-----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, PA/YlfyWE9laUvkqOLEFpTWBW0Fjp3pBj0NvjYHVgXcp6SAS/+SNT/Y/jCkmkb0n VlnsjmGwL8aXdQ63TLAo7A== 0000950148-98-002576.txt : 19981123 0000950148-98-002576.hdr.sgml : 19981123 ACCESSION NUMBER: 0000950148-98-002576 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOWSCAN ENTERTAINMENT INC CENTRAL INDEX KEY: 0000812882 STANDARD INDUSTRIAL CLASSIFICATION: 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: 98752700 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 September 30, 1998 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from_________ to __________ Commission file number 0-15939 SHOWSCAN ENTERTAINMENT INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3940004 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3939 LANDMARK STREET CULVER CITY, CALIFORNIA 90232 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 558-0150 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of November 6, 1998, the Registrant had 5,642,058 shares of Common Stock, $.001 par value, issued and outstanding. ================================================================================ This report contains 25 consecutively numbered pages. 2 SHOWSCAN ENTERTAINMENT INC. INDEX
Page ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of September 30, 1998 and March 31, 1998 3 Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended September 30, 1998 and 1997 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 1998 and 1997 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 23 Signatures 24
2 3 PART I. - FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Balance Sheets (Dollars in Thousands Except Share Information)
SEPTEMBER 30, MARCH 31, 1998 1998 ------------- --------- (unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 1,599 $ 2,492 Accounts receivable (net of allowances) 2,870 2,161 Unbilled receivables on uncompleted film and equipment contracts 1,598 708 Due from affiliated entities, net of allowances (Note 6) 174 794 Equipment sales inventory 1,467 1,186 Prepaid expenses and other current assets 31 193 ------- ------- Total current assets 7,739 7,534 Film library (net of amortization) 3,325 3,765 Investment in and advances to O&O theatres (Note 2) 353 440 Patents and other intellectual properties (net of amortization) 684 900 Other assets, including equipment and leasehold improvements, net of accumulated depreciation and amortization 1,021 1,072 ------- ------- Total assets $13,122 $13,711 ======= =======
Note: The balance sheet at March 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to unaudited condensed consolidated financial statements. (Continued) 3 4 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Balance Sheets (continued) (Dollars in Thousands Except Share Information)
SEPTEMBER 30, MARCH 31, 1998 1998 ------------- --------- (unaudited) (Note) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 254 $ 752 Customer advances on uncompleted film and equipment contracts 3,278 2,317 Accrued expenses and other current liabilities 2,726 2,241 11% note payable (Note 3) 1,000 1,000 8% convertible notes, due September 1, 1999 (Note 4) 5,690 -- -------- -------- Total current liabilities 12,948 6,310 -------- -------- 8% convertible notes (Note 4) -- 5,690 Stockholders' equity: Series A Convertible Preferred Stock, $.001 par value; 150,000 shares authorized, no shares issued and outstanding -- -- 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 (42,399) (40,862) -------- -------- Total stockholders' equity 174 1,711 -------- -------- Total liabilities and stockholders' equity $ 13,122 $ 13,711 ======== ========
Note: The balance sheet at March 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to unaudited condensed consolidated financial statements. 4 5 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Operations (Dollars in Thousands Except Per Share Information)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 -------------------- -------------------- (Unaudited) (Unaudited) Revenues: Film licensing and production services $ 924 $ 1,192 $ 1,550 $ 2,131 Equipment sales and related services 1,744 1,280 2,880 1,580 ------- ------- ------- ------- 2,668 2,472 4,430 3,711 Costs of revenues 1,330 1,382 2,610 2,117 ------- ------- ------- ------- Gross profit 1,338 1,090 1,820 1,594 Costs and expenses: General and administrative expenses 1,314 1,576 2,585 3,166 Depreciation and amortization 118 190 288 389 ------- ------- ------- ------- 1,432 1,766 2,873 3,555 ------- ------- ------- ------- Operating loss (94) (676) (1,053) (1,961) Other income (expense): Equity in net operations of O&O Theatres (55) (202) (113) (364) Other income, including interest 39 23 58 41 Interest and other expenses (215) (137) (429) (327) ------- ------- ------- ------- (231) (316) (484) (650) ------- ------- ------- ------- Net loss $ (325) $ (992) $(1,537) $(2,611) ======= ======= ======= ======= Basic and diluted net loss per common share (Note 5) $ (.06) $ (.18) $ (.27) $ (.46) ======= ======= ======= =======
See accompanying notes to unaudited condensed consolidated financial statements. 5 6 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Dollars in Thousands)
