-----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, MnYrHdsllSd5312pcc7flslB57T3vKL6yLFfA1v+4FZ68eq5Dne7tVvJXNgJAmOU qcx123tITHjX1hgA/XoNRg== 0001011438-00-000179.txt : 20000215 0001011438-00-000179.hdr.sgml : 20000215 ACCESSION NUMBER: 0001011438-00-000179 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000211 FILED AS OF DATE: 20000214 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: 544176 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934. For the quarterly period ended: December 31, 1999 or [ ] 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 of (I.R.S. Employer incorporation or organization) Identification Number 4540 West Valerio Street Burbank, California 91505-1046 (Address of principal executive offices) (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 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 ______. The number of shares outstanding of the registrant's Common Stock, $0.001 par value, at February 11, 2000 was 3,541,001 shares. IWERKS ENTERTAINMENT, INC. INDEX
PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements Condensed Consolidated Balance Sheets as of December 31, 1999 3-4 and June 30, 1999 Condensed Consolidated Statements of Operations for the Three and Six Months ended December 31, 1999 and 1998 5 Condensed Consolidated Statements of Cash Flows for the Six Months ended December 31, 1999 and 1998 6 Notes to the Condensed Consolidated Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-18 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20
Page 2 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (IN THOUSANDS)
December 31, June 30, 1999 1999 (Unaudited) (Audited) ------------ ----------- Current Assets: $ 1,746 $ 4,217 Cash and cash equivalents (Note 2) -- 2,500 Short-term investments 4,843 5,619 Accounts receivable, net of allowance for doubtful accounts Costs and estimated earnings in excess of billings on uncompleted contracts 2,216 1,495 Assets held for sale, current 1,655 -- Inventories and other current assets 5,358 5,555 ------------ ----------- Total current assets 15,818 19,386 Portable simulation theatres at cost, net of accumulated depreciation -- 2,783 Property and equipment at cost, net of accumulated depreciation 5,832 5,626 Film inventory at cost, net of accumulated amortization 4,736 4,861 Goodwill, net of accumulated amortization 13,803 14,115 Investments in joint ventures and other assets 4,341 3,997 Assets held for sale, net of current portion 967 -- ------------ ----------- Total Assets $ 45,497 $ 50,768 ============ =========== See accompanying notes.
Page 3 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, June 30, 1999 1999 (Unaudited) (Audited) ------------ ----------- Current Liabilities: Accounts payable $ 4,508 3,244 Accrued liabilities 5,997 6,115 Notes payable, current portion 706 737 Billings in excess of costs and estimated earnings on uncompleted contracts 4,305 7,008 Deferred revenue 65 10 Capital lease obligations, current portion 696 792 ------------ ----------- Total current liabilities 16,277 17,906 Notes payable, net of current portion 648 797 Capital lease obligations, net of current portion -- 290 Stockholders' equity: Preferred stock, $0.001 par value, 1,000,000 authorized, none issued and outstanding -- -- Common stock, $0.001 par value, 50,000,000 shares authorized; 3,540,437 and 3,539,856 issued and outstanding 57 57 Additional paid-in capital 78,084 78,084 Treasury Stock, 91,600 shares at cost (341) (341) Common stock warrants 250 -- Accumulated deficit (49,478) (46,025) ------------ ----------- Total stockholders' equity 28,572 31,775 ------------ ----------- Total liabilities and stockholders' equity $ 45,497 $ 50,768 ============ =========== See accompanying notes.
Page 4 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Six Months Ended December 31 December 31 ------------------ ------------------ 1999 1998 1999 1998 Revenue $ 9,159 $ 8,649 $ 16,768 $ 16,022 Cost of sales 7,903 6,146 14,268 11,524 ---------- ---------- ---------- ---------- Gross profit 1,256 2,503 2,500 4,498 Selling, General and Administrative expenses 3,176 3,388 5,951 6,438 ---------- ---------- ---------- ---------- Loss from operations (1,920) (885) (3,451) (1,940) Interest income 91 105 149 216 Interest expense (54) (41) (152) (87) ---------- ---------- ---------- ---------- Net loss $ (1,883) $ (821) $ (3,454) $ 1,811) ========== ========== ========== ========== Net loss per common share-basic and diluted $ (0.55) $ (0.23) $ (1.00) $ (0.51) ========== ========== ========== ========== Weighted average shares outstanding-basic and diluted 3,449 3,547 3,448 3,530 ========== ========== ========== ========== See accompanying notes.
