-----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, GSTcXr0Jn40t0lLHrq1MNFK0nl7CyaQHUWz0zSdxD1LWQzOo4XGocWNCbPNA0z7c hiKxPfmjrdPekL/Nj8gu0w== 0001011438-98-000060.txt : 19980224 0001011438-98-000060.hdr.sgml : 19980224 ACCESSION NUMBER: 0001011438-98-000060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980223 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: 98547523 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 =========================================================================== 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 December 31, 1997 [ ] 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 February 5, 1998, the Registrant had 12,161,250 shares of Common Stock, $.001 par value, issued and outstanding. =========================================================================== IWERKS ENTERTAINMENT, INC. Form 10-Q for the Quarter and Six Months Ended December 31, 1997 INDEX PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS - ----------------------------- Condensed Consolidated Balance Sheets as of December 31, 1997 and June 30, 1997 2 Condensed Consolidated Balance Sheets Liabilities and Stockholders' Equity as of December 31, 1997 and June 30, 1997 3 Condensed Consolidated Statements of Operations for the Three and Six Months ended December 31, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1997 and 1996 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 6 - EXHIBITS AND REPORTS ON FORM 8-K 17 - ------------------------------------------ Signatures 18 Page 1 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (IN THOUSANDS)
Current assets: Cash and cash equivalents $ 3,662 $ 3,608 Short-term investments 13,718 15,459 Trade accounts receivable, net of allowance for doubtful accounts 3,040 5,447 Costs and estimated earnings in excess of billings on uncompleted contracts 2,738 6,339 Inventories and other current assets 3,899 4,402 --------- ---------- Total Current Assets 27,057 35,255 Portable simulation theaters at cost, net of accumulated depreciation 3,711 4,018 Property and equipment at cost, net of accumulated depreciation 3,871 2,920 Film inventory at cost, net of amortization 4,972 3,439 Goodwill, net of amortization 15,054 15,367 Investment in joint ventures and other assets 3,185 3,530 --------- --------- Total assets $ 57,850 $ 64,529 ========= =========
See accompanying notes Page 2 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, June 30, 1997 1997 ----------- --------- (unaudited) (audited) Current liabilities: Accounts payable $ 2,164 $ 3,435 Accrued expenses 6,419 8,793 Notes payable, current portion -- 81 Billings in excess of costs and estimated earnings on uncompleted contracts 2,507 990 Deferred revenue 176 278 Capital leases, current portion 693 739 ---------- --------- Total current liabilities 11,959 14,316 Capital lease obligations, excluding current portion 1,511 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 authorized; issued and outstanding 12,161,250 and 12,160,102, respectively 57 57 Additional paid-in capital 78,016 78,016 Accumulated deficit (33,693) (29,687) ---------- --------- Total stockholders' equity 44,380 48,386 ---------- --------- Total liabilities and stockholders' equity $ 57,850 $ 64,529 ========== =========
See accompanying notes. Page 3 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (In Thousands, Except Per Share Amounts)
For the Three Months For the Six Months Ended December 31, Ended December 31, --------------------- ------------------- 1997 1996 1997 1996 --------- ------- ------- ------- Revenue $5,989 $10,023 $14,041 $19,618 Cost of sales 5,168 6,955 9,957 13,192 ------- ------- ------- ------- Gross profit 821 3,068 4,084 6,426 Selling, general, and administrative expenses 4,311 3,322 7,916 6,703 Merger related expenses (note 6) 218 - 531 - ------- ------ ------ ------ Loss from operations (3,708) (254) (4,363) (277) Interest income 272 296 491 610 Interest expense 64 99 134 216 ------- ------ ------ ------- Net income (loss) $(3,500) $(57) $(4,006) $117 ======= ====== ======= ======= Basic and diluted income (loss) per common share (note 4) $(0.29) $0.00 $ (0.33) $0.01 ====== ====== ======= ======= Weighted average shares outstanding - Basic 12,161 11,715 12,160 11,675 ======= ====== ======= ======= Weighted average shares outstanding - Diluted 12,161 11,715 12,160 12,335 ======= ====== ======= =======
See accompanying notes. Page 4 IWERKS ENTERTAINMENT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
For the six months ended December 31, ---------------------- 1997 1996 -------- -------- Operating Activities Net income (loss) $ (4,006) $ 117 Depreciation and amortization 2,259 2,810 Changes in operating assets and liabilities 4,673 (2,855) ---------- ---------- Net cash provided by operating activities 2,926 72 ---------- ---------- Investing Activities Investment in joint ventures (208) (673) Investment in portable simulation theaters (45) (108) Purchases of property and equipment (1,399) (365) Additions to film inventory (2,518) (698) Investment in debt securities 1,741 (3,056) --------- --------- Net cash used in investing activities (2,429) (4,900) Financing Activities Repayment of notes payable (81) (1,188) Payments on capital leases (362) (304) Exercise of stock options - 312 --------- --------- Net cash used in financing activities (443) (1,180) --------- --------- Net increase (decrease) in cash 54 (6,008) Cash and cash equivalents at beginning of period 3,608 12,674 --------- --------- Cash and cash equivalents at end of period $ 3,662 $ 6,666 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 131 $ 233 ========= ========= Cash paid during the period for income taxes $ 8 $ -- ========= =========
See accompanying notes. Page 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, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of December 31, 1997 and the results of its operations for the three and six months ended December 31, 1997 and 1996 and the cash flows for the six months ended December 31, 1997 and 1996 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 - INCOME TAXES - --------------------- At June 30, 1997, the Company had available federal and state tax net operating loss carryforwards of approximately $18,650,000 and $7,720,000, 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. Page 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 Ended Six Months Ended December 31, December 31, ----------------------- --------------------- 1997 1996 1997 1996 --------- --------- -------- -------- Depreciation and amortization on fixed assets $ 230,000 $ 294,000 $ 448,000 $ 574,000 Depreciation on touring equipment 184,000 373,000 352,000 740,000 Amortization of film 367,000 449,000 985,000 1,033,000 Amortization of goodwill and other 227,000 232,000 474,000 463,000 ----------- ----------- ----------- ----------- Total depreciation and amortization $ 1,008,000 $ 1,348,000 $ 2,259,000 $ 2,810,000 =========== =========== =========== ===========
Depreciation and amortization included in cost of sales was $561,000 and $836,000 for the quarter ended December 31, 1997 and 1996, respectively, and $1,356,000 and $1,800,000 for the six months ended December 31, 1997 and 1996, respectively. NOTE 4 - NET (LOSS) INCOME 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 - ------------------- On or about February 5, 1998, the Company received notice of a complaint filed in the US District Court of New York by a subsidiary of IMAX Corporation alleging that the pending merger with Showscan Entertainment, Inc. is in violation of the Sherman and Clayton Anti-trust Acts. The Company believes that the suit is without merit and intends to vigorously defend itself. There are no other 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. Page 7 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. This agreement was amended December 29, 1997. The amended merger agreement calls for each share of Showscan Common Stock to be converted into 0.62 of a share of Iwerks' Common Stock. Outstanding Showscan Preferred Stock will be exchanged for Iwerks' Common Stock at the 0.62 ratio on an as converted basis. Iwerks expects to issue approximately 4.0 million shares of Iwerks' Common Stock in the merger (plus shares issuable upon exercise of outstanding Showscan options, warrants and 8% Convertible Notes) resulting in an estimated transaction value of approximately $10.0 million at February 9, 1998 (based on closing price of Iwerks' Common Stock on the NASDAQ National Market of $2.50 per share). The transaction will be accounted for as a pooling of interests, after which Showscan will become a wholly owned subsidiary of the Company. Under the pooling rules, the costs incurred in consummating the merger are expensed as incurred, as such the Company has expensed $218,000 and $531,000 for the three and six months ended December 31, 1997, respectively. Further, if the merger is consummated, the Company expects to incur an additional $5.8 million in expenses related to investment banking, legal, accounting, printing, severance, estimated cost to sublease Showscan's current facility, relocation costs, write-offs associated with equipment which the combined company will not utilize, and other expenses, some of which will be incurred even if the merger is not consummated. Completion of the Merger is subject to approval by the stockholders of the Company and Showscan, as well as other customary closing conditions. If shareholder approval is not obtained or other closing conditions are not satisfied or if the parties mutually agree to terminate or modify the terms of the merger agreement, the transaction may not be consummated pursuant to the existing terms of the merger agreement, or at all. The stockholders meetings are expected to occur in March, 1998. NOTE 7 - 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. Page 8 Note 8 - Subsequent Events - -------------------------- In January 1998, the Company reduced its workforce by approximately 13% after which the Company has approximately 131 employees. In an unrelated event, on February 20, 1998, Charles Goldwater was appointed Chief Executive Officer, President and Chairman of the Board, succeeding Roy A. Wright. The Company anticipates accruing approximately $1.7 million in third quarter of fiscal 1998 for severance and related expense with respect to the foregoing. 