SIX MONTHS ENDED SEPTEMBER 30, 1998 1997 ------------------------ (Unaudited) Cash flows from operating activities: Net loss $(1,537) $(2,611) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 288 389 Amortization of film library 509 423 Equity in net operations of O & O theatres 113 364 Accrued interest on debt 229 232 Provision for doubtful accounts 60 60 Changes in operating assets and liabilities: Accounts receivable (149) (46) Equipment sales inventory (281) 195 Unbilled receivables on uncompleted film and equipment contracts (890) (978) Prepaid expenses 162 706 Investment in and advances to O&O theatres (26) 278 Accounts payable, accrued expenses and other current liabilities (242) (1,097) Customer advances on uncompleted equipment contracts 961 2,485 ------- ------- Net cash (used in) provided by operating activities $ (803) $ 400 ------- ------- Cash flows from investing activities: Redemptions of short term investments -- -- Purchases of equipment and leasehold improvements (7) (15) Additions to film library (69) (763) Other assets (14) 557 ------- ------- Net cash used in investing activities $ (90) $ (221) ------- -------
(Continued) 6 7 SHOWSCAN ENTERTAINMENT INC. Condensed Consolidated Statements of Cash Flows (Continued) (Dollars in Thousands)
SIX MONTHS ENDED SEPTEMBER 30, 1998 1997 ------------------------ (Unaudited) Balance forwarded $ (893) $ 179 ------- ------- Net increase/(decrease) in cash and cash equivalents (893) 179 Cash and cash equivalents, beginning of period 2,492 2,562 ------- ------- Cash and cash equivalents, end of period $ 1,599 $ 2,741 ======= ======= Supplemental disclosures of cash flow information: Interest paid $ 228 $ 232 ======= ======= 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 six-month period ended September 30, 1998 are not necessarily indicative of the results that may be expected either for any other quarter in the fiscal year ending March 31, 1999 or for the entire fiscal year ending March 31, 1999. 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, 1998. Note 2--Owned and Operated Theatres ("O&O Theatres"): The Company has significantly revised its O&O Theatres policies and has during the past 18 months, closed five (5) of its theatres, including Framingham, Massachusetts (2), San Antonio, Texas (1), and London, England (2). Accordingly, the Company currently operates and/or has an ownership interest in two (2) Showscan Attractions located at Universal CityWalk in Universal City, California and Osaka, Japan. 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. Note 3--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. Principal and interest amounts are payable in full on November 15, 1998. The note is secured by accounts receivable from the distribution of the Company's film library and the proceeds thereof. In connection with the placement, $130,000 of debt issue costs were incurred and have been amortized over the original term of the note. On November 13, 1998, the Company and the lender reached an agreement to modify the note so that the principal will be repaid in the following installments: 8 9 November 15, 1998 $290,000 December 31, 1998 $150,000 January 31, 1999 $150,000 February 28, 1999 $150,000 March 31, 1999 $260,000
All accrued but unpaid interest on the note as of November 15, 1998 ($110,000) shall be paid together with the principal payment on such date. All interest that accrues after such date shall be due and payable on March 31, 1999. Note 4--8% Convertible Notes: On September 1, 1995, the Company completed a private placement of $7,000,000 in secured convertible notes ("8% Convertible Notes") with a European bank. The 8% Convertible Notes mature on September 1, 1999 and bear interest at 8% per annum which is payable semi-annually and are convertible at the option of the holder into shares of the Company's common stock ("Common Stock") at a conversion price of $5.75 per share. Through September 30, 1998, $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 includes its O&O Theatres. In connection with the placement, $619,000 of debt issue costs were incurred and are being amortized over the life of the notes. The Company is in discussions with its European bank regarding an extension of the maturity date of this debt and additional financing in excess of the amounts currently outstanding. There can be no assurance that the Company will be successful in the extension of the maturity date or such additional financing. Note 5--Loss per common share: The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128), effective with its March 31, 1998 fiscal year end. 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. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15, with certain modifications. SFAS No. 128 also required dual presentation of basic EPS and diluted EPS on the face of the income statement for all periods presented. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements. Per share information has been determined by using 5,642,058 weighted average shares outstanding for the six-months and the three-months ended September 30, 1998 and 1997. 