Page 5 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
For the six months ended December 31, -------------------------------- 1999 1998 ------------ ----------- OPERATING ACTIVITIES Net loss $ (3,454) $ (1,811) Depreciation and amortization 1,728 2,136 Changes in operating assets and liabilities (1,673) 1,627 ------------ ----------- Net cash (used in) provided by operating activities (3,399) 1,952 INVESTING ACTIVITIES Investments in joint ventures -- (701) Purchases of property, plant and equipment (575) (1,107) Additions to film inventory (430) (982) Proceed from sales of debt securities 2,500 2,922 ------------ ----------- Net cash provided by investing activities 1,495 132 FINANCING ACTIVITIES Restricted cash (780) -- Principal payments on long-term debt (180) -- Payments on capital leases (385) (391) Proceeds from issuance of common stock warrants 250 -- Deferred financing fees (252) -- Net proceeds on exercise of stock options -- 88 ------------ ----------- Net cash used in financing activities (1,347) (303) ------------ ----------- Net (decrease) increase in cash and cash equivalents (3,251) 1,781 Cash and cash equivalents at beginning of period 4,217 7,542 ------------ ----------- Cash and cash equivalents at end of period, net of restricted cash $ 966 $ 9,323 ============ =========== Supplemental disclosures Interest paid during the period $ 127 $ 90 ============ =========== Income taxes paid during the period $ 10 $ 13 ============ =========== See accompanying notes.
Page 6 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 the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of the Company as of December 31, 1999 and the results of its operations for the three and six months ended December 31, 1999 and 1998 and the cash flows for the six months ended December 31, 1999 and 1998 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 as filed with the SEC. NOTE 2 - RESTRICTED CASH Included in the December 31, 1999 cash and cash equivalents balance is $780,000 of cash received from one customer which is restricted as to its use. This restriction will remain in effect until the Company reaches a certain milestone related to the completion of the project. The milestone is expected to be reached by the first quarter of fiscal 2001 at which time this cash will become available for Company use. NOTE 3 - ASSETS HELD FOR SALE On September 30, 1999 the Company decided to sell the assets relating to the Touring Division. These assets are described as the portable motion theatres and are reflected at cost, net of accumulated depreciation which is less than management's estimate of their net realizable value. NOTE 4 - ISSUANCE OF WARRANTS On September 9, 1999 the Company appointed two new outside members to its Board of Directors bringing the number of outside Directors to eight. Peter Guber, co-founder of Mandalay Entertainment Group was appointed Chairman of the Board of Directors and Paul Schaeffer, co-founder of Mandalay entertainment Group was appointed Vice Chairman of the Board of Directors. The two new members purchased warrants to purchase an aggregate 442,857 shares of Iwerks common stock. The warrants were issued in four tranches of equal amounts ranging in a per share price of $5.01 to $10.50. Page 7 All shares and per share prices have been retroactively restated to reflect the reverse stock split approved by the Company's stockholders in January, 2000 (see note 6). Certain restrictions apply to the exercise of these warrants which have a life of five years. NOTE 5 - 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 Ended Six Months Ended December 31 December 31 ------------------ ------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ---------- Depreciation on fixed assets $ 322,000 $ 416,000 $ 649,000 $ 728,000 Depreciation on touring equipment -- 160,000 161,000 320,000 Amortization of film 373,000 284,000 556,000 726,000 Amortization of goodwill and other 181,000 181,000 362,000 362,000 ----------- ----------- ----------- ---------- Total depreciation and amortization $876,000 $1,041,000 $1,728,000 $2,136,000 =========== =========== =========== ===========
Depreciation and amortization included in cost of sales was $377,000 and $451,000 for the three months ended December 31, 1999 and 1998, respectively, and $723,000 and $1,060,000 for the six months ended December 31, 1999 and 1998, respectively. NOTE 6 - NET LOSS PER COMMON SHARE For the three and six months ended December 31, 1999 and 1998, the basic and diluted per share data is based on the weighted average number of common shares outstanding during the period. Common equivalent shares, consisting of outstanding stock options and warrants, are not included in the diluted loss per share calculation since they are antidilutive. During the six months ended December 31, 1999, 286 shares of common stock were issued as a result of exercises of stock options. On January 13, 2000, the Company's stockholders approved an amendment to the Company's certificate of incorporation to effect a one for three and one-half reverse stock split with no change in par values, effective for stockholders of record on November 12, 1999. The reverse stock split was effective January 18, 2000. All references to per share amounts and shares outstanding included herein have been retroactively restated to reflect the stock split. NOTE 7 - INCOME TAXES At December 31, 1999, the Company had available federal and state tax net operating loss carryforwards of approximately $31,200,000 and $14,800,000, respectively. The federal and state net operating loss carryforwards expire, in varying amounts, through 2018. Page 8 As a result of these net operating loss carryforwards 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. NOTE 8 - LITIGATION