-----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, PdsbC2WI8poescEvqhI4k59sO3iTG/kYy4UE+hJxkcv2DO8tdkIwegkBDA1/L+Pz ksDM4dLrzv83eMOHdB96Rw== 0000944209-98-001029.txt : 19980518 0000944209-98-001029.hdr.sgml : 19980518 ACCESSION NUMBER: 0000944209-98-001029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IWERKS ENTERTAINMENT INC CENTRAL INDEX KEY: 0000830404 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE THEATERS [7830] IRS NUMBER: 954439361 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22558 FILM NUMBER: 98623195 BUSINESS ADDRESS: STREET 1: 4540 WEST VALERIO ST CITY: BURBANK STATE: CA ZIP: 91505 BUSINESS PHONE: 8188417766 MAIL ADDRESS: STREET 1: 4540 WEST VALERIO ST CITY: BURBANK STATE: CA ZIP: 91505 10-Q 1 FORM 10-Q FOR THE PERIOD ENDING MARCH 31, 1998 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-22558 IWERKS ENTERTAINMENT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 95-4439361 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 4540 West Valerio Street Burbank, California 91505-1046 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (818) 841-7766 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 and 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 May 12, 1998, the Registrant had 12,321,497 shares of Common Stock, $.001 par value, issued and outstanding. ================================================================================ IWERKS ENTERTAINMENT, INC. FORM 10-Q FOR THE QUARTER AND NINE MONTHS ENDED MARCH 31, 1998 INDEX
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS - ----------------------------- Condensed Consolidated Balance Sheets as of March 31, 1998 and June 30, 1997 2 Condensed Consolidated Statements of Operations for the Three and Nine Months ended March 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1998 and 1997 5 Notes to the Condensed Consolidated Financial Statements 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------------------------------------------------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 --------------------------------------------- PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS 17 - -------------------------- ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 - ------------------------------------------------------------ ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17 - ----------------------------------------- Signatures 19
1 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (in thousands)
March 31, June 30, 1998 1997 --------- -------- (unaudited) (audited) Current assets: Cash and cash equivalents $ 6,614 $ 3,608 Short-term investments 7,558 15,459 Trade accounts receivable, net of allowance for doubtful accounts 3,138 5,447 Costs and estimated earnings in excess of billings on uncompleted contracts 2,829 6,339 Inventories and other current assets 4,155 4,402 ------- ------- Total current assets 24,294 35,255 Portable simulation theaters at cost, net of accumulated depreciation 3,541 4,018 Property and equipment at cost, net of accumulated depreciation 4,195 2,920 Film inventory at cost, net of amortization 4,914 3,439 Goodwill, net of amortization 14,898 15,367 Investment in joint ventures and other assets 3,106 3,530 ------- ------- Total assets $54,948 $64,529 ======= =======
See accompanying notes. 2 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands, except share amounts)
March 31, June 30, 1998 1997 -------- -------- (unaudited) (audited) Current liabilities: Accounts payable $ 2,705 $ 3,435 Accrued expenses 7,645 8,793 Notes payable, current portion -- 81 Billings in excess of costs and estimated earnings on uncompleted contracts 3,099 990 Deferred revenue 181 278 Capital leases, current portion 693 739 -------- -------- Total current liabilities 14,323 14,316 Capital lease obligations, excluding current portion 1,322 1,827 Stockholders' equity: Preferred stock, $.001 par value, 1,000,000 -- -- authorized, none issued and outstanding Common stock, $.001 par value, 50,000,000 57 57 authorized; issued and outstanding 12,321,497 and 12,160,102, respectively Additional paid-in capital 78,016 78,016 Accumulated deficit (38,770) (29,687) -------- -------- Total stockholders' equity 39,303 48,386 -------- -------- Total liabilities and stockholders' equity $ 54,948 $ 64,529 ======== ========
See accompanying notes. 3 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share amounts)
For the Three Months Ended For the Nine Months Ended March 31, March 31, 1998 1997 1998 1997 ------------- -------------- -------------- -------------- Revenue $ 4,483 $11,042 $18,524 $30,660 Cost of sales 4,195 7,335 14,152 20,527 ------------- -------------- -------------- -------------- Gross profit 288 3,707 4,372 10,133 Selling, general, and administrative expenses 4,637 3,582 12,553 10,285 Proposed merger expenses (note 6) 888 - 1,419 - ------------- -------------- -------------- -------------- Income (loss) from operations (5,237) 125 (9,600) (152) Interest income 219 235 710 845 Interest expense 59 90 193 306 ------------- -------------- -------------- -------------- Net income (loss) $(5,077) $ 270 $(9,083) $ 387 ============= ============== ============== ============== Basic and diluted income (loss) per common share (note 4) $(0.42) $0.02 $(0.75) $0.03 ============= ============== ============== ============== Weighted average shares outstanding -basic 12,199 11,918 12,173 11,756 ============= ============== ============== ============== Weighted average shares outstanding - diluted 12,199 12,174 12,173 12,281 ============= ============== ============== ==============
See accompanying notes. 4 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
For the nine months ended March 31, ------------------------- 1998 1997 --------- --------- Operating Activities Net income (loss) $ (9,083) $ 387 Depreciation and amortization 3,558 4,204 Changes in operating assets and liabilities 6,199 (4,413) -------- -------- Net cash provided by operating activities 674 178 Investing Activities Investment in joint ventures 125 (897) Investment in portable simulation theaters (46) (108) Purchases of property and equipment (1,970) (702) Additions to film inventory (3,046) (1,349) Investment in debt securities 7,901 (853) Purchase of Pioneer and acquisition of related patent, net of cash acquired and stock issued (Note 7) -- (1,088) -------- -------- Net cash provided by (used in) investing activities 2,964 (4,997) Financing Activities Repayment of notes payable (81) (1,315) Payments on capital leases (551) (526) Exercise of stock options -- 486 -------- -------- Net cash used in financing activities (632) (1,355) -------- -------- Net increase (decrease) in cash 3,006 (6,174) Cash and cash equivalents at beginning of period 3,608 12,674 -------- -------- Cash and cash equivalents at end of period $ 6,614 $ 6,500 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 188 $ 327 ======== ======== Cash paid during the period for income taxes $ 8 $ -- ======== ========
See accompanying notes. 5 IWERKS ENTERTAINMENT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Introduction - --------------------- The accompanying condensed consolidated financial statements of Iwerks Entertainment, Inc. (the "Company") have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make information presented not misleading. In the opinion of management, all adjustments, including those related to the proposed merger (see note 6) and other normal recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 1998 and the results of its operations for the three and nine months ended March 31, 1998 and 1997 and the cash flows for the nine months ended March 31, 1998 and 1997 have been included. The results of operations for interim periods are not necessarily indicative of the results which may be realized for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's latest Annual Report on Form 10-K. Note 2 - Income Taxes - --------------------- At June 30, 1997, the Company had available federal and state tax net operating loss carryforwards of approximately $20,378,000 and $9,740,000, respectively expiring through 2012. As a result of these net operating losses and current period losses, the Company's effective tax rate was negligible and consequently no income tax provision or benefit was recorded in the periods presented. 6 Note 3 - Depreciation and Amortization - -------------------------------------- Depreciation expense and amortization expense for goodwill and other is computed using the straight line method over the estimated useful lives of the assets. Film costs are amortized using the individual film forecast method.