9 10 Note 6--Receivables from affiliated entities: At June 30, 1998, the Company was due $712,000 from United Artists Theatre Circuit, Inc. ("UA"). The payment terms for this receivable provided for (a) interest on the unpaid principal balance to be charged at 7.5% and (b) principal and interest to be paid in full on or before December 31, 1996 (Maturity Date); since the UA Venture had not accepted one of the theatre sites it had been offered by UA prior to the Maturity Date, the Maturity Date was to be extended 30 days after the date that the UA Venture did accept, but in no event would that Maturity Date have been extended later than August 19, 1999. In July 1998, the Company and UA reached an agreement to settle the amount owed by means of a $318,000 payment, the purchase by the Company of certain new simulation equipment and other assets owned by UA, the offset of certain amounts and the payment of the remaining amounts over approximately one year. As part of this agreement, the Company also agreed to expand the ability of UA to "source" projection and other theatre equipment, in addition to simulation equipment, through the Company. Fifty percent (50%) of any such "sourced" equipment will count toward UA's achievement of the $13,950,000 aggregate equipment purchase requirement. Any such "sourcing" of projection and other theatre equipment must result in at least an aggregate benefit (as defined) to the Company of $3,200,000. If UA shall fail to achieve this requirement and/or shall fail to order and install 16 additional Simulation Attractions by August 1999, then UA shall owe the Company liquidated damages as set forth in the Theater Rights Agreement, which at present aggregates $5,280,000. It is the Company's belief that UA will not order or install any additional Simulation Attractions but that it may source projection equipment through the Company. The Company has removed the UATC systems from its contract backlog. At September 30, 1998, affiliates of certain directors owed the Company a combined balance of $336,000 related to advances made by the Company on their behalf to several O&O Theatres to satisfy capital calls to cover operating expenses at such theatres and certain other administrative costs. On July 8, 1998, the affiliates of the certain directors indicated to the Company that they dispute their obligation to pay these sums. Accordingly, the Company has fully reserved for such amounts in its accompanying consolidated balance sheets. 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 expanding out-of-home entertainment market. The Company's business includes: (i) licensing and distributing the films in its library to all operators of simulation attractions (including those installed by the Company and those previously installed by competitors of the Company); (ii) licensing the proprietary technologies necessary to produce and exhibit Showscan films; (iii) 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); (iv) producing films using the Showscan process; and (v) to a limited extent, 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 (60-85% for each of the three years ended March 31, 1998 and the six-month period ended September 30, 1998). 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 and the six-month period ended September 30, 1998. Comparison of the six months ended September 30, 1998 and 1997: Revenues for the six-month period ended September 30, 1998 (the "Six Month Period") increased by $719,000 or 19% from revenues for the six-month period ended September 30, 1997 due to an increase in revenues recognized from equipment sales and related services. Film licensing and production service revenues in the Six Month Period decreased by $581,000 or 27% to $1,550,000 from $2,131,000 in the six-month period ended September 30, 1997. The decrease was primarily due to (i) the renegotiation of certain film licensing contracts in Asia due to adverse economic conditions in that region, and (ii) the reduction in film revenues collected from O & O Theatres due to the closure of five such theatres since the prior year period. Revenues from equipment sales and related services for the Six Month Period increased $1,300,000 or 82% to $2,880,000 from $1,580,000 in the six-month period ended September 30, 1997. The increase is due to the increase in the number of Showscan Attractions shipped during the Six Month Period as compared to the corresponding prior year six-month period and to certain modifications of two equipment sales contracts which resulted in additional non-refundable payments (aggregating $519,000) to the Company under such contracts. Three Showscan 11 12 Attractions were shipped in the Six Month Period as compared to two units shipped in the six-month period ended September 30, 1997. 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. Costs of revenues were 59% of revenues in the Six Month Period as compared to 57% in the six-month period ended September 30, 1997. Equipment cost of sales to total equipment sales decreased to 63% in the Six Month Period from 72% in the six-month period ended September 30, 1997, primarily as a result of the modifications to two equipment sales contracts. Film licensing cost of sales to total film licensing sales was 51% in the Six Month Period as compared to 46% in the six-month period ended September 30, 1997. The increase in film licensing cost of sales in the Six Month Period from the six-month period ended September 30, 1997 is due to the increase in film distribution expenses for three films that were acquired during the fiscal year ended March 31, 1998 and were released in the Six Month Period. Amortization of the film library for the Six Month Period and the six-month period ended September 30, 1997 was $509,000 and $423,000, respectively. The increase in film amortization is due to the additional amortization of three films in the Six Month Period that were added to the Company's film library in the past fiscal year (and are now in release) and were not amortized in the six-month period ended September 30, 1997. 