The proceedings to which the Company is a defendant consist of ordinary routine litigation in the course of business. In the opinion of management, based in part upon the advice of outside counsel, resolution of these matters will not have a material adverse impact on the Company's consolidated financial position or results of operations. NOTE 9 - SUBSEQUENT EVENTS On January 18, 2000 Peter Guber, and Paul Schaeffer, co-founders of Mandalay Entertainment Group resigned their position as Chairman and Vice Chairman of the Board of Directors of Iwerks Entertainment, Inc. On February 7, 2000 Charles Goldwater resigned as the Chief Executive Officer and Director of Iwerks Entertainment, Inc. Don Iwerks, the company's co-founder, has been named by the Board of Directors as the company's Chairman and interim Chief Executive Officer. Page 9 IWERKS ENTERTAINMENT, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION This Report contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. The words "expect", "estimate", "anticipate", "predict", "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of Iwerks, its directors or officers with respect to, among other things (a) trends affecting the financial condition or results of operations of Iwerks and (b) the business and growth strategies of Iwerks. The stockholders of Iwerks are cautioned not to put undue reliance on such forward looking statements. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in this Report, for the reasons, among others, discussed in the Sections - "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Future Operating Results". Iwerks undertakes no obligation to publicly revise these forward looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Annual Report on form 10-K filed by the Company on September 28, 1999, the Quarterly Reports on Form 10-Q to be filed by the Company in calendar years 1999 and 2000 and any Current Reports on Form 8-K filed by the Company. RESULTS OF OPERATIONS HARDWARE SALES AND SERVICE Revenues on sales of theatre systems are recognized on the percentage-of-completion method over the life of the contract. The gross margin for each contract varies based upon pricing strategies, competitive conditions and product mix. OWNED AND OPERATED 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 venture revenues 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 revenues for the portable theatres are recognized ratably over the term of the contract. On September 30, 1999 the Company made the determination to shut down the Touring division and sell the related assets in an effort to concentrate on its core business. Page 10 FILM LICENSING Revenues and related expenses are recognized at the beginning of the license period at which time the customer is billed the license fee and the film is delivered to the customer. FILM PRODUCTION AND OTHER Revenue from film production and other is generated primarily through the leasing of camera equipment, the rental of post production facilities, and the production of films for third parties. The following table presents summary information regarding revenues (amounts in thousands):
Periods Ended December 31, Three Months Six Months ------------------ ------------------ 1999 1998 1999 1998 --------- ----------- ----------- ---------- Hardware Sales & Service $ 5,588 $ 6,174 $ 10,348 $ 9,432 Owned and Operated 728 908 1,833 3,101 Film Licensing 1,709 1,392 2,636 3,105 Film Production and Other 1,134 175 1,951 384 --------- ----------- ----------- ---------- Total $ 9,159 $ 8,649 $ 16,768 $ 16,022 ========= =========== =========== ===========
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1998. For the three months ended December 31, 1999 the Company recorded revenues of approximately $9,159,000 compared to approximately $8,649,000 for the same period last year. For the three months ended December 31, 1999, the Company recorded a net loss of approximately $1,883,000 or $.55 per share compared to a net loss of approximately $821,000 or $.23 per share for the same period last year. REVENUES Revenue for the three months ended December 31, 1999 increased approximately $0.5 million or 6% compared to the three months ended December 31, 1998. Hardware sales and service decreased by approximately $586,000 or 9% from the prior fiscal year. During the quarter ended December 31, 1999, hardware sales recognized in the Asia-Pacific region increased by approximately $112,000, hardware sales recognized in the South America region increased by approximately $730,000, hardware sales recognized in Europe and the Middle East increased by approximately $58,000 while hardware sales recognized in the North American region decreased by approximately $1.6 million. Revenue generated from Customer Service was $117,000 greater in the three months ended December 31, 1999 than the three months ended December 31, 1998. Page 11 Owned and Operated revenue decreased by approximately $180,000 as compared to the same period last year, primarily due to declining sales at joint venture locations and the September 30, 1999 shut down of the touring division. Revenues generated from the touring division were approximately $441,000 during the quarter ended December 31, 1999 compared to $539,000 during the quarter ended December 31, 1998. Film Licensing revenues for the quarter ended December 31, 1999 increased by approximately $317,000 or 23% compared to the same period last year. These results were due to the increase in new venues signed this year as compared to the prior year. Film Production and other revenue increased by approximately $959,000 due to the Company securing one major film production deal and concluding two others during the quarter ended December 31, 1999. There were no major film productions