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. 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):
Periods Ended December 31, Three Months Six Months ----------------- ---------------- 1997 1996 1997 1996 ------ ------ ------ ------ Hardware Sales & Service $ 3,620 $ 7,366 $ 7,092 $ 12,358 Owned and Operated 860 1,278 4,040 4,547 Film Licensing 1,415 1,277 2,759 2,506 Film Production and Other 94 102 150 207 ------- -------- -------- --------- Total $ 5,989 $ 10,023 $ 14,041 $ 19,618 ======= ========= ======== =========
Page 9 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 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 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 DECEMBER 31, 1997 TO THREE MONTHS ENDED DECEMBER 31, 1996 REVENUES Hardware sales and service revenue decreased by approximately $3.7 million as compared to the same period last year. Sales recognized from Asian customers decreased by approximately $3.8 million as compared to the prior year. The Company has experienced a decline in the signing of new sales contracts in Asia, which adversely impacted simulation hardware revenue in the second quarter of fiscal 1998 and will have a negative impact on sales in future periods. Management believes this decline is primarily due to the Asian economic crisis. Typically, sales are denominated in U.S. dollars and are backed by letters of credit, which reduce the risks attendant to international sales. Owned and operated revenue decreased by approximately $418,000 as compared to the same period last year, primarily due to a reduction in sponsorship revenue relating to the portable simulation theatres. The Company expects the lower touring sponsorship sales trends to continue to adversely affect results for the remainder of fiscal 1998 and may continue into future periods. The Company continues to actively seek alternatives to increase the utilization of the 16 touring ride simulators. Film licensing revenue increased by 10.8% 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 three months ended December 31, 1997 and 1996 were 13.7% and 30.6%, respectively. The decrease in gross profit margin in the 1997 quarter compared to the same quarter in 1996 is primarily related Page 10 to the portable simulation theatre business. This business segment has significant fixed cost of sales regardless of revenue fluctuations. Therefore, as sales decreased, due to a decline of sponsorship revenue, and costs of sales remained relatively constant, the gross margin was negatively impacted. 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 relations 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 December 31, 1997 by approximately $989,000 over the same period in the prior year. This increase was primarily due to increased research and development efforts, additional bad debt expense, higher insurance costs and additional marketing expenses. INTEREST INCOME AND EXPENSE Interest income for the three months ended December 31,1997 and 1996 was $272,000 and $296,000, respectively, and is derived from the Company's investments, primarily in U.S. Treasury Notes. The decrease in interest income resulted primarily from the decrease in the invested balances in the comparable periods. COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 TO SIX MONTHS ENDED DECEMBER 31, 1996 REVENUES Hardware sales and service revenue decreased by approximately $5.3 million as compared to the same period last year. Sales recognized from Asian customers decreased by approximately $5.4 million as compared to the same period in the prior year. The Company has experienced a decline in the signing of new sales contracts in Asia, which adversely impacted simulation hardware revenue in the six months ended December 31, 1997 and will have a negative impact on sales in future periods. Management believes this decline is primarily due to the Asian economic crisis. Typically, sales are denominated in U.S. dollars and are backed by letters of credit, which reduce the risks attendant to international sales. Owned and operated revenue decreased by approximately $507,000 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 10.1% as a result of the increasing base of installed theatres that license the Company's film software. Page 11 COST OF SALES AND GROSS PROFIT MARGIN The total gross profit margin percentages for the six months ended December 31, 1997 and 1996 were 29.1% and 32.8%, respectively. The decrease in gross profit margin was primarily related to the portable simulation theatre business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased for the six months ended December 31, 1997 by approximately $1.2 million over the same period in the prior year. This increase was primarily due to increased research and development efforts, additional bad debt expense, higher insurance costs and additional marketing expenses. 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 transaction will be accounted for as a pooling of interest, consequently all transaction related costs are to be expensed in the period incurred. During the quarter and six months ended December 31, 1997, the Company incurred $218,000 and $531,000 of transaction expenses. The Company expects to incur additional transaction expenses in the next quarter (regardless of whether the merger is consummated). 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 an assessment of its existing software systems and after reviewing various factors, one of which being the year 2000 issue, has decided to replace its key manufacturing and financial software systems. The new systems will function properly with respect to dates in the year 2000 and thereafter. The total project cost is estimated at approximately $400,000 which includes $300,000 for the purchase and implementation of new software and hardware that will be capitalized and approximately $100,000 that will be expensed as incurred. To date, the Company has incurred approximately $25,000. The project is estimated to be completed not later than June 30, 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. Page 12 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 six 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 may have a continuing negative impact in future periods. The Company and its 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. 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. While the Company has been aggressively pursuing other sponsorship opportunities since that time, 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. Page 13 Iwerks has entered into a merger agreement with Showscan Entertainment, Inc. with the expectation that the transaction will result in beneficial synergies for the combined business. Achieving these anticipated business benefits will depend in part on whether the operations of Showscan can be integrated with the operations of Iwerks in an efficient, effective and timely manner. There can be no assurance that this will occur. The combination of the companies will require, among other things, integration of the companies' management staffs, coordination of the companies' sales and marketing efforts, integration and coordination of the companies' film production and distribution efforts, acceptance by the companies' respective theater networks of film software originally produced in the other company's format, and the identification and elimination of redundant and/or unnecessary overhead. Further, the integration of operations of the companies following the Merger will require the dedication of management resources, which may temporarily distract management's attention from the day-to-day business of the combined business. The inability of management to integrate successfully the operations of the