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 decreased $581,000 or 18% in the Six Month Period from the six-month period ended September 30, 1997. The decrease can be primarily attributed to (i) the significant reduction in the number of employees, and (ii) a reduction in legal and marketing expenses from the six-month period ended September 30, 1997. The loss on investment in O&O Theatres decreased to $113,000 in the Six Month Period from $364,000 in the six-month period ended September 30, 1997, as a result of the Company's closing of five of its O&O Theatres. The loss for the Six Month Period is primarily the result of the following factors: (i) operating losses at the Universal CityWalk theatre, (ii) operating losses at the two (2) London/Trocadero theatres through their closing on July 2, 1998 and related costs of such closing, (iii) partially offset by the operating profits of the Osaka theatre. The Company earns film licensing revenues and management fees (if applicable) which are recorded separately in the accompanying consolidated statements of operations, thereby inherently increasing the operating expenses at the specific O&O Theatres. 12 13 The Company's net loss decreased $1,075,000 or 41% in the Six Month Period to $1,536,000 from $2,611,000 in the six-month period ended September 30, 1997 primarily due to (i) the increase in equipment sales revenues, (ii) the continued decrease in general and administrative expenses, and (iii) the decrease in the equity loss from the net operations of O&O Theatres. Comparison of the three months ended September 30, 1998 and 1997: Revenues for the three-month period ended September 30, 1998 (the "1999 Second Quarter") increased by $196,000 or 8% from revenues for the three-month period ended September 30, 1997 (the "1998 Second Quarter") due to an increase in revenues recognized from equipment sales and related services in the 1999 Second Quarter. Film licensing and production service revenues in the 1999 Second Quarter decreased by $268,000 or 22% to $924,000 from $1,192,000 in the 1998 Second Quarter. The decrease was primarily due to (i) the renegotiation of certain film licensing contracts in Asia due to adverse economic conditions in that region, and (ii) the reduction in film revenues collected from O & O Theatres due to the closure of five such theatres since the 1998 Second Quarter. Revenues from equipment sales and related services for the 1999 Second Quarter increased 36% to $1,744,000 from $1,280,000 in the 1998 Second Quarter. The increase is due to the higher sales price of the two Showscan Attractions that shipped during the 1999 Second Quarter as compared to the two Showscan Attractions that shipped in the 1998 Second Quarter, and to certain modifications of two equipment sales contracts which resulted in additional non-refundable payments to the Company under such contracts. 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. Costs of revenues were 50% of revenues in the 1999 Second Quarter as compared to 56% in the 1998 Second Quarter. Equipment cost of sales to total equipment sales decreased to 54% in the 1999 Second Quarter from 70% in the 1998 Second Quarter primarily as a result of the modifications to two equipment sales contracts. Film licensing cost of sales to total film licensing sales was 42% in the 1999 Second Quarter as compared to 41% in the 1998 Second Quarter. Amortization of the film library for the 1999 Second Quarter and the 1998 Second Quarter was $255,000 and $248,000, respectively. The Company reviews film library estimated revenues 13 14 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 decreased $262,000 or 17% in the 1999 Second Quarter from the 1998 Second Quarter. The decrease can be primarily attributed to (i) the significant reduction in the number of employees, and (ii) a reduction in legal and marketing expenses from the 1998 Second Quarter. The loss on investment in O&O Theatres decreased to $55,000 in the 1999 Second Quarter from $202,000 in the 1998 Second Quarter, as a result of the Company's closing of five of its O&O Theatres. The loss for the 1999 Second Quarter is primarily the result of the following factors: (i) operating losses at the Universal CityWalk theatre, (ii) costs related to the closing of the two (2) London/Trocadero theatres on July 2, 1998, (iii) partially offset by the operating profits of the Osaka theatre. The Company earns film licensing revenues and management fees (if applicable) 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 decreased 67% in the 1999 Second Quarter to $325,000 from $992,000 in the 1998 Second Quarter primarily due to (i) the increase in equipment sales revenues, (ii) the continued decrease in general and administrative expenses, and (iii) the decrease in the equity loss from the net operations of O&O Theatres. Liquidity and Capital Resources: At September 30, 1998, the Company's operating working capital decreased to a deficit of $5,209,000 from $1,224,000 at March 31, 1998. The decrease in operating working capital was primarily due to the operating loss of the Company in the Six Month Period. Additionally, the Company's 8% convertible notes mature within twelve months, on September 1, 1999 and accordingly, the