during the quarter ended December 31, 1998. COST OF SALES Cost of sales primarily includes costs of theatre systems sold, expenses associated with operating portable ride simulation theatres, and costs associated with film production and licensing fees. The cost of theatre systems include the cost of components, customization, engineering, project management, assembly, system integration and installation. Also included in cost of sales are royalties payable to a former joint venture partner and estimated warranty expenses. The costs associated with film license fees primarily reflect amortization of film production costs over the lives of certain films and royalties paid to third parties. The cost of sales associated with operating portable ride simulation theatres include costs for personnel, event fees, fuel, insurance and maintenance. Cost of sales as a percentage of sales was 86% for the three months ended December 31, 1999 as compared to 71% for the three months ended December 31, 1998. The increase is primarily due to increased film production projects which typically have higher cost of sales percentages and an increase in the cost of hardware sales due to unexpected cost overruns during the installation phase of certain projects. 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 were relatively constant at approximately $3.2 million, which represented 35% of revenue and $3.4 million, which represented 39% of revenue, for the three months ended December 31, 1999 and 1998, respectively. Page 12 INTEREST INCOME & EXPENSE Interest income for the three months ended December 31, 1999 and 1998 was approximately $91,000 and $105,000, respectively. The decrease resulted primarily from a reduction in the invested cash balances during the three months ended December 31, 1999 compared to the comparable period in the prior year. Interest expense for the three months ended December 31, 1999 and 1998 was approximately $54,000 and $41,000, respectively. The increase relates to a note payable recorded in the quarter ended June 30, 1999. NET LOSS The Company recorded a net loss of approximately $1.9 million in the quarter ended December 31, 1999, compared to a net loss of approximately $0.8 million in the quarter ended December 31, 1998 due to the reasons mentioned above. SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1998. For the six months ended December 31, 1999 the Company recorded revenues of approximately $16.8 million compared to approximately $16.0 million for the same period last year. For the six months ended December 31, 1999, the Company recorded a net loss of approximately $3.4 million or $1.00 per share compared to a net loss of approximately $1.8 million or $.51 per share for the same period last year. REVENUES Hardware sales and service increased by approximately $916,000 or 10% from the prior fiscal year. During the six months ended December 31, 1999, hardware sales recognized in the Asia-Pacific region increased by approximately $1.1 million, hardware sales recognized in the South America region increased by approximately $1.0 million, hardware sales recognized in Europe and the Middle East increased by approximately $1.45 million while hardware sales recognized in the North American region decreased by approximately $2.9 million. In addition, revenue generated from Customer Service was $281,000 greater in the six months ended December 31, 1999 than the six months ended December 31, 1998. Owned and Operated revenue decreased by approximately $1.3 million as compared to the same period last year, primarily due to declining sales in the touring division. The Company has made the determination to shut down the touring division and sell the related assets in an effort to concentrate on its core business. Revenues generated from the touring division were approximately $1.2 million during the six months ended December 31, 1999 compared to $2.3 million during the six months ended December 31, 1998. Revenue from the joint venture venues decreased by approximately $140,000. This was primarily due to lower attendance at the joint venture locations. Film Licensing revenues for the six months ended December 31, 1999 decreased by approximately $469,000 or 15% compared to the same period last year. These results were due to an increased number of multi-year agreements signed during the first three months of fiscal 1999. There were no such deals during the first three months of fiscal 2000. Page 13 Film Production and other revenue increased by approximately $1.6 million. This was primarily due to the Company securing one major film production deal and concluding two others during the six months ended December 31, 1999 compared to no such deals during the six months ended December 31, 1998. COST OF SALES Cost of sales primarily includes costs of theatre systems sold, expenses associated with operating portable ride simulation theatres, and costs associated with film production and licensing fees. The cost of theatre systems include the cost of components, customization, engineering, project management, assembly, system integration and installation. Also included in cost of sales are royalties payable to a former joint venture partner and estimated warranty expenses. The costs associated with film license fees primarily reflect amortization of film production costs over the lives of certain films and royalties paid to third parties. The cost of sales associated with operating portable ride simulation theatres include costs for personnel, event fees, fuel, insurance and maintenance. Cost of sales as a percentage of sales was 85% for the six months ended December 31, 1999 as compared to 72% for the six months ended December 31, 1998. The primary reason for the increase compared with the comparable period in 1998, as a percentage of sales, was primarily due to a significant decline in revenues attributable to the touring operations, while costs remained relatively stable. In addition, an increase in the cost of hardware sales was primarily due to unexpected cost overruns during the installation phase of certain projects. Additionally, an increase in film production revenues, which typically have higher cost of sales, adversely affected the overall cost of sales percentage. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased to approximately $6.0 million, which represented 36% of revenue, for the six months ended December 31, 1999 compared to $6.4 million, which represented 40% of revenue for the six months ended December 31, 1998, respectively. This decrease was primarily due to a tax refund of approximately $200,000 received in October of 1999 relating to a prior period as well as an increased effort in expense management. INTEREST INCOME & EXPENSE Interest income for the six months ended December 31, 1999 and 1998 was approximately $149,000 and $216,000, respectively. The decrease resulted primarily from the reduction in the invested cash balances. Interest expense for the six months ended December 31, 1999 and 1998 was approximately $152,000 and $87,000, respectively. The increase was due to a note payable recorded in June 30, 1999. Page 14 NET LOSS The Company recorded a net loss of approximately $3.5 million in the six months ended December 31, 1999, compared to a net loss of approximately $1.8 million in the six months ended December 31, 1998 due to the reasons mentioned above. YEAR 2000 READINESS - UPDATE The Company has substantially completed its Year 2000 compliance program. (Readers should refer to the Company's Annual Report on Form 10-K for a more complete discussion of the Company's Year 2000 Readiness program) The Company is on schedule with completion of the remaining open items of its Year 2000 readiness plan. The failure to identify and correct a Y2K problem could result in an interruption in , or failure of , certain normal business activities or operations. However, the Company does not expect such failures to have a materially adverse effect on its results of operations or financial condition. It is not presently possible to describe a reasonably likely "worst case Year 2000 scenario" without making numerous assumptions. The Company presently believes that a most likely worst case scenario would make it necessary for the Company to replace some suppliers or contractors, rearrange some plans, or interrupt some office and field activities. Assuming this scenario is correct, there could be a materially adverse effect on its financial condition or the results of operations, even if additional costs to correct unanticipated compliance failures are incurred. No such compliance failures have been experienced to date. 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 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. In addition, the Company's ability to compete effectively in the market is hampered by restrictions placed on its operations as a result of its limited cash resources. The Company and its principal competitor in the giant screen market, Imax Corporation, are aggressively competing, particularly in the United States market, for new 15 perforation, 70 millimeter format (15/70) theatre installations. Page 15 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 base of installed theatres. 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 in this market. However, the Company believes there is potential and is pursuing the 8 perforation, 70 millimeter (8/70) format theatre market in addition to its 15/70 sales efforts. Imax does not offer an 8/70 product. In addition to competition in the giant screen market, the Company faces competition in the simulation industry from Showscan Entertainment and a 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. The Company recognizes these competitive issues and is in the process of creating new products, such as developing a 3D/4D FX TM speciality attraction system which include multiple sensory effects and the development of a new generation of smaller ride simulation configurations that can accommodate the potential opportunity in the mass retail environment and movie theatres. The Company has already made one sale of its new 3D/4D FX TM theatre system in China which will open in the third quarter of fiscal 2000. There can be no assurance that these new products will be developed, and if developed, that the Company will have the financial resources to appropriately market them to its full advantage or that they will be commercially accepted. Ultimately, the success of the Company in this market will be dependent upon its ability to produce and distribute new film product and continue to improve and technologically enhance its hardware products. Currently, the Company has had to restrict expenditures in these areas pending receipt of new financing. Revenues from the Company's owned and operated attractions (primarily portable simulation theatres) have been declining since the first quarter of fiscal 1998 when the Company lost its principal sponsorship contract. The Company is aggressively pursuing the sale of its touring division. 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 theatre system deliveries, contract signing, sponsorships, the mix of theatre systems shipped, the completion of custom film contracts, the existence of world expos, the amount of revenues from portable simulation theatre 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, and 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. Page 16 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 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. Iwerks may also choose to reduce prices or increase spending in response to market conditions, which may have a material adverse effect on Iwerks' results of operations. 