Three Months Nine Months Ended Ended March 31, March 31, --------------------------- ---------------------------- 1998 1997 1998 1997 ---- ----- ---- ---- Depreciation and amortization on fixed assets $ 247,000 $ 307,000 $ 695,000 $ 881,000 Depreciation on touring equipment 171,000 373,000 523,000 1,113,000 Amortization of film inventory 586,000 469,000 1,571,000 1,502,000 Amortization of goodwill and other 295,000 245,000 769,000 708,000 ---------- ---------- ---------- ---------- Total depreciation and amortization $1,299,000 $1,394,000 $3,558,000 $4,204,000 ========== ========== ========== ==========
Depreciation and amortization included in cost of sales was $766,000 and $853,000 for the quarter ended March 31, 1998 and 1997, respectively, and $2,122,000 and $2,653,000 for the nine months ended March 31, 1998 and 1997, respectively. Note 4 - Net Income (Loss) Per Common Share: - -------------------------------------------- In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective for annual and interim financial statements issued for periods ending after December 15, 1997. The statement requires restatement of prior years' earnings per share ("EPS"). SFAS No. 128 was issued to simplify the standards for calculating EPS previously found in APB No. 15, Earnings Per Share. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes the dilutive effects of stock options and warrants. Under the provisions of FAS 128, basic and diluted EPS were the same for the periods reported herein. Note 5 - Litigation - ------------------- There are no material legal proceedings to which the Company is a defendant other than ordinary routine litigation in the course of business. In the opinion of management, resolution of these matters will not have a material adverse impact on the Company's financial position or results of operations. Note 6 - Proposed Merger with Showscan Entertainment, Inc. - ---------------------------------------------------------- On August 5, 1997, Iwerks and Showscan Entertainment, Inc. (Showscan) announced that they signed a definitive agreement to merge which was subsequently 7 amended December 29, 1997. The agreement was terminated on March 31, 1998 when the Iwerks' stockholders failed to approve the merger at it's annual meeting held on that date. In connection with the proposed merger, the Company incurred $888,000 and $1.4 million of expenses which include investment banking, legal (including costs to defend an antitrust lawsuit), accounting, printing, solicitation, filing fees and other related expenses, in the three and nine months ended March 31, 1998, respectively. The Company does not expect to incur any additional costs related to this proposed merger with Showscan. Note 7 - Acquisition of Pioneer and Related Companies - ----------------------------------------------------- On March 4, 1997 two newly formed wholly-owned subsidiaries of the Company acquired the stock of Pioneer Marketing Corporation and a related company (collectively referred to as "Pioneer") in exchange for 299,101 shares of Iwerks common stock. On the same date in a related transaction, the Company purchased a patent from a partnership related to Pioneer for approximately $1,114,000 in cash. These transactions were accounted for as a purchase by Iwerks of Pioneer resulting in an aggregate purchase price of approximately $2,784,000 including acquisition costs. The aggregate purchase price of Pioneer in excess of the fair value of the identifiable assets of Pioneer at the date of acquisition was $1,536,000 which has been allocated to goodwill. The operations of Pioneer have been consolidated with the operations of the Company from March 4, 1997. Note 8 - New Accounting Pronouncements - -------------------------------------- In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income. The Statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Statement applies to all enterprises that provide a full set of general purpose financial statements. The Statement becomes effective for all financial statements for fiscal years beginning after December 15, 1997, with earlier application permitted. Further, in June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. The Statement becomes effective for all financial statements for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company has reviewed those Statements and does not believe that they will have a material impact on its financial statements and related disclosures. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL - ------- The Company is engaged in the business of designing, engineering, manufacturing, marketing and servicing specialty theatre systems which employ a variety of projection, show control, ride simulation and software technologies. The Company is currently in the business of: (a) selling and installing ride simulation attractions in specialty theatres, (b) selling and installing giant screen theatres (generally such theatres require projection technology which utilize film sizes ranging between five perforations per frame by 70 millimeters (5/70) and fifteen perforations per frame by 70 millimeter (15/70), (c) licensing and distributing the films in its library to ride simulation theatres previously sold by the Company, (d) producing films in the 5/70, 8/70 and 15/70 film format for its film library as well as producing films in these formats for third parties, (e) investing in joint ventures by contributing its ride simulation technology, design and equipment and participating in the theatre profits, and (f) operating a fleet of 16 mobile ride simulation attractions. During the quarter ended March 31, 1998 the Company had certain management changes. Charles Goldwater was appointed CEO, Chairman of the Board and President, replacing Roy Wright. The Company hired two additional officers and terminated two officers during the quarter. Between January 1, and May 5, 1998 the Company has reduced its full-time workforce by 22%, from 151 to 118 employees resulting in annualized savings of approximately $1.6 million. The Company is currently in the process of continuing to review its personnel needs. The following sections contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward- looking statements involve risks and uncertainties such that actual results may vary materially. Certain factors that may affect the Company's results and financial condition over the next few quarters are discussed under the caption "future operating results" below. Other factors that may affect such results and financial condition are set forth in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS - --------------------- The Company derives its revenues primarily from three sources: sales of hardware systems, owned and operated (primarily portable simulation theatres), and licensing of films. To a lesser extent, revenues are also earned from service to existing theatre owners and production of films for third parties. The following table presents summary information regarding revenues (amounts in thousands): 9
Periods Ended March 31, Three Months Nine Months ------------------------------------ ----------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Hardware Sales & Service $1,233 $ 7,831 $ 8,325 $20,189 Owned and Operated 1,272 1,277 5,312 5,824 Film Licensing 1,785 1,864 4,544 4,370 Film Production and Other 193 70 343 277 ------ ------- ------- ------- Total $4,483 $11,042 $18,524 $30,660 ====== ======= ======= =======
