomfield Title: Vice President & Director -------------------------- SHOWSCAN ENTERTAINMENT INC. By: \s\ DENNIS POPE ----------------------------- Dennis Pope Title: President & CEO -------------------------- 32 9 EXHIBIT A TERM LOAN PROMISSORY NOTE Culver City, California November 1, 1997 USD$1,000,000 FOR VALUE RECEIVED, Showscan Entertainment Inc., a Delaware corporation (the "Company"), promises to pay to the order of Eldee Foundation, or order (collectively, "Payee"), on or before November 15, 1998, the lesser of (i) USD$1,000,000 and (ii) the then unpaid principal balance of this Note. The Company also promises to pay interest on the unpaid principal amount hereof from the date hereof until paid in full at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement, dated as of November 1, 1997, by and between the Company and Payee (such agreement, as it may be amended, modified or supplemented from time to time, the "Credit Agreement"). Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement. This Note is the Company's "Term Note" and is issued pursuant to and entitled to the benefits of the Credit Agreement to which reference is hereby made for a more complete statement of the terms and conditions under which the advances evidenced hereby were made and are to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the office of Payee located at 1080 Beaver Hall Hill, Suite 1720, Montreal, Quebec, H2Z 1S8, or at such other place as shall be designated in writing for such purpose in accordance with the notice provisions of the Credit Agreement. Whenever any payment on this Note shall be stated to be due on a day which is not a business day, such payment shall be made on the next succeeding business day and such extension of 10 time shall be included in the computation of the payment of interest on this Note. This Note is subject to repayment and mandatory prepayment as, and to the extent, provided in the Credit Agreement and prepayment at the option of the Company as provided in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO CONFLICTS OF LAW PROVISIONS. Upon the occurrence and during the continuance of an Event of Default, the unpaid balance of the principal amount of this Note and all other obligations of the Company under the Credit Agreement, together with all accrued but unpaid interest thereon, may automatically become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The obligation of the Company to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed is absolute and unconditional. The Company and endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. IN WITNESS WHEREOF, the Company has caused this Note to be executed and delivered by its duly authorized officer, as of the day and year and at the place first above written. SHOWSCAN ENTERTAINMENT INC. By: \s\ DENNIS POPE ------------------------- Name: Dennis Pope ----------------------- Title:President & CEO ---------------------- A-2 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1998 OCT-01-1997 DEC-31-1997 2,188 0 4,535 746 1,855 8,821 6,174 5,541 16,038 5,980 5,690 0 0 6 4,362 16,038 2,634 3,425 2,288 3,889 2,610 0 190 (3,264) 0 (3,264) 0 0 0 (3,264) (0.58) (0.58)
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