required reclassification of the $5,690,000 as a current liability in the September 30, 1998 balance sheet results in negative working capital of $5,209,000. The Company is in discussions with its European bank regarding an extension of the maturity date of this debt and additional financing in excess of the amounts currently outstanding, as further discussed below (also see note 4 to Condensed Consolidated Financial Statements). Cash and cash equivalents at September 30, 1998 decreased by $893,000 to $1,599,000 from the cash level at March 31, 1998. This reduction was the result of $803,000 used in operating activities and $90,000 used in investing activities. Net cash used in operating activities was primarily due to (i) a 46% increase in accounts receivable (net of allowances), unbilled receivables on uncompleted contracts and equipment sales inventory, and (ii) a 66% decrease in accounts payable. These 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. 14 15 Net cash used in investing activities was primarily due to expenditures related to the post-production of one motion simulation film. As the Company derives 60-85% 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 foreign currency exchange rates (which can significantly affect the affordability of the Company's products and services), trade protection measures, and policies with respect to currency and fiscal controls may negatively affect liquidity. The current Asian economic situation has caused the re-negotiation of certain film licensing agreements and the delay of certain projects. The Company's business strategy includes an increase in the installed base of Showscan Attractions, new film productions, the securing of distribution rights to motion simulation films produced by other companies, the licensing and distribution of its motion simulation library (including films produced using the Showscan process and films acquired from other producers) to all operators of simulation attractions (including those installed by the Company and those previously installed by competitors of the Company), new product development and new product lines, enhancement of existing product lines, possible investments in O&O Theatres and the continued reduction of overhead. The Company intends to finance the foregoing business strategy by utilizing its current working capital resources, the proceeds to be received from its existing contract backlog and anticipated future equipment sales and film licensing agreements, together with proceeds derived from one or more of the following financing alternatives: the sale of securities, the sale of non-performing assets, additional financing from banking institutions, the renegotiation of existing indebtedness repayment schedules, 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. During the past fiscal year and the Six Month Period, the Company took a substantial number of actions to reduce its negative cash flow from operations. These actions included implementing significant cost reductions, such as the reduction in employee head-count to 29 from 61 at March 31, 1997, and the closure of five of the seven existing O&O Theatre screens. The Company's management is evaluating further cost reductions, including the out-sourcing of certain operating functions (thereby further reducing employee head-count) and the relocation of the Company's headquarters to smaller office space. There can be no assurance that these cost-cutting measures will be sufficient to eliminate the negative cash flow or that they will not further adversely impact the Company's operations. The Company has limited capital resources and has debt obligations from two different financial institutions, which mature in November 1998 ($1,000,000) and in September 1999 ($5,690,000). The Company has reached an agreement with the holder of the $1,000,000 note to revise the payment schedule on the note, from being due in full in November 1998 to monthly payments beginning November 15, 1998 and continuing through March 31, 1999. The Company is also in discussions with its European bank regarding additional financing in excess of the $5,690,000 currently outstanding and an extension of the maturity date of repayment of this debt. Although the Company has held discussions with its European bank regarding additional financing, 15 16 there can be no assurance that the Company will be successful in obtaining any such financing. There can also be no assurance that this creditor will agree to extend its maturity date or other terms. Each creditor is secured by certain assets which together constitute substantially all of the assets of the Company. The Company believes that its existing funds, combined with the Company's ability to generate cash from future operations, the sale of non-performing assets, the re-negotiation of existing indebtedness repayment schedule and other financing transactions, will be adequate to finance its revised levels of activities and operations. However, based on the Company's current cash flow projections, it is anticipated that cash generated from operations will not be sufficient to pay all of the $5,690,000 due on September 1, 1999. The Company is considering possible alternatives available to it in order to pay the debt due in September 1999, including the possible sale and/or licensing of assets to others, the re-negotiation of debt re-payment schedules, the raising of cash through debt and/or equity financings, the further curtailment of operating expenses and the receipt of payments by the Company from UA by August 1999 either through the "sourcing" of projection and other theatre equipment, or through the liquidated damages provisions of the Theater Rights Agreement with UA (estimated to range from $3,200,000 to $5,280,000), since the Company does not believe that UA will order any additional Showscan Attractions. See Note 6 of Notes to Condensed Consolidated Financial Statements. 