companies could have an adverse effect on the business and results of the combined business. In addition, even if the operations of the companies are ultimately successfully integrated, it is anticipated that the integration will be accomplished over time and, in the interim, the combination may have an adverse effect on the business, results of operations and financial condition of the combined business. Iwerks currently is evaluating the operations of the business of Showscan for purposes of developing a plan for the integration of the business to be acquired with Iwerks' existing operations. Although this plan is not complete, it is anticipated that a significant restructuring of the combined operations will be required as a result of the Merger. As a consequence of this restructuring and the consummation of the Merger, Iwerks anticipates that the combined companies will incur one-time restructuring and related charges of $6.9 million of which $1.2 million has been recorded in the fourth fiscal quarter of 1997 and the first six months of fiscal 1998. Further, assuming the Merger is consummated in the third quarter of fiscal 1998 and that the transaction costs associated with the Merger are paid in that quarter, the combined company expects to have a significant decline in its cash and short-term investment balances from those existing at December 31, 1997 which, on a combined basis was $19.6 million. The Merger will be accounted for on a pooling of interests basis. Under the pooling rules, the historical financial results of Iwerks will be restated to reflect the combination, following certain adjustments. Following the consummation of the Merger, the historical results of Iwerks will be restated to reflect the historical profits and losses of Showscan. Showscan generated profits in each of fiscal years ended 1995 and 1996 and incurred losses in the fiscal year ended March 31, 1997 and in the first nine months of fiscal 1998. The combined effect of the restructuring and other charges discussed above and the pooling accounting treatment in the Merger will have an adverse effect on the results of operations of Iwerks in each of the first, second and third fiscal quarters of 1998. 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 Page 14 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 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 complimentary 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 six months ended December 31, 1997 generated positive cash flow of $2.9 million. This was mainly due to the net loss of $4.0 million offset by non-cash charges of $2.3 million for depreciation and amortization along with changes in operating assets and liabilities of $4.7 million. Investing activities for the six months ended December 31, 1997 consisted primarily of investments in film inventory and purchases of property and equipment partially offset by investments in debt securities. Cash used in financing activities consisted primarily of payments for notes payable and capital leases. At December 31, 1997, the Company had cash and short-term investments of approximately $17.4 million. In addition, the Company maintains a bank line of credit in the amount of $5 million. At December 31, 1997 and 1996, there were no amounts outstanding on the line of credit. At December 31, 1997 the Company was not in compliance with respect to certain financial covenants relating to the bank line of credit. The Company and the bank have decided to renegotiate the line of credit pending the merger with Showscan. The Company anticipates that its investment activities, financing activities, along with the proposed merger related costs will use cash and expects that its cash balance will decline in Fiscal 1998. If the proposed merger with Showscan is consummated, it is anticipated that the transaction fees associated with the merger after December 31, 1997, which Page 15 affect cash, would be approximately $4.5 million which would be offset by any cash received from Showscan as a result of the merger. However, with the existing cash balances and short-term investments in debt securities on hand at December 31, 1997, the Company believes that it has adequate liquidity to meet its cash requirements for at least the next twelve months, after which time it may be required to raise additional cash through the sale of equity or debt securities. In addition, to the extent the Company experiences growth in the future, or its cash flow from operations is less than anticipated, the Company may be required to obtain additional sources of cash. Page 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- On or about February 5, 1998, the Company received notice of a complaint filed in the U.S. District Court of New York by a subsidiary of IMAX Corporation alleging that the pending merger with Showscan Entertainment, Inc. is in violation of the Sherman and Clayton Anti-trust Acts. The Company believes that the suit is without merit and intends to vigorously defend itself. 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 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits: 10.1 Separation Agreement dated October 31, 1997 between the Company and Roy A. Wright. 10.2 Separation Agreement dated October 31, 1997 between the Company and Bruce Hinckley. 10.3 Separation Agreement dated October 31, 1997 between the Company and William J. Battison, III. 10.4 Separation Agreement dated October 31, 1997 between the Company and Catherine Giffen. 10.5 Separation Agreement dated October 31, 1997 between the Company and Jon Corfino. 10.6 Separation Agreement dated October 31, 1997 between the Company and Curt Thornton. 11.1 Earnings per share 15.1 Auditors consent regarding unaudited Interim Financial Information 27.1 Schedule of financial data 99.1 Independent Accountants' Review Report (b) Reports on Form 8-K filed during the quarter ended December 31, 1997: A report on Form 8-K was filed December 30, 1997 relating to a press release announcing the amendment to the proposed Showscan merger. Page 17 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 23 day of February, 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) EX-10.1 2 EXHIBIT 10.1 SEPARATION AGREEMENT SEPARATION AGREEMENT -------------------- This Separation Agreement (this "Agreement") is made and entered into as of October 31, 1997 by and between Iwerks Entertainment, Inc., a Delaware corporation (the "Company"), and, Roy A. Wright, an individual ("Executive"). RECITALS: A. Iwerks Entertainment Inc. (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection with this, the Corporation's Board of Directors (the "Board") recognizes the possibility of a change in management personnel or a change in control of the Corporation may exist and that such possibility, and that such uncertainty and questions that it may raise among management, could result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders. B. The Board has decided to reinforce and encourage the continued attention and dedication of members of the Corporation's management to their assigned duties without distraction arising from the possibility of a change in management of control of the Corporation. C. In order to induce Executive to remain in its employ, the Corporation has entered into this Agreement with Executive. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive agree as set forth below. 1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY EXECUTIVE. The Company may terminate Executive's employment at any time with or without Cause, and Executive may terminate his or her employment at any time for any reason, in each case by delivery of written notice to the other party. If the Company terminates Executive's employment with the Company for Cause or if Executive terminates such employment by reason of disability, death or voluntary resignation, then Executive shall be entitled to receive all salary and benefits (including vacation, death, disability and medical benefits, if any, to the extent such benefits are accorded to Executive under the Company's benefit plans maintained for employees generally) accrued and payable to him or her with respect to services rendered through the date of termination and shall be entitled to no additional separation or severance payment hereunder. Further, in such case, this Agreement shall have no effect on, and shall not be deemed to amend or modify, any of the terms of any stock option granted to Executive by the Company through the date of termination (collectively, the "Options") and Executive's rights thereunder shall be limited to the terms and conditions set forth in the applicable stock option agreement evidencing such Page 1 Options. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Executive involving the Company; or (ii) any action by Executive involving the arrest of Executive for violation of any criminal statute constituting a felony or a misdemeanor involving moral turpitude if the Board reasonably determines that the continuation of Executive's employment after such event would have an adverse impact on the operations or reputation of the Company in the financial community; or (iii) gross misconduct or habitual negligence in the performance of Executive's duties, or (iv) an act constituting a breach of Executive's fiduciary duty to the Corporation under the Delaware General Corporation Law, or (v) a continuing, repeated willful failure or refusal by Executive to perform his duties; PROVIDED, HOWEVER, that termination shall not be deemed to be for Cause under this subclause (v) unless Executive shall have first received written notice from the Board advising Executive of the specific acts or omissions alleged to constitute a failure or refusal to perform and such failure or refusal to perform continues after Executive shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. 2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the provisions of Section 4 below, if the Company terminates Executive's employment with the Company other than for Cause or if the Company causes a Defacto Termination of Executive (as defined below) (each a "Separation Termination"), Executive shall receive the "Separation Package." As used herein, the "Separation Package" shall consist of (i) a cash amount equal to the base salary which would have been payable to Executive over 24 months (computed at the annual rate in effect at the date of the Separation Termination), plus (ii) a cash amount equal to the pro rated portion of the performance bonus (computed by reference to the actual number of days Executive is employed during the applicable fiscal year) which would have been paid to Executive under the Company's performance bonus plan for the fiscal year in which the Separation Termination occurs (if any such plan is then in effect) if Executive's employment had continued through the end of the fiscal year and the Company had achieved 100% of its scheduled performance goals, plus (iii) paid up group medical, supplemental life and disability and other insurance benefits made available to senior executives under the Company's employee benefit plans for Executive and his or her family for the 24 months following the date of the Separation Termination. Further, notwithstanding any contrary provision in the applicable stock option agreement, all Options which are not vested as of the date of the Separation Termination shall become vested and immediately exercisable and all Options held by Executive as of the date of the Separation Termination (including those which become exercisable solely as a result of the provisions of this sentence) shall remain exercisable for a period of 36 months following the date of the Separation Termination. For purposes of this paragraph, "Defacto Termination" shall include any of the following events: (i) the Company shall reduce the Executive's 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 executive officers compensation in general; (ii) the Company shall fail to cause Executive to remain Chief Executive Officer of the Company; (iii) Executive shall not be afforded the authority, powers, responsibilities and privileges customarily accorded to an executive with his title; or (iv) the Company shall require Executive's primary services to be Page 2 rendered in an area other than the Company's principal offices in the greater Los Angeles metropolitan area. 3. SPECIAL BONUS ARRANGEMENTS. In addition to Executive's base salary, annual stipend and any Separation Package payable to him and regardless of whether a Separation Termination occurs, the following provision shall apply: 3.1 BONUS. Subject to the provisions of Section 4 hereof (if applicable), and in addition to the Separation Package, Executive shall be paid a one-time bonus payment in the amount of $250,000 if the Company's realizes net income per share in an amount which equals or exceeds $0.20 for the six months ended June 30, 1998 (prior to giving effect to the accrual of the bonus provided for in this Section 3.1), as computed by reference to the Company's Quarterly Report on Form 10-Q for the six months ended December 31, 1997 and the Company's financial statements for the year ended June 30, 1998, as audited by Ernst & Young. 3.2 PAYMENT OF AMOUNTS. The amounts referred to in Sections 3.1 above, if payable, shall be paid in one lump sum on the second business day following delivery by Ernst & Young of their audit opinion with respect to the financial statements of the Company for the year ended June 30, 1998. 4. TRANSITION SERVICES. As a condition to the payments referred to in Sections 2 and 3 hereof, Executive agrees, if requested by the Board of Directors of the Company, to provide continued employment services to the Company for a minimum period of three months and a maximum period of six months from the date of notice of termination without cause or the date of de facto termination, as applicable, to assist in an orderly transition to his successor. During such period, Executive shall receive base salary in an amount equal to twice that of the base salary he was being paid prior to termination or Defacto termination plus his annual stipend. 5. CHANGE IN CONTROL. The following provisions shall be applicable in the case of an occurrence of a Change in Control of the Company: 5.1 Executive may (but shall not be obligated to) terminate his or her employment with the Company effective 30 days after the giving of such notice given at any time commencing with the sixth month anniversary of such Change in Control and terminating on the one year anniversary of the Change in Control, and receive the payments provided for in Section 5.3 hereof. 5.2 If the Company terminates Executive's employment for any reason (including death, disability, Cause, without Cause or in the case of a Defacto Termination) at any time within the one year period following the date of a Change in Control, then Executive shall be entitled to the payments provided for in Section 5.3 hereof. 5.3 In the circumstances described in Sections 5.1 and 5.2 above, Executive shall be entitled to and receive the Separation Package. Page 3 5.4 In addition to any amounts payable to Executive pursuant to Sections 5.1 and 5.2 above, and without regard to whether Executive's employment is terminated following a Change in Control, upon the occurrence of a Change in Control, all Options then held by Executive which are not yet vested shall vest as of the date of a Change in Control and shall become immediately exercisable. Further, all Options that are exercisable as of the date of such Change in Control (including those which do so as a result of the provisions of the preceding sentence) shall remain so for 36 months following the date of such Change in Control. 5.5 For purposes of this Agreement, a Change in Control shall mean: 5.5.1 The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of more than 25% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that neither of the following acquisitions shall constitute a Change in Control: (i) any acquisition by the Company or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or 5.5.2 Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the stockholders of the Company, shall be approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or 5.5.3 Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation: (i) more than 60% of the combined voting power of the then outstanding voting securities of the corporation resulting from such reorganization, merger, or consolidation, which may be the Company (the "Resulting Corporation") entitled to vote generally in the election of directors (the "Resulting Corporation Voting Securities") shall then be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of Outstanding Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions as their respective ownership of Outstanding Voting Securities immediately prior to such reorganization, merger, or consolidation; (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, the Resulting Corporation, and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities) shall own beneficially, directly or indirectly 25% or more of Page 4 the combined voting power of the Resulting Corporation Voting Securities; and (iii) at least a majority of the members of the Board shall have been members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or 5.5.4 Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation (the "Buyer") with respect to which (i) following such sale or other disposition, more than 60% of the combined voting power of securities of Buyer entitled to vote generally in the election of directors ("Buyer Voting Securities"), shall be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of the Outstanding Voting Securities immediately prior to such sale or other disposition, in substantially the same proportion as their respective ownership of Outstanding Voting Securities, immediately prior to such sale or other disposition; (ii) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or Buyer and any Person that shall immediately prior to such sale or other disposition own beneficially, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities), shall own beneficially, directly or indirectly, 25% or more of the combined voting power or, Buyer Voting Securities; and (z) at least a majority of the members of the board of directors of Buyer shall have been members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition or assets of the Company. 6. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump sum on the second business day following termination of Executive's employment with the Company. 7. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and exercise dates of Options as set forth in other Sections of this Agreement, Executive's rights under any other agreement or plan under which stock options, restricted stock or similar awards are granted shall be determined in accordance with the terms and provisions of such plans or agreements. 8. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement shall not be subject to any claim of mitigation nor shall the Company be entitled to any right of offset with respect thereto. 9. GENERAL RELEASE. As a condition to the payment of the Separation Package, Executive shall execute and deliver a general release to the Company in the form attached as Exhibit A attached hereto. 10. GENERAL PROVISIONS. 10.1 NOTICES. All notices, requirements, requests, demands, claims or other communications hereunder shall be in writing. Any notice, requirement, request, demand, claim or other communication hereunder shall be deemed duly given (i) if personally Page 5 delivered, when so delivered, (ii) if mailed, two (2) business days after having been set by registered or certified mail, return-receipt requested, postage prepaid and addressed to the intended recipient as set forth below, (iii) if given by telecopier, once such notice or other communication is transmitted to the telecopier number specified below, and the appropriate telephonic confirmation is received, provided that such notice or other communication is promptly thereafter mailed in accordance with the provisions of clause (ii) above or (iv) if sent through an overnight delivery service under circumstances by which such service guarantees next day delivery, the date following the date so sent: IF TO THE COMPANY, TO: 4540 W. Valerio Street Burbank, CA 91505 IF TO EXECUTIVE TO: Roy A. Wright 30972 Via Mirador San Juan Capistrano, CA 92675 Any party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 10.2 ASSIGNMENT. This Agreement and the benefits hereunder are personal to the Company and are not assignable or transferable, nor may be the services to be performed hereunder be assigned by the Company to any person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the benefits hereunder may be assigned by the Company to any corporation into which the Company may be merged or consolidated, and this Agreement and the benefits hereunder will automatically be deemed assigned to any such corporation, subject, however, to Executive's right to terminate this Agreement to the extent provided herein. 10.3 COMPLETE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes and cancels any and all previous written or oral negotiations, commitments, understandings, agreements and any other writings or communications in respect of such subject matter. 10.4 AMENDMENTS. This Agreement may be modified, amended, superseded or terminated only by a writing duly signed by both parties. 10.5 SEVERABILITY. Any provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. Page 6 10.6 NO WAIVER. Any waiver by either party of a breach of any provisions of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of either party to insist upon strict adherence to any term of this Agreement on one or more occasions shall be considered a waiver or to deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 10.7 BINDING EFFECT. This Agreement shall be binding on, and shall inure to the benefit of, the parties hereto and their permitted assigns, successors and legal representatives. 10.8 COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same document. 10.9 GOVERNING LAW. This Agreement has been negotiated and entered into in the State of California and shall be construed in accordance with the laws of the State of California. 10.10 ARBITRATION. The parties hereby expressly agree that any controversy or claim relating to this Agreement, including the construction, enforcement or application of the terms hereof, shall be submitted to arbitration in Los Angeles, California by the American Arbitration Association in accordance with the Commercial Arbitration Rules of such association. The arbitrator shall be a retired judge of the Los Angeles Superior Court or other party acceptable to the parties and the rules of evidence shall apply. The costs of the arbitrator shall be borne equally. Each party shall be responsible for its own attorneys' fees and costs. However, the arbitrator shall have the right to award costs and expenses (including actual attorneys' fees) to the prevailing party as well as equitable relief. The award of the arbitrator shall be final and binding and shall be enforceable in any court of competent jurisdiction. Nothing in this paragraph shall preclude the parties from seeking an injunction or other equitable relief from a court of competent jurisdiction under appropriate circumstances. Page 7 10.11 PRESS RELEASE. Any press release issued in a circumstance described in Section 2 hereof, shall be in form and substance mutually acceptable to the Company and Executive, which approval shall not be unreasonably withheld or delayed. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and Executive has executed the same as of the day and year first above written. IWERKS ENTERTAINMENT, INC. /s/ Dag Tellefsen By: ---------------------- Its: Director /s/ Roy A. Wright ------------------------- Roy A. Wright Page 8 EXHIBIT A WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard to any claims which may exist or arise out of the Executive's current or any prior affiliation with the Company (the "Disputes"), Executive expressly waives all claims against the Company, including, without limitation, any and all rights under Section 1542 of the Civil Code of the State of California which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Executive waives and releases any right or benefit which he has or may have under any similar law or rule of any other jurisdiction pertaining to the Disputes. It is the intention of Executive, through this Agreement, fully, finally, and forever to settle and release all such matters and claims relative thereto which have existed, do now exist or may exist between the parties arising out of or related to the Disputes. In furtherance of such intention, the release herein given shall be, and remain in effect as, a full and complete release of such matters notwithstanding the discovery of the existence of any additional claims or facts relating thereto. EX-10.2 3 EXHIBIT 10.2 SEPARATION AGREEMENT SEPARATION AGREEMENT -------------------- This Separation Agreement (this "Agreement") is made and entered into as of October 31, 1997 by and between Iwerks Entertainment, Inc., a Delaware corporation (the "Company"), and, Bruce Hinckley, an individual ("Executive"). RECITALS: A. Iwerks Entertainment Inc. (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection with this, the Corporation's Board of Directors (the "Board") recognizes the possibility of a change in management personnel or a change in control of the Corporation may exist and that such possibility, and that such uncertainty and questions that it may raise among management, could result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders. B. The Board has decided to reinforce and encourage the continued attention and dedication of members of the Corporation's management to their assigned duties without distraction arising from the possibility of a change in management of control of the Corporation. C. In order to induce Executive to remain in its employ, the Corporation has entered into this Agreement with Executive. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive agree as set forth below. 1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY EXECUTIVE. The Company may terminate Executive's employment at any time with or without Cause, and Executive may terminate his or her employment at any time for any reason, in each case by delivery of written notice to the other party. If the Company terminates Executive's employment with the Company for Cause or if Executive terminates such employment by reason of disability, death or voluntary resignation, then Executive shall be entitled to receive all salary and benefits (including vacation, death, disability and medical benefits, if any, to the extent such benefits are accorded to Executive under the Company's benefit plans maintained for employees generally) accrued and payable to him or her with respect to services rendered through the date of termination and shall be entitled to no additional separation or severance payment hereunder. Further, in such case, this Agreement shall have no effect on, and shall not be deemed to amend or modify, any of the terms of any stock option granted to Executive by the Company through the date of termination (collectively, the "Options") and Executive's rights thereunder shall be limited to the terms and conditions set forth in the applicable stock option agreement evidencing such Options. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Executive involving the Company; or (ii) any action by Executive involving the arrest of Executive for violation of any criminal statute constituting a felony or a misdemeanor involving moral turpitude if the Board reasonably determines that the continuation of Executive's employment after such event would have an adverse impact on the operations or reputation of the Company in the financial community; or (iii) gross misconduct or habitual negligence in the performance of Executive's duties, or (iv) an act constituting a breach of Executive's fiduciary duty to the Corporation under the Delaware General Corporation Law, or (v) a continuing, repeated willful failure or refusal by Executive to perform his duties; PROVIDED, HOWEVER, that termination shall not be deemed to be for Cause under this subclause (v) unless Executive shall have first received written notice from the Board advising Executive of the specific acts or omissions alleged to constitute a failure or refusal to perform and such failure or refusal to perform continues after Executive shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. 2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the provisions of Section 4 below, if the Company terminates Executive's employment with the Company other than for Cause or if the Company causes a Defacto Termination of Executive (as defined below) (each a "Separation Termination"), Executive shall receive the "Separation Package." As used herein, the "Separation Package" shall consist of (i) a cash amount equal to the base salary which would have been payable to Executive over 12 months (computed at the annual rate in effect at the date of the Separation Termination), plus (ii) a cash amount equal to the pro rated portion of the performance bonus (computed by reference to the actual number of days Executive is employed during the applicable fiscal year) which would have been paid to Executive under the Company's performance bonus plan for the fiscal year in which the Separation Termination occurs (if any such plan is then in effect) if Executive's employment had continued through the end of the fiscal year and the Company had achieved 100% of its scheduled performance goals, plus (iii) paid up COBRA benefits for Executive and his or her family for the 12 months following the date of the Separation Termination. Further, notwithstanding any contrary provision in the applicable stock option agreement, all Options which are not vested as of the date of the Separation Termination shall become vested and immediately exercisable and all Options held by Executive as of the date of the Separation Termination (including those which become exercisable solely as a result of the provisions of this sentence) shall remain exercisable for a period of 15 months following the date of the Separation Termination. For purposes of this paragraph, "Defacto Termination" shall include any of the following events: (i) the Company shall reduce the Executive's 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 executive officers compensation in general; (ii) the Company shall fail to cause Executive to remain an executive officer of the Company; (iii) Executive shall not be afforded the authority, powers, responsibilities and privileges customarily accorded to an executive with his or her title; or (iv) the Company shall require Executive's primary services to be rendered in an area other than the Company's principal offices in the greater Los Angeles metropolitan area. Page 2 3. CHANGE IN CONTROL. The following provisions shall be applicable in the case of an occurrence of a Change in Control of the Company: 3.1 Executive may (but shall not be obligated to) terminate his or her employment with the Company effective 30 days after the giving of such notice given at any time commencing with the sixth month anniversary of such Change in Control and terminating on the one year anniversary of the Change in Control, and receive the payments provided for in Section 3.3 hereof. 3.2 If the Company terminates Executive's employment for any reason (including death, disability, Cause, without Cause or in the case of a Defacto Termination) at any time within the one year period following the date of a Change in Control, then Executive shall be entitled to the payments provided for in Section 3.3 hereof. 3.3 In the circumstances described in Sections 3.1 and 3.2 above, Executive shall be entitled to and receive the Separation Package. 3.4 In addition to any amounts payable to Executive pursuant to Sections 3.1 and 3.2 above, and without regard to whether Executive's employment is terminated following a Change in Control, upon the occurrence of a Change in Control, all Options then held by Executive which are not yet vested shall vest as of the date of a Change in Control and shall become immediately exercisable. Further, all Options that are exercisable as of the date of such Change in Control (including those which do so as a result of the provisions of the preceding sentence) shall remain so for 15 months following the date of such Change in Control. 3.5 For purposes of this Agreement, a Change in Control shall mean: 3.5.1 The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of more than 25% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that neither of the following acquisitions shall constitute a Change in Control: (i) any acquisition by the Company or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or 3.5.2 Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the stockholders of the Company, shall be approved by a vote of at least a majority of the directors Page 3 then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or 3.5.3 Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation: (i) more than 60% of the combined voting power of the then outstanding voting securities of the corporation resulting from such reorganization, merger, or consolidation, which may be the Company (the "Resulting Corporation") entitled to vote generally in the election of directors (the "Resulting Corporation Voting Securities") shall then be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of Outstanding Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions as their respective ownership of Outstanding Voting Securities immediately prior to such reorganization, merger, or consolidation; (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, the Resulting Corporation, and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities) shall own beneficially, directly or indirectly 25% or more of the combined voting power of the Resulting Corporation Voting Securities; and (iii) at least a majority of the members of the Board shall have been members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or 3.5.4 Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation (the "Buyer") with respect to which (i) following such sale or other disposition, more than 60% of the combined voting power of securities of Buyer entitled to vote generally in the election of directors ("Buyer Voting Securities"), shall be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of the Outstanding Voting Securities immediately prior to such sale or other disposition, in substantially the same proportion as their respective ownership of Outstanding Voting Securities, immediately prior to such sale or other disposition; (ii) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or Buyer and any Person that shall immediately prior to such sale or other disposition own beneficially, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities), shall own beneficially, directly or indirectly, 25% or more of the combined voting power or, Buyer Voting Securities; and (z) at least a majority of the members of the board of directors of Buyer shall have been members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition or assets of the Company. 4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump sum on the second business day following termination of Executive's employment with the Company. Page 4 5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and exercise dates of Options as set forth in other Sections of this Agreement, Executive's rights under any other agreement or plan under which stock options, restricted stock or similar awards are granted shall be determined in accordance with the terms and provisions of such plans or agreements. 6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement shall not be subject to any claim of mitigation nor shall the Company be entitled to any right of offset with respect thereto. 