Revenues on sales of theatre systems are recognized on the percentage-of- completion method over the life of the contract. Accordingly, the timing of shipment schedules as dictated by the customer can result in variability of quarterly revenues and earnings. The gross margin for each contract varies based upon pricing strategies, competitive conditions and product mix. Revenues from owned and operated (O&O) consist of portable ride simulation theatre revenues (touring) derived primarily from corporate sponsorship or ticket sales at state fairs, air shows, and similar events, as well as revenues derived from fixed site joint ventures, which includes Iwerks' contractual share of the sites' revenues or profits as applicable. Admission revenues from the portable ride simulation theatres are subject to variability due to the seasonal nature of these events and are higher during the summer months. Sponsorship and contract revenues for the portable theatres are recognized ratably over the term of the contract. The Company typically licenses its film software under one year film license agreements. Revenues and related expenses are recognized at the beginning of the license period at which time the customer is billed the license fee and film is delivered to the customer. COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 TO THREE MONTHS ENDED MARCH - ------------------------------------------------------------------------------- 31, 1997 - -------- REVENUES Hardware sales and service revenue in the three month period ended March 31, 1998 decreased by approximately $6.6 million or 84% as compared to the same period last year. The Company experienced sharply lower hardware sales in each of its principal markets during the 1998 quarter when compared to the 1997 quarter. The Company's hardware sales in Asia continue to be negatively impacted by the economic downturn being experienced in that region. The Company's results in the 1997 third quarter were benefited by a significant contract with a South American customer. There were no corresponding revenues realized in that region in the 1998 third quarter. In addition, the Company experienced a sharp decline in revenues in North America. 10 The Company expects that the lower Asia sales trend is likely to continue into the foreseeable future. The Company signed no new sales contracts in that region during the third quarter. The Company's current contractual backlog in the Americas has recently increased, however, and the Company anticipates that realization on this backlog will contribute to higher revenues from hardware sales and service in the fourth quarter when compared to the third quarter of 1998, but lower than corresponding revenues recognized in the fourth quarter of 1997. The Company did not realize material revenues in Europe or other international markets in fiscal 1998 or 1997. The Company is in the process of searching for a key executive with marketing expertise who will oversee the sales and marketing operations for the Company. As discussed in greater detail below under "Future Operating Results," hardware sales can fluctuate substantially as a result of the timing of theaters system deliveries, contract signing, the rate of completion of contracts and other factors. Film licensing revenue decreased by $79,000 or 4.2% due to one Asian customer which did not renew its license agreement in the current year. Film production and other revenue increased due to the Company actively renting its cameras in the current quarter as compared to the prior year's quarter. COST OF SALES AND GROSS PROFIT MARGIN The total gross profit margin percentages for the three months ended March 31, 1998 and 1997 were 6.4% and 33.6%, respectively. The decrease in gross profit margin in the 1998 third quarter compared to the same quarter in 1997 is primarily related to the decrease in hardware sales. Included in hardware cost of sales are certain fixed costs such as facility and certain labor costs which did not decrease with the decline in hardware sales. The gross profit margin on the other revenue sources were generally consistent with the prior year's quarter. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses include, among other things, personnel costs, trade shows and other promotional expenses, sales commissions, travel expenses, public relation costs, outside consulting and professional fees, depreciation on fixed assets, amortization of goodwill, departmental administrative costs and research and development costs. Selling, general and administrative expenses increased for the three months ended March 31, 1998 by approximately $1.1 million over the same period in the prior year. This increase was primarily due to a $1.5 million charge for severance costs that were made to fifteen employees including the former CEO and two other officers whose employment terminated in the third quarter of fiscal 1998. In addition, bad debt expense was greater by $0.7 million for the comparable three month period due to Asia customers and one domestic customer. These increases were partially offset by a decrease in sales commissions. 11 As discussed above, between January 1, and May 5, 1998, the Company has reduced its full time workforce by 22% from 151 to 118 employees resulting in annualized savings of approximately $1.6 million. A significant portion of these cutbacks are in the area of SG&A, but will be partially offset in future periods as the Company adds additional personnel to complete its management team. INTEREST INCOME AND EXPENSE Interest income for the three months ended March 31, 1998 and 1997 was $219,000 and $235,000, respectively, and is derived from the Company's investments, primarily in U.S. Treasury Notes and short term commercial paper. The decrease in interest income resulted primarily from the decrease in the invested balances in the comparable periods. COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 TO NINE MONTHS ENDED MARCH 31, - ----------------------------------------------------------------------------- 1997 - ---- REVENUES Hardware sales and service revenue in the nine months ended March 31, 1998 decreased by approximately $11.9 million or 58.8% as compared to the same period last year. The Company experienced sharply lower hardware sales in each of its principal markets during the 1998 nine months when compared to the 1997 nine months. As discussed above, the Company's hardware sales in Asia continue to be negatively impacted by the economic downturn being experienced in that region. Sales represented by customers located in Asia declined by about $8 million in the fiscal 1998 period when compared to the comparable period in 1997. In addition, the Company experienced in 1998 declines in revenues in North and South America when compared with 1997, primarily in the third quarter. Hardware sales in the Americas declined by approximately $4.7 million and $4.5 million in the three month and nine month period, respectively. Owned and operated revenue decreased by approximately $512,000 as compared to the same period last year, primarily due to a reduction in sponsorship revenue relating to the portable simulation theatres. Film licensing revenue increased by approximately 4.0% as a result of the increasing base of installed theatres that license the Company's film software. COST OF SALES AND GROSS PROFIT MARGIN The total gross profit margin percentages for the nine months ended March 31, 1998 and 1997 were 23.6% and 33.0%, respectively. The decrease in gross profit margin was primarily related to the decrease in sales. Included in hardware cost of sales are 12 certain fixed costs such as facility and certain labor costs which did not decrease with the decline in hardware sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased for the nine