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 would need to be replaced or upgraded. The necessary upgrades will cost approximately $25,000. The Company believes that the required changes to its existing computer systems will be completed and tested not later than June 30, 1999, which is prior to any anticipated impact on the operating systems. Although the Company believes that with the conversions to the software, the year 2000 issue will not pose significant operational problems for its computer systems, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or material additional costs caused by an undetected error or defect in the technology used in the Company's internal systems that were acquired from third parties. 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 16 17 factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. The Company has assigned several key employees as a Year 2000 committee, whose sole purpose is to determine the compliance of all Company products, software systems and key vendors with the necessary conversion requirements. This committee (the "Year 2000 Committee") is responsible for identifying all potential issues which must be addressed. The Year 2000 Committee's recommendations will be followed by the Company. The Year 2000 Committee is in the process of reviewing all of the products of the Company in order to identify any Year 2000 sensitive software included in the products sold currently or in the past. The Company has identified some potential software problems and has not yet determined if a material cost will be incurred to test or correct products initially sold by the Company. The Year 2000 Committee is also beginning the process of surveying key vendors to insure their compliance with Year 2000 transition requirements. As of November 11, 1998, the Company is unaware of any key vendors who are not in compliance. At this date, the survey is in its initial stages, and will be continuing into the next few fiscal quarters of the Company. 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. History of Operating Losses For the fiscal years ending March 31, the Company had net profits of $79,000 in fiscal 1995, net profits of $101,000 in fiscal 1996, a net loss of $3.9 million in fiscal 1997 and a net loss of $8.5 million in fiscal 1998. At March 31, 1998, the Company had an accumulated deficit of $40.9 million. For the fiscal years ended March 31, 1995, 1996, 1997 and 1998, the Company's ratio of indebtedness to stockholders equity was 23.6%, 49.8%, 55.6% and 390%, respectively. This history of losses has had a negative impact on the Company's stock price and will adversely effect the Company's ability to carry out its business strategy, increase stockholder value, and to obtain financing in the future. The Company received notification from the Nasdaq Stock Market in the fiscal quarter ended June 30, 1998, that it was not in compliance with the continued listing requirements of the Nasdaq National Market(R). Nasdaq indicated that the Company had not maintained the required $1 minimum closing bid price per share nor the required $5,000,000 minimum market value of public float, nor 17 18 the required $4,000,000 minimum net tangible assets. The Company was granted an oral hearing on September 10, 1998 to demonstrate its ability to meet all of the continued listing requirements. After the hearing, Nasdaq decided to delist the Company's Common Stock from trading on the Nasdaq National Market(R) at the opening of business on September 17, 1998. The Company's Common Stock now trades on the OTC Bulletin Board. Since the Company has moved to the Electronic Bulletin Board, the Company has lost some of its market makers with the result that it may now be more difficult to effect trades of the Company's shares and to obtain timely and accurate quotations and reports of trading. This delisting could also adversely affect the liquidity of the Company's shares and thus their market value. This delisting could also adversely affect the Company's ability to obtain debt and/or equity financing. Ability to Obtain Additional Financing To date, the Company's primary source of capital has been from debt and equity financings. Unless the Company is able to obtain additional proceeds from such financing sources the Company will have to restructure its business and operations. A number of factors will make it difficult for the Company to obtain equity financing in the future, including the significant losses the Company incurred in the last fiscal year, the de-listing of the Common Stock from the Nasdaq National Market(R), the on-going financial turmoil in Asia (historically the Company's largest market and principal source of operating revenues), the Company's historical stock performance, and a general decrease in investor interest in the Company's industry. The Company's lack of assets