7. GENERAL RELEASE. As a condition to the payment of the Separation Package, Executive shall execute and deliver a general release to the Company in the form attached as Exhibit A attached hereto. 8. GENERAL PROVISIONS. 8.1 NOTICES. All notices, requirements, requests, demands, claims or other communications hereunder shall be in writing. Any notice, requirement, request, demand, claim or other communication hereunder shall be deemed duly given (i) if personally delivered, when so delivered, (ii) if mailed, two (2) business days after having been set by registered or certified mail, return-receipt requested, postage prepaid and addressed to the intended recipient as set forth below, (iii) if given by telecopier, once such notice or other communication is transmitted to the telecopier number specified below, and the appropriate telephonic confirmation is received, provided that such notice or other communication is promptly thereafter mailed in accordance with the provisions of clause (ii) above or (iv) if sent through an overnight delivery service under circumstances by which such service guarantees next day delivery, the date following the date so sent: IF TO THE COMPANY, TO: 4540 W. Valerio Street Burbank, CA 91505 IF TO EXECUTIVE TO: Bruce Hinckley 1420 Greenbriar Road Glendale, CA 91207 Any party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 8.2 ASSIGNMENT. This Agreement and the benefits hereunder are personal to the Company and are not assignable or transferable, nor may be the services to be performed hereunder be assigned by the Company to any person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the benefits hereunder may be assigned by the Company to any corporation into which the Company may be merged or consolidated, and this Agreement and the benefits hereunder will automatically be deemed assigned to any such corporation, subject, however, to Executive's right to terminate this Agreement to the extent provided herein. Page 5 8.3 COMPLETE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes and cancels any and all previous written or oral negotiations, commitments, understandings, agreements and any other writings or communications in respect of such subject matter. 8.4 AMENDMENTS. This Agreement may be modified, amended, superseded or terminated only by a writing duly signed by both parties. 8.5 SEVERABILITY. Any provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. 8.6 NO WAIVER. Any waiver by either party of a breach of any provisions of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of either party to insist upon strict adherence to any term of this Agreement on one or more occasions shall be considered a waiver or to deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 8.7 BINDING EFFECT. This Agreement shall be binding on, and shall inure to the benefit of, the parties hereto and their permitted assigns, successors and legal representatives. 8.8 COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same document. 8.9 GOVERNING LAW. This Agreement has been negotiated and entered into in the State of California and shall be construed in accordance with the laws of the State of California. 8.10 ARBITRATION. The parties hereby expressly agree that any controversy or claim relating to this Agreement, including the construction, enforcement or application of the terms hereof, shall be submitted to arbitration in Los Angeles, California by the American Arbitration Association in accordance with the Commercial Arbitration Rules of such association. The arbitrator shall be a retired judge of the Los Angeles Superior Court or other party acceptable to the parties and the rules of evidence shall apply. The costs of the arbitrator shall be borne equally. Each party shall be responsible for its own attorneys' fees and costs. However, the arbitrator shall have the right to award costs and expenses (including actual attorneys' fees) to the prevailing party as well as equitable relief. The award of the arbitrator shall be final and binding and shall be enforceable in any court of competent jurisdiction. Page 6 Nothing in this paragraph shall preclude the parties from seeking an injunction or other equitable relief from a court of competent jurisdiction under appropriate circumstances. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and Executive has executed the same as of the day and year first above written. IWERKS ENTERTAINMENT, INC. By: /s/ Roy A. Wright ------------------------ Its: Chairman & CEO /s/ Bruce Hinckley ------------------------- Bruce Hinckley Page 7 EXHIBIT A Waiver Under Section 1542 of the California Civil Code. With regard to any claims which may exist or arise out of the Executive's current or any prior affiliation with the Company (the "Disputes"), Executive expressly waives all claims against the Company, including, without limitation, any and all rights under Section 1542 of the Civil Code of the State of California which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Executive waives and releases any right or benefit which he has or may have under any similar law or rule of any other jurisdiction pertaining to the Disputes. It is the intention of Executive, through this Agreement, fully, finally, and forever to settle and release all such matters and claims relative thereto which have existed, do now exist or may exist between the parties arising out of or related to the Disputes. In furtherance of such intention, the release herein given shall be, and remain in effect as, a full and complete release of such matters notwithstanding the discovery of the existence of any additional claims or facts relating thereto. EX-10.3 4 EXHIBIT 10.3 SEPARATION AGREEMENT SEPARATION AGREEMENT -------------------- This Separation Agreement (this "Agreement") is made and entered into as of October 31, 1997 by and between Iwerks Entertainment, Inc., a Delaware corporation (the "Company"), and, William J. Battison, an individual ("Executive"). RECITALS: A. Iwerks Entertainment Inc. (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection with this, the Corporation's Board of Directors (the "Board") recognizes the possibility of a change in management personnel or a change in control of the Corporation may exist and that such possibility, and that such uncertainty and questions that it may raise among management, could result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders. B. The Board has decided to reinforce and encourage the continued attention and dedication of members of the Corporation's management to their assigned duties without distraction arising from the possibility of a change in management of control of the Corporation. C. In order to induce Executive to remain in its employ, the Corporation has entered into this Agreement with Executive. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive agree as set forth below. 1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY EXECUTIVE. The Company may terminate Executive's employment at any time with or without Cause, and Executive may terminate his or her employment at any time for any reason, in each case by delivery of written notice to the other party. If the Company terminates Executive's employment with the Company for Cause or if Executive terminates such employment by reason of disability, death or voluntary resignation, then Executive shall be entitled to receive all salary and benefits (including vacation, death, disability and medical benefits, if any, to the extent such benefits are accorded to Executive under the Company's benefit plans maintained for employees generally) accrued and payable to him or her with respect to services rendered through the date of termination and shall be entitled to no additional separation or severance payment hereunder. Further, in such case, this Agreement shall have no effect on, and shall not be deemed to amend or modify, any of the terms of any stock option granted to Executive by the Company through the date of termination (collectively, the "Options") and Executive's rights thereunder shall be limited to the terms and conditions set forth in the applicable stock option agreement evidencing such Options. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Executive involving the Company; or (ii) any action by Executive involving the arrest of Executive for violation of any criminal statute constituting a felony or a misdemeanor involving moral turpitude if the Board reasonably determines that the continuation of Executive's employment after such event would have an adverse impact on the operations or reputation of the company in the financial community; or (iii) gross misconduct or habitual negligence in the performance of Executive's duties, or (iv) an act constituting a breach of Executive's fiduciary duty to the Corporation under the Delaware General Corporation Law, or (v) a continuing, repeated willful failure or refusal by Executive to perform his duties; PROVIDED, HOWEVER, that termination shall not be deemed to be for Cause under this subclause (v) unless Executive shall have first received written notice from the Board advising Executive of the specific acts or omissions alleged to constitute a failure or refusal to perform and such failure or refusal to perform continues after Executive shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. 