months ended March 31, 1998 by approximately $2.3 million over the same period in the prior year. The increase was mainly due to a $1.5 million charge for severance costs that were made to fifteen employees including the former CEO and two other officers whose employment terminated in the third quarter of fiscal 1998. In addition, bad debt expense was greater by $1.1 million due to greater delinquencies of receivables from Asian customers and two domestic customers. Research and development costs and insurance costs were also higher in the nine months ended March 31, 1998. These increases were partially offset by a decrease in sales commissions. MERGER RELATED EXPENSES On August 5, 1997, the Company and Showscan Entertainment, Inc. announced an agreement to merge. The merger agreement was subsequently amended on December 29, 1997 (see note 6 of Notes to Condensed Consolidated Financial Statements). The agreement was terminated on March 31, 1998 when the Iwerks stockholders failed to approve the merger at its annual meeting held on that date. During the quarter and nine months ended March 31, 1998, the Company incurred $888,000 and $1,419,000 of merger related expenses. IMPACT OF YEAR 2000 Some of the Company's older computer programs 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 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 its initial assessment of its existing software systems and after reviewing various factors, one of which being the year 2000 issue, has determined that modifications or upgrades to or replacements of certain software and hardware is required. The Company's most critical software systems are its assembly and financial software systems. The Company has determined that these systems will require replacement. The Company's initial estimate of the cost of such replacement is $400,000, which includes approximately $300,000 for the purchase and implementation of new software and hardware (which will be capitalized and amortized over their respective useful lives) and approximately $100,000 of which will be expensed in the period incurred. The Company has not yet completed the process of selecting its preferred systems or vendors and consequently the Company's estimates may change depending upon the 13 systems but does not believe they will be material. At March 31, 1998, the Company had incurred approximately $25,000 in connection with this project. The Company believes that the required changes to its existing computer systems will be substantially completed no later than June 30, 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with these changes, the year 2000 issue will not pose significant operational problems for the Company. 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. FUTURE OPERATING RESULTS The market for the Company's products is intensely competitive and 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. 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. The Company has experienced a significant decline in revenues in recent periods. Historically, a substantial portion of the Company's revenues from new hardware sales in the ride simulation market have originated in international markets, particularly in Asia. The Company began to experience a significant decline in new hardware contracts during the fourth quarter of fiscal 1997, which trend has continued through the first nine months of fiscal 1998. This trend has been exacerbated by the recent economic crisis experienced in this region. While the Company is placing greater focus on other markets, particularly the United States, Latin America and Europe, the trend of declining sales in Asia is expected to have a continuing negative impact on the Company's revenues through the remainder of fiscal 1998 and expected to have a continuing negative impact in future periods. The Company and it principal competitor in the large screen market, Imax Corporation, are aggressively competing, particularly in the United States market, for new theater installations. The Company primarily competes in this market based upon the price and terms of its projection technology. Imax, the dominant competitor in the market, competes primarily on the basis of its brand identity and its larger film library. These factors, and Imax's access to greater financial and other resources, are expected to continue to place the Company at a competitive disadvantage in this market and could have a negative impact on the Company's gross margins over time. 14 In addition to competition in the large-screen market, the Company faces intense competition in the simulation industry from Showscan Entertainment and a large number of other competitors. The Company competes in this market based upon the breadth of its product offerings and the size and quality of its film library. Few of its competitors in this market have sufficient financial resources to effectively compete with the Company based on these criteria. The Company's competitive position in this market segment could be materially affected if any of its existing competitors or a new entrant were to assemble the financial, technical and creative resources required to effectively compete with the Company's range of product offerings and film library. Revenues from the Company's owned and operated attractions (primarily portable simulation theaters) have been declining since the first quarter of fiscal 1997 when the Company lost its principal sponsorship contract with AT&T. The Company has been aggressively pursuing and has recently signed other sponsorship contracts since that time. However, it has not been successful in fully replacing this revenue source. Because this segment of the Company's business has a significant level of fixed costs regardless of fluctuations in revenues, the Company's gross margins will continue to be adversely impacted unless it is able to secure alternate sources of revenue or disposes of all or a portion of this business segment or otherwise eliminates a portion of the fixed costs associated with its operation. Iwerks 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 theater system deliveries, contract signing, sponsorships, the mix of theater systems shipped, the completion of custom film contracts, the existence of world expos, amount of revenues from portable simulation theater and film licensing agreements, the timing of sales of ride simulation 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 theater system sales and deliveries from quarter to quarter can materially affect quarterly and periodic operating results, and theater system contract signing can materially affect quarterly or periodic cash flow. Accordingly, Iwerks' revenues and earnings in any particular period may not be indicative of the results for any future period. The seasonal fluctuations in earnings also may cause volatility in the stock price of Iwerks. While a significant portion of Iwerks' expense levels are relatively fixed, the timing of increases in expense levels is based in large part on Iwerks' forecasts of future sales. If net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by Iwerks' inability to adjust spending quickly enough to compensate for the sales shortfall. Iwerks may also choose to reduce prices or 15 increase spending in response to market conditions, which may have a material adverse effect on Iwerks' results of operations. Additionally, the Company plans to continue to evaluate and, when appropriate, make acquisitions of complementary technologies, products or businesses. The Company will continue to evaluate the changing value of its assets, and when necessary, make adjustments thereto. While the Company cannot predict what effect these various factors may have on its financial results, the aggregate effect of these and other factors could result in significant volatility in the Company's future performance and stock price. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's operating activities for the nine months ended March 31, 1998 generated positive cash flow of $674,000. This was mainly due to the net loss of $9.1 million offset by non-cash charges of $3.6 million for depreciation and amortization along with changes in operating assets and liabilities of $6.2 million. Investing activities for the nine months ended March 31, 1998 consisted primarily of redemptions of investments in debt securities of $7.9 million partially offset by investments in film inventory of $3.0 million and purchases of property and equipment of $2.0 million. Cash used in financing activities consisted primarily of payments for notes payable and capital leases. At March 31, 1998, the Company had cash and short-term investments of approximately $14.2 million compared to $19.1 million at June 30, 1997. In addition, the Company has maintained a bank line of credit in the amount of $5 million. At March 31, 1998 and 1997, there were no amounts outstanding on the line of credit. However, at March 31, 1998 the Company was not in compliance with respect to certain financial covenants relating to the bank line of credit and the Company is currently renegotiating changes to certain covenants to the line of credit. There can be no assurance that the Company will be successful in extending this line into future periods. The Company believes that its cash balances, short-term investments in debt securities and expected cash flow from operations will be adequate to meet its cash requirements over at least the next twelve months. However, the Company expects that its cash balances will continue to decline during this period. The Company's operations are expected to be cash flow positive over this twelve month period. This positive cash flow will be more than offset by the payment of expenses accrued but not yet paid at March 31, 1998 and planned additions to film inventory and other fixed assets. If the Company's revenues were to be materially less than that forecasted, the Company's cash balances, short-term investments in debt securities and cash flow from operations may not be sufficient to meet its expected cash needs. In such a case, the Company's liquidity may be dependent upon reinstating its current bank line or arranging for additional equity or debt financing. If unsuccessful, the Company would be required to defer capital and other expenditures that are not then committed. Consequently, the Company is exploring available debt financing resources in the form of bank financing, film financing and equipment financing. There can be no assurance that such financing will be available to the Company or, if available, that such financing could be arranged on terms that the Company would consider attractive. 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ------------------------- The Company is a party to various actions arising in the ordinary course of business which, in the opinion of management, will not have a material adverse impact on the Company's financial condition; however, there can be no assurance that the Company will not become a party to other lawsuits in the future, and such lawsuits could potentially have a material adverse effect on the Company's financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ On March 31, 1998, the Company held its annual shareholders meeting. The following three items were voted on: 1. The issuance of shares of Iwerks' Common Stock related to the Agreement and Plan of Reorganization, as amended, with Showscan Entertainment, Inc. Votes cast for totaled 4,000,470; votes cast against totaled 4,729,215; abstentions totaled 14,446; broker non- votes totaled 2,972,418. 2. Charles Goldwater was elected to the board of directors for a term of three years. Votes cast for totaled 10,220,876; votes withheld totaled 1,495,943. The continuing directors are Dag Tellefsen, Gary Matus and Don Iwerks. 3. To amend the 1994 Stock Incentive Plan to increase the shares of Iwerks Common Stock reserved for issuance thereunder from 1,750,000 to 2,500,000 and to provide a per employee limit on stock option grant in any one year. Votes cast for totaled 3,047,138; votes cast against totaled 5,481,750; abstentions totaled 130,862; broker non-votes totaled 3,057,069. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits: 10.1 Employment agreement dated March 2, 1998 between the Company and Dan Griesmer 11.1 Earnings per share 27.1 Schedule of financial data (b) Reports on Form 8-K filed during the quarter ended March 31, 1998: 17 i) A Form 8-K was filed on February 2, 1998, Item 5, regarding a press release dated January 28, 1998. ii) A Form 8-K was filed on February 12, 1998, Item 5, regarding a press release dated February 10, 1998. iii) A Form 8-K was filed on March 23, 1998, Item 5, regarding a press release dated March 23, 1998. ii) A Form 8-K was filed on March 25, 1998, Item 5, regarding a press release dated March 24,. iii) A Form 8-K was filed on March 26, 1998, Item 5, regarding a press release dated March 25,. iv) A Form 8-K was filed on March 27, 1998, Item 5, regarding a press release dated March 26, 1998. v) A Form 8-K was filed on March 30, 1998, Item 5, regarding a press release dated March 26,. 18 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the city of Burbank, State of California on the 14 day of May, 1998. IWERKS ENTERTAINMENT, INC. (Registrant) By: /s/ Bruce C. Hinckley --------------------- Executive Vice President Chief Financial Officer (Principal Finance Officer) By: /s/ Jeffrey M. Dahl ------------------- Vice President / Controller (Principal Accounting Officer) 19 EX-10.1 2 EMPLOYMENT AGREEMENT DATED MARCH 2, 1998 Iwerks Entertainment, Inc. 4540 West Valerio Street Burbank, California 91505 March 2, 1998 Mr. Dan Griesmer 17144 Cantara Street Van Nuys, California 91406 Dear Mr. Griesmer: Iwerks Entertainment, Inc. (the "Company") and you have agreed as follows: 1. Employment and Services: ----------------------- The Company has employed you as Senior Vice President - General Manager, and you have agreed, commencing on March 2, 1998 (the "Commencement Date"), to perform your exclusive and full-time services in that capacity for the Company upon the terms and conditions herein set forth. You shall report directly to the Company's Chief Executive Officer or his duly authorized representatives. You shall have all the duties customarily accorded to a Senior Vice President - General Manager of a corporation and such additional duties commensurate with your offices as are from time to time delegated to you by the Chief Executive Officer of the Company. You shall devote your business time, energy and efforts faithfully and diligently to promote the Company's interests. You will render your services primarily at the Company's offices which shall be in the Los Angeles metropolitan area and which are presently on West Valerio Street in Burbank, and shall travel on business on a temporary basis to such other places as the Company may direct. 