that are available for collateral and its cash flow fluctuations may make it difficult for the Company to attract additional debt financing. Any investor or lender may require a significant equity position in the Company that could result in dilution of the Company's present stockholders. In addition to curtailing its business strategy, the Company has debt obligations from two different financial institutions which mature in November 1998 ($1,000,000) and in September 1999 ($5,690,000). The Company has an agreement to revise the payment schedule on the $1,000,000 obligation from being due in November, 1998 to monthly payments beginning November 15, 1998 and continuing through March 31, 1999, and is in discussions with its European Bank with regard to re-negotiation of its debt repayment schedule and additional financing. There can be no assurance that the European bank will agree to extend its maturity date or provide additional financing. The failure to repay either of these debts could result in the foreclosure against the collateral securing them which, between the two obligations, constitute substantially all of the assets of the Company. Based on current cash flow projections, the management of the Company anticipates that cash generated from operations will not be sufficient to pay all of the $5.7 million due on September 1, 1999. The Company has various alternatives available to it in order to pay this debt. There can be no assurance that any of these alternatives will be successful. 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. In addition, existing sites considering licensing the Company's films will consider the type and number of films available to them. 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 18 19 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. To the extent that the Company does not have its own funds available to invest and financing cannot be found on acceptable terms, then the Company's ability to produce new films could be restricted. Other competitors have each indicated that they are devoting substantial portions of their financial resources to the production of new motion simulation films. The Company's recent operating losses and declining cash balances have caused it to decrease the level of its investments in film software, which may have an adverse effect on revenues in future periods. 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. Period to Period Fluctuations The Company has experienced quarterly fluctuations in operating results and anticipates that these fluctuations will continue in future periods. Operating results and cash flow can fluctuate substantially from quarter to quarter and periodically as a result of the timing of theatre system deliveries, contract signings, the mix of theatre systems shipped, the completion of custom film contracts, the amount of revenues from film licensing agreements, the timing of sales of Showscan Attractions, 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, the size, type and configuration of the attractions sold, 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 the timing of sales and marketing efforts and related expenditures. In particular, fluctuations in theatre system sales and deliveries from quarter to quarter can materially affect quarterly and periodic operating results, and theatre system contract signings can materially affect quarterly or periodic cash flow. 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. 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. 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 several of the Company's competitors 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. 19 20 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, Europe, Middle East and Australasia. During the fiscal years ended 1998, 1997, 1996 and 1995, 85%, 62%, 61% and 69% of the Company's revenues, respectively, were derived from sales outside the United States. 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), 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. The Company typically denominates the prices of its films and equipment in United States Dollars. As a result of the recent devaluation of a number of Asian countries' currencies relative to the U.S. Dollar, the price of the Company's products to prospective buyers in such countries has increased significantly. This effective price increase could adversely affect the Company's future sales in the region and its ability to continue to negotiate and receive its current levels of film rental from existing sites in the region. 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 certain of the markets in which it competes. 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 the Company's products. The Company has not engaged in any currency hedging programs. 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 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. 20 21 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. Volatility of Stock Price The Company's stock price has been, and could continue to be, highly volatile. During the 12 months prior to September 30, 1998, the Company's closing market price has ranged from a low of $0.0625 per share to a high of $3.375 per share. Future announcements concerning the Company or its competitors, quarterly variations in operating results, introduction of new products or changes in product pricing policies by the Company or its competitors, the acquisition or loss of significant customers, or changes in earnings estimates by analysts, among other factors, may affect or be perceived to affect the Company's operations and could cause the market price of the Company's shares to fluctuate substantially. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public 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 Company's shares. Ability to Retain Key Personnel Over the past eighteen months, the Company has reduced its number of employees from 61 to 29. The possible merger of the Company, the financial losses, the potential for additional staff reductions and a tight job market have resulted in some departures by key personnel. While none of the departures have had a significant effect upon the Company's operations, there can be no assurance that there will not be additional departures. 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 could be held liable for the costs of remedial actions with respect to hazardous substances at its corporate headquarters 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 21 22 Company will not be required to incur remediation or other costs in the future in connection with these properties. The Company believes it is in compliance with all applicable Federal, state and local environmental laws and regulations. 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 film licensing business has a concentration located in Japan where Imagine Japan presently operates or is otherwise responsible for fifteen simulation attractions. In the fiscal year ended March 31, 1998, Showscan earned revenues from Imagine Japan in the amount of $1,318,000. The Company's short and long-term performance could be adversely impacted if disruptions were to occur in this area of concentration, such as license terminations or payment problems. Current Trends in the Global Economy The Company's revenues and profitability are dependent on the strength of the national and international economies. In a recessionary or deflationary environment, sales of the Company's products and products of other entertainment companies may be adversely affected. Theme parks and other out-of-home entertainment venues may also experience a downturn in sales which could reduce the funds available for capital improvements and film licensing, resulting in price and other concessions and discounts by the Company in order to maintain sales activity. Recent turmoil in the economies of the countries in Asia have had a material adverse affect on the Company's revenues and results of operations. If recent economic problems experienced in Asia, Russia, and Eastern Europe were to spread to Europe, South America or the United States, it could have a material adverse affect upon the Company's revenues and results of operations. The Company is not able to predict to what extent, or for what period, these economic trends may adversely affect the sales of its products. 22 23 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 -------------- ----------- 10.36 Amendment to Employment Agreement, dated October 1, 1998, by and between the Company and Dennis Pope.
(b) Reports on Form 8-K None 23 24 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 16th day of November, 1998. Showscan Entertainment Inc. --------------------------- (Registrant) By /s/ DENNIS POPE -------------------------------------- Dennis Pope President - Chief Executive Officer (Authorized Officer and Principal Executive Officer) By /s/ MARC SABELLA -------------------------------------- Marc Sabella Vice President - Corporate Controller (Authorized Officer and Principal Accounting Officer) 24 25 EXHIBIT INDEX
Exhibit No. Description Page Number ----------- ----------- ----------- 10.36 Amendment to Employment Agreement, dated October 1, 1998, by and between the Company and Dennis Pope.
25 EX-10.36 2 EXHIBIT 10.36 1 EXHIBIT 10.36 [SHOWSCAN ENTERTAINMENT LETTERHEAD] October 1, 1998 Mr. Dennis Pope 2058 Westridge Road Los Angeles, California 90049 Re: Employment Agreement Dear Dennis: Based on your performance as President and Chief Executive Officer of Showscan, since your appointment to such position nineteen (19) months on March 1, 1998, the Board of Directors at its September 30, 1998 meeting, approved an increase in your salary to Three Hundred Thousand Dollars ($300,000) per annum effective as of October 1, 1998. All of the other terms under your Employment Agreement with Showscan dated May 3, 1994 and that certain letter agreement, dated August 7, 1996, as amended by the "First Amendment to Severance Agreement" dated January 31, 1997, shall remain unchanged and in full force and effect. Additionally, the Board of Directors also approved a Seventy-Five Thousand Dollar ($75,000) bonus payable October 1, 1998 as additional recognition of your performance as President and Chief Executive Officer. Thank you again for all of your considerable efforts and your anticipated continued performance on behalf of Showscan. Best Regards, /s/ William D. Eberle William D. Eberle Chairman of the Board WDB/das EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1999 JUL-01-1998 SEP-30-1998 1,599 0 4,386 1,342 1,467 7,739 3,578 3,195 13,122 12,948 0 0 0 6 168 13,122 1,744 2,668 940 1,330 1,487 0 215 (325) 0 (325) 0 0 0 (325) (.06) (.06)
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