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. In order to preserve cash, the Company has been required to reduce expenditures for capital projects (including new films) and research and development, and is considering further reductions in its corporate infrastructure, any of which may have a material adverse affect on the Company's future operations. Further reductions in its cash balances could require the Company to make more significant cuts in its operations which would have a material adverse impact on its future operations. There can be no assurance that the Company could achieve these reductions over a short enough period of time in order to allow it to continue as a going concern. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had cash and cash equivalents of approximately $1.7 million of which $0.8 was restricted from use by the Company due to it being held as collateral for a standby letter of credit on a hardware project. At that date, the Company had accounts payable of $4.5 million and accrued liabilities and notes payable of $6.7 million. Total negative working capital was $0.4. The Company has been unable to pay all of its trade creditors in accordance with their terms and some of its creditors have refused to provide further product or services except on a C.O.D. basis. Because of the substantial, unanticipated reduction in the Company's cash balances over the last nine months, and contractual restrictions on the use of some of its cash balances, the Company may not be able to continue operations at its current levels. The Company is dependent upon current cash collections to meet its operating needs and pay its current liabilities. The Company has experienced significant difficulty in accurately projecting its cash balances historically. The Company's cash flow is dependent on the timing of delivery of hardware systems, collections and the signing of new contracts, all of which are difficult to predict with accuracy. Further complicating its ability to project cash balances is that the timing of progress payments of the hardware projects are dependent upon achieving certain performance milestones under its hardware sales agreements. In addition, progress payments on some of the Company's hardware sales agreements are not sufficient to provide for the cost of assembly and delivery of the systems, requiring the Company to fund the cash cost of performing on the agreements. The Company has made the determination to sell its touring units which would generate cash and is considering a number of other options to improve the financial condition of the Company. Page 17 There can be no assurance that any of these assets will be sold. The Company is also aggressively seeking additional debt or equity financing. However, recent operating losses, the Company's declining cash balances, the Company's historical stock performance, and a general decrease in investor interest in the Company's industry, may make it difficult for the Company to attract equity investments or debt financing on terms that are deemed to be favorable to the Company. The Company has been aggressively seeking additional equity or debt financing for more than the last six months and to date has been unsuccessful in attracting new financing. In order to preserve cash, the Company has been required to reduce expenditures for capital projects (including new films) and research and development, and is considering further reductions in its corporate infrastructure, any of which may have a material adverse affect on the Company's future operations. Further reductions in its cash balances could require the Company to make more significant cuts in its operations which would have a material adverse impact on its future operations. There can be no assurance that the Company could achieve these reductions over a short enough period of time in order to allow it to continue as a going concern. On February 7, 2000, the Company was notified that NASDAQ has determined the Company did not maintain the continuing listing requirements for the national market. As a result, the Company intends to apply for listing its common stock on the NASDAQ Smallcap Market. The move from the National Market to the Smallcap Market could adversely effect the Company's ability to raise additional capital. Page 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. A. EXHIBITS: i) Exhibit 27.1 Financial Data Schedule B. REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED SEPTEMBER 30, 1999: NONE Page 19 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 12th day of November, 1999. IWERKS ENTERTAINMENT, INC. (Registrant) By: /S/ JEFFREY M. DAHL ------------------------- Senior Vice President Chief Financial Officer (Principal Finance Officer) By: /S/ BRUCE E. PALMORE ------------------------- Vice President / Controller (Principal Accounting Officer) DATE: NOVEMBER 12, 1999 Page 20 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (AMOUNTS IN THOUSANDS) 6-MOS JUN-30-2000 JUL-1-1999 DEC-31-1999 1,746 0 4,843 (2,162) 4,380 15,818 37,834 27,266 45,497 16,277 0 0 0 78,391 49,478 45,497 16,768 16,917 14,268 14,268 5,951 365 152 (3,454) 0 (3,454) 0 0 0 (3,454) (1.00) (1.00) Includes Costs and estimated earnings in excess of billings on uncompleted contracts of $2,216, assets held for sale of $1,655 and other current assets of $978. Includes film inventory of $22,755. Includes film inventory of $18,019. Includes long-term portion of assets held for sale of $967. Includes interest income of $149.
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