2. Term: ---- The term of this Agreement shall be the Initial Period and the Additional Period, if the Company's option is exercised, unless sooner terminated. a. Initial Period: The initial period shall commence on the Commencement -------------- Date and continue for a two year period; and b. Additional Period: The Company shall have the irrevocable option to ----------------- extend the Term of this Agreement following the termination of the Initial Period for an additional two year period (the "Additional Period"), upon the same terms and conditions as during the Initial Period. Such option is exercisable by written notice sent on or before September 1, 2000. c. Notice at Expiration of Additional Term. If the option referred to in --------------------------------------- clause b above is exercised by the Company. at your request, the Company shall provide to you written notice on or prior to September 1, 2002 as to whether it desires to extend the Term beyond the Additional Term. 3. Salary: ------ As compensation for all your services rendered under this Agreement, and so long as you are not in default of any material obligation, for the period ending March 1, 1999, the Company shall pay you a base salary at an annual rate of $130,000. Commencing on the anniversary of the date of this Agreement, your base salary for each subsequent contract year during the Term of your employment (including the Initial Term and the Additional Term) shall be increased by an amount equal to 4% of the base salary prevailing during the prior contract year. Such compensation shall be payable in equal installments on the Company's regular paydays during the Term subject to the usual and required employee payroll deductions, withholding and reduction to offset payments you receive from governmental agencies or programs, including, but not limited to, State Disability Insurance benefits. (You are obligated to seek such payments or benefits and report them to the Company). The Company is not obligated to actually utilize your services, subject to its obligations set forth in this Agreement. 4. Performance Bonus: ----------------- Commencing in Fiscal 1999, you will be eligible for a performance based bonus pursuant to a bonus plan adopted by the Compensation Committee of the Board of Directors. You will be eligible to receive a bonus in an amount of up to 50% of your then current annual base salary upon achieving 100% of the established performance goals. It is anticipated that the bonus plan will provide bonus payments in amounts less than this percentage if the Company achieves a portion of the stated goals and a percentage greater than 50% (up to an agreed upon maximum contemplated to be set at 100%) if the Company's performance exceeds the stated goals. Performance goals will be established by the Compensation Committee of the Board of Directors after consultation with the Chief Executive Officer during the first quarter of each fiscal year and shall be commensurate with the corresponding bonus targets. It is anticipated that the performance goals will include financial goals for the Company as well as nonfinancial goals for the Company. During the fiscal year ending June 30, 1998 ("Fiscal 1998"), the performance bonus will not be available; however, the Board of Directors will consider the grant of a discretionary bonus based on your performance during the third and fourth quarters of Fiscal 1998. 5. Stock Options: ------------- The Company will grant to you options to purchase 100,000 shares of common stock of the Company upon commencement of your employment hereunder. Of these 100,000 options, 60,000 options shall be priced at the closing sale price of the Company's common stock on the Nasdaq National Market on February 27, 1998, the trading date immediately prior to the effectiveness of this Agreement (the "Closing Price"). Of the remaining options, 20,000 shall be priced at 125% of the 2 Closing Price and 20,000 shall be priced at 150% of the Closing Price. Effective as of the beginning of each fiscal year in which you are employed by the Company (commencing with the fiscal year ending June 30, 2000) and if the Company achieves 100% of the performance goals as established for purposes of the performance bonus described above for the prior fiscal year, you will be granted options to purchase an additional 40,000 shares of common stock at the closing sale price of the common stock on the Nasdaq National Market on the last trading day of such prior fiscal year. If the Company achieves less than 100% of the performance goals for any fiscal year, but you qualify for a bonus under the bonus plan for such fiscal year, you shall be granted options for that number of shares which bears the same ratio to 60,000 as the percentage bonus actually received bears to 50%. Of the options described herein, 25,000 shall vest on the first anniversary of your employment by the Company and the remaining options shall vest in equal monthly installments over the next three years. All options described herein shall be subject to accelerated vesting as described below under "Severance Arrangements" and "Change of Control." All options shall terminate on the earlier to occur of three years from the date of your termination of employment and ten years from the date of grant. 6. Benefits: -------- During the period for which the Company actually utilizes your services and so long as you are not in default of any material obligation: a. Vacation. You shall be entitled to three weeks paid vacation for each calendar year during your employment; provided, however, that vacation shall -------- ------- only be taken at such times as not to interfere with the necessary performance of your duties and obligations under this Agreement. Vacation time shall accrue and may be carried over only in accordance with Company policy. It shall be your responsibility to schedule and take all accrued vacation prior to the expiration of the Term hereof. b. Automobile. The Company shall provide you with an automobile allowance in an amount equal to $ 1,000.00 per month . c. Reimbursement. You shall be entitled to reimbursement from the Company for the reasonable costs and expenses incurred in connection with the performance of the duties and obligations provided for in this Agreement in accordance with the Company's travel policies. Reimbursement shall be paid upon prompt presentation of expense statements or vouchers and such other supporting information as the Company may from time to time require. d. Other Benefits; Insurance. During the term of your employment under this Agreement, if and to the extent eligible, you shall be entitled to participate in all operative employee benefit and welfare plans of the Company then in effect ("Company Officer Benefit Plans"), including, to the extent then in effect, group life, medical, disability and other insurance plans, all on the same basis generally applicable to the executives of the Company; provided, -------- however, that nothing contained in this Section 6.d shall, in any manner - ------- whatsoever, directly or indirectly, require or otherwise prohibit the Company from amending, modifying, curtailing, discontinuing or 3 otherwise terminating, any Company Officer Benefit Plan at any time (whether during or after the Term hereof). 7. Severance Arrangements: ---------------------- In the event of a termination not "for cause" or a "defacto termination", (either prior to or at the expiration of the Initial Term or Additional Term, as applicable (i.e. whether you are terminated during the Initial Term or the Additional Term, as applicable, or your employment is terminated as a result of the Company's failure to renew your employment at the end of the Initial Term or Additional Term, as applicable), you will be entitled to receive the following (the "Severance Amount"): (i) a cash amount equal to the base salary which would have been payable to you over the remaining Term (but not less than 15 months), as computed based on your base salary at the date of notice of termination, (ii) a cash amount equal to the pro rated portion (based on time served) of the performance bonus which would have been paid to you under the performance bonus plan for the fiscal year in which the termination occurs, if your employment had continued through the end of the fiscal year and the Company had achieved 100% of its scheduled performance goals, and (iii) the automobile allowance, (iv) COBRA benefits for you and your family (medical and dental, if applicable), and (v) other applicable benefits under other Company Officer Benefit Plans for the remaining Term (but not less than 15 months). In addition, if termination occurs for any of the foregoing reasons prior to or at the expiration of the Initial Term or Additional Term, as applicable, all of the stock options then held by you which would vest during the remainder of the Initial Term or Additional Term, as applicable, and during the 12 months thereafter, shall become vested and immediately exercisable and the time for exercise shall be extended until the expiration of three years from the date of termination of employment. Notwithstanding the foregoing, (x) if a termination giving rise to an obligation by the Company to pay the Severance Amount occurs at any time during the Initial Term or upon the expiration of the Initial Term, each reference to 15 months above shall be deemed to refer to 18 months, and (y) if during the fiscal year in which a termination giving rise to an obligation by the Company to pay the Severance Amount occurs the Company achieves 100% of its scheduled performance goals, the Company shall pay to you 100% of the performance bonus (in lieu of the pro rated portion referred to above) as part of the Severance Amount. The amounts payable to you pursuant to this Section 7 shall be paid to you within 10 days of your termination "For cause" is defined to mean (a) an act of fraud, embezzlement or similar conduct by you involving the Company, (b) any action by you involving your arrest for violation of any criminal statute constituting a felony or a misdemeanor involving moral turpitude if the Board of Directors reasonably determines that the continuation of your employment after such event would have an adverse impact on the operations or reputation of the Company in the financial community, (c) gross misconduct or habitual negligence in the performance of your duties, (d) an act constituting a breach of your fiduciary duty to the Company under the Delaware General Corporation Law, or (e) a continuing, repeated and willful failure or refusal by you to perform your duties. A "defacto termination" is defined to include any of the following events: (a) the Company reduces your base salary in an aggregate amount in excess of 10% from that paid in the prior fiscal year, except as part of a general reduction of compensation of executive officers, (b) the Company fails to cause you to remain an executive officer of the Company, (c) you were not afforded the authority, powers, 4 responsibilities and privileges customarily accorded to an executive with your title, or (d) the Company requires your primary services to be rendered in an area other than the Company's principal offices in the greater Los Angeles metropolitan area. 8. Change in Control: ----------------- If there is a "change in control" of the Company during the Initial Term or the Additional Term, as applicable, upon the expiration of 90 days (or such longer period as is then mutually agreeable to you and the Company) following the date of such Change in Control (if you are requested to serve during such period) and for a 180 day period thereafter you shall be entitled to terminate your employment by delivery of written notice and receive (i) a cash amount equal to the base salary which would have been payable to you over the remaining Term (but not less than 18 months), as computed based on your base salary at the date of notice of termination, (ii) a cash amount equal to the performance bonus which would have been paid to you under the performance bonus plan for the fiscal year in which the termination occurs, if your employment had continued through the end of the fiscal year and the Company had achieved 100% of its scheduled performance goals, and (iii) the automobile allowance, (iv) COBRA benefits for you and your family (medical and dental, if applicable), and (v) other applicable benefits under other Company Officer Benefit Plans for the remaining Term (but not less than 18 months). In addition, all options held by you on the date of the Change in Control which are unvested shall vest and become exercisable at the time of the Change in Control and will remain exercisable (if they are not terminated as a result of the Change in Control) for a period ending at the end of the third year following the date of such Change in Control. Nothing contained in this Section 8 shall modify or alter the Company's obligations under Paragraph 7 above with respect to termination without cause or defacto termination during the period following a Change in Control; provided, however, if a termination without cause or a defacto termination occurs between the date of a Change in Control and the expiration of the period in which you are entitled to terminate your employment pursuant to this Section 8, the Severance Amount payable to you shall be the benefits described in this Section 8 and not the benefits described in Section 7. The amounts payable to you pursuant to this Section 8 shall be paid to you within 10 days of your termination. A "change in control" is defined to mean (a) the acquisition by any individual, entity or group (within the meaning of the Exchange Act of 1934, as amended) of 25% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote in the election of directors, (b) a liquidation, dissolution, reorganization, merger or consolidation of the Company, except where (i) more than 60% of the combined voting power of the then outstanding voting securities of the resulting corporation entitled to vote in the election of directors shall be owned by substantially all of the persons who were owners immediately prior to such event in substantially the same proportions as their respective ownership immediately prior to such event, or (ii) no person owns 25% or more of the combined voting power of the resulting corporation, or (iii) at least a majority of the members of the Board of Directors shall have been members of the Board of Directors at the time of the execution of the initial agreement providing for such event, or (c) a change in the membership of the Board of Directors such that the directors sitting on the Board of Directors on the effective date of this Agreement cease to constitute at least a majority of the Board of Directors following the event. 5 9. No Mitigation: ------------- The payments required to be paid to you by the Company pursuant to Sections 7 and 8 shall not be reduced by or mitigated by amounts which you earn or are capable of earning during any period following your termination date. 10. Indemnification: --------------- The Company and you are parties to an Indemnification Agreement, pursuant to which, inter alia, the Company has agreed, on the terms and conditions ----- ---- therein set forth, to indemnify you against certain claims arising by reason of the fact that you were an officer or director of the Company. 11. Trade Secrets: ------------- The Company and you are parties to a separate confidentiality agreement in a form which is required of all employees pursuant to the Company's personnel policies. 12. Injunctive Relief ----------------- You hereby recognize, acknowledge and agree that in the event of any material breach by you of any of your covenants, agreements, duties or obligations hereunder, the Company would suffer great and irreparable harm, injury and damage, the Company would encounter extreme difficulty in attempting to prove the actual amount of damages suffered by the Company as a result of such breach, and the Company would not be reasonably or adequately compensated in damages in any action at law. You therefore agree that, in addition to any other remedy the Company may have at law, in equity, by statute or otherwise, in the event of any material breach by you of any of the covenants, agreements, duties or obligations hereunder, and after written notice is provided to you with a reasonable opportunity to cure, the Company or its subsidiaries shall be entitled to seek and receive temporary, preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to enforce any of the rights of the Company or its subsidiaries or any of the covenants, agreements, duties or obligations of you hereunder, or otherwise to prevent the violation of any of the terms or provisions hereof, all without the necessity of proving the amount of any actual damage to the Company or its subsidiaries thereof resulting therefrom; provided, however, that nothing contained in this Section 12 shall be deemed or construed in any manner whatsoever as a waiver by the Company or its subsidiaries of any of the rights which any of them may have against you at law, in equity, by statute or otherwise arising out of, in connection with or resulting from the breach by you of any of your covenants, agreements, duties or obligations hereunder. 13. Survivability: ------------- Without prejudice to the survival of any of your other rights or obligations and/or any of the Company's other rights or obligations, you and we expressly acknowledge that your obligations and/or the Company's rights under paragraphs 7, 8, 9, 12 and 13 will survive the expiration or termination of this Agreement. 6 14. Notices: ------- All notices, requests, consents and other communications required or permitted to be given hereunder shall be written and shall be deemed to have been duly given if delivered personally or sent by prepared telegram, by facsimile, or mailed first-class, postage prepaid, as follows: Employee: Mr. Dan Griesmer 17144 Cantara Street Van Nuys, California 91406 the Company: Iwerks Entertainment, Inc. 4540 West Valerio Street Burbank, California 91505 with a copy to: Troop Meisinger Steuber & Pasich LLP 10940 Wilshire Boulevard, Suite 800 Los Angeles, California 90024 Attn: C.N. Franklin Reddick III, Esq. or at such other addresses as either party may specify by written notice to the other. 15. General: ------- a. During the Term of this Agreement, except within the final one hundred eighty (180) days of the Term or a Change in Control (whichever is the first to occur), you shall not seek, or negotiate for, employment other than with the Company. b. This Agreement sets forth the entire agreement and understanding of the parties hereto, and, effective on the Commencement Date hereof, supersedes all prior agreements, arrangements, and understandings. No representation, promise or inducement has been made by either party that is not embodied in this Agreement. c. Nothing herein contained shall be construed so as to require the commission of any act contrary to law. Wherever there is any conflict between any provision of this Agreement and any present or future statute, law, ordinance or regulation, the latter shall prevail, but in such event the provision of this Agreement affected shall be curtailed and limited only to the extent necessary to bring it within legal requirements. Without limiting the generality of the foregoing, in the event any compensation payable hereunder shall be in excess of the amount permitted by any statute, law, ordinance or regulation, payment of the maximum amount allowed thereby shall constitute full compliance by the Company with the payment requirements of this Agreement. d. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 7 e. The provisions of this Agreement are severable, and if any one or more provisions are determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. f. This Agreement and all obligations and benefits of you and the Company hereunder shall bind and inure to the benefit of you and the Company and your and the Company's respective affiliates, successors and assigns; provided, however, you shall not be entitled to assign any of your obligations under this Agreement and the Company's right to assign this Agreement is subject to the provisions of Section 8 hereof. g. No amendment or waiver of any term or provision of this Agreement shall be effective unless made in writing. Any written amendment or waiver shall be effective only in the instance given and then only with respect to the specific term or provision (or portion thereof) of this Agreement to which it expressly relates, and shall not be deemed or construed to constitute a waiver of any other term or provision (or portion thereof) waived in any other instance. h. This Agreement has been made and entered into in the State of California and shall be construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof. i. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. j. You have read this Agreement, fully understand its contents and terms, and have had the opportunity to ask the Company about any questions, concerns or issues you may have in connection with the Agreement or the terms of the Agreement. You also have had the opportunity, and taken it to the extent you choose, to consult legal counsel or any other advisers of your choice in connection with this Agreement. Very truly yours, IWERKS ENTERTAINMENT, INC. By:____________________________________ Charles Goldwater Chief Executive Officer AGREED: _________________________________ Dan Griesmer 8 EX-11.1 3 EARNINGS PER SHARE EXHIBIT 11.1 IWERKS ENTERTAINMENT, INC. EARNINGS PER SHARE (in thousands, except per share amounts)
For the Three Months Ended For the Nine Months Ended March 31, March 31, 1998 1997 1998 1997 ----------------- ------------------ ----------------- -------------------- Denominator for Basic Earnings per Share - Weighted average shares outstanding 12,199 11,918 12,173 11,756 Effect of dilutive securities: Options and warrants - 256 - 525 ----------------- ------------------ ----------------- -------------------- Denominator for Diluted Earnings per Share 12,199 12,174 12,173 12,281 ================= ================== ================= ==================== Net income (loss) $(5,077) $ 270 $(9,083) $ 387 ================= ================== ================= ==================== Basic and diluted income (loss) per share $ (0.42) $ 0.02 $ (0.75) $ 0.03 ================= ================== ================= ====================
EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-30-1998 JUL-01-1997 MAR-31-1998 6,614 7,558 5,045 (1,907) 3,445 24,294 40,230 (27,580) 54,948 14,323 1,322 0 0 78,073 (38,770) 54,948 18,524 19,234 14,152 14,152 13,972 1,198 193 (9,083) 0 (9,083) 0 0 0 (9,083) (0.75) (0.75) Includes Costs and estimated earnings in excess of billings on uncompleted contracts of $2,829 and other current assets of $710. Includes portable simulation theaters and film inventory. Includes portable simulation theaters and film inventory. Includes the non-current portions of capital losses. Accumulated deficit. Includes interest income of $710.
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