2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the provisions of Section 4 below, if the Company terminates Executive's employment with the Company other than for Cause or if the Company causes a Defacto Termination of Executive (as defined below) (each a "Separation Termination"), Executive shall receive the "Separation Package." As used herein, the "Separation Package" shall consist of (i) a cash amount equal to the base salary which would have been payable to Executive over 12 months (computed at the annual rate in effect at the date of the Separation Termination), plus (ii) a cash amount equal to the pro rated portion of the performance bonus (computed by reference to the actual number of days Executive is employed during the applicable fiscal year) which would have been paid to Executive under the Company's performance bonus plan for the fiscal year in which the Separation Termination occurs (if any such plan is then in effect) if Executive's employment had continued through the end of the fiscal year and the Company had achieved 100% of its scheduled performance goals, plus (iii) paid up COBRA benefits for Executive and his or her family for the 12 months following the date of the Separation Termination. Further, notwithstanding any contrary provision in the applicable stock option agreement, all Options which are not vested as of the date of the Separation Termination shall become vested and immediately exercisable and all Options held by Executive as of the date of the Separation Termination (including those which become exercisable solely as a result of the provisions of this sentence) shall remain exercisable for a period of 15 months following the date of the Separation Termination. For purposes of this paragraph, "Defacto Termination" shall include any of the following events: (i) the Company shall reduce the Executive's 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 executive officers compensation in general; (ii) the Company shall fail to cause Executive to remain an executive officer of the Company; (iii) Executive shall not be afforded the authority, powers, responsibilities and privileges customarily accorded to an executive with his or her title; or (iv) the Company shall require Executive's primary services to be rendered in an area other than the Company's principal offices in the greater Los Angeles metropolitan area. Page 2 3. CHANGE IN CONTROL. The following provisions shall be applicable in the case of an occurrence of a Change in Control of the Company: 3.1 Executive may (but shall not be obligated to) terminate his or her employment with the Company effective 30 days after the giving of such notice given at any time commencing with the sixth month anniversary of such Change in Control and terminating on the one year anniversary of the Change in Control, and receive the payments provided for in Section 3.3 hereof. 3.2 If the Company terminates Executive's employment for any reason (including death, disability, Cause, without Cause or in the case of a Defacto Termination) at any time within the one year period following the date of a Change in Control, then Executive shall be entitled to the payments provided for in Section 3.3 hereof. 3.3 In the circumstances described in Sections 3.1 and 3.2 above, Executive shall be entitled to and receive the Separation Package. 3.4 In addition to any amounts payable to Executive pursuant to Sections 3.1 and 3.2 above, and without regard to whether Executive's employment is terminated following a Change in Control, upon the occurrence of a Change in Control, all Options then held by Executive which are not yet vested shall vest as of the date of a Change in Control and shall become immediately exercisable. Further, all Options that are exercisable as of the date of such Change in Control (including those which do so as a result of the provisions of the preceding sentence) shall remain so for 15 months following the date of such Change in Control. 3.5 For purposes of this Agreement, a Change in Control shall mean: 3.5.1 The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of more than 25% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that neither of the following acquisitions shall constitute a Change in Control: (i) any acquisition by the Company or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or 3.5.2 Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the stockholders of the Company, shall be approved by a vote of at least a majority of the directors Page 3 then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or 3.5.3 Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation: (i) more than 60% of the combined voting power of the then outstanding voting securities of the corporation resulting from such reorganization, merger, or consolidation, which may be the Company (the "Resulting Corporation") entitled to vote generally in the election of directors (the "Resulting Corporation Voting Securities") shall then be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of Outstanding Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions as their respective ownership of Outstanding Voting Securities immediately prior to such reorganization, merger, or consolidation; (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, the Resulting Corporation, and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities) shall own beneficially, directly or indirectly 25% or more of the combined voting power of the Resulting Corporation Voting Securities; and (iii) at least a majority of the members of the Board shall have been members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or 3.5.4 Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation (the "Buyer") with respect to which (i) following such sale or other disposition, more than 60% of the combined voting power of securities of Buyer entitled to vote generally in the election of directors ("Buyer Voting Securities"), shall be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of the Outstanding Voting Securities immediately prior to such sale or other disposition, in substantially the same proportion as their respective ownership of Outstanding Voting Securities, immediately prior to such sale or other disposition; (ii) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or Buyer and any Person that shall immediately prior to such sale or other disposition own beneficially, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities), shall own beneficially, directly or indirectly, 25% or more of the combined voting power or, Buyer Voting Securities; and (z) at least a majority of the members of the board of directors of Buyer shall have been members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition or assets of the Company. 4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump sum on the second business day following termination of Executive's employment with the Company. Page 4 5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and exercise dates of Options as set forth in other Sections of this Agreement, Executive's rights under any other agreement or plan under which stock options, restricted stock or similar awards are granted shall be determined in accordance with the terms and provisions of such plans or agreements. 6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement shall not be subject to any claim of mitigation nor shall the Company be entitled to any right of offset with respect thereto. 7. GENERAL RELEASE. As a condition to the payment of the Separation Package, Executive shall execute and deliver a general release to the Company in the form attached as Exhibit A attached hereto. 8. GENERAL PROVISIONS. 8.1 NOTICES. All notices, requirements, requests, demands, claims or other communications hereunder shall be in writing. Any notice, requirement, request, demand, claim or other communication hereunder shall be deemed duly given (i) if personally delivered, when so delivered, (ii) if mailed, two (2) business days after having been set by registered or certified mail, return-receipt requested, postage prepaid and addressed to the intended recipient as set forth below, (iii) if given by telecopier, once such notice or other communication is transmitted to the telecopier number specified below, and the appropriate telephonic confirmation is received, provided that such notice or other communication is promptly thereafter mailed in accordance with the provisions of clause (ii) above or (iv) if sent through an overnight delivery service under circumstances by which such service guarantees next day delivery, the date following the date so sent: IF TO THE COMPANY, TO: 4540 W. Valerio Street Burbank, CA 91505 IF TO EXECUTIVE TO: William J. Battison 334 Meadow Grove Street La Canada Flintridge, CA 91011 Any party may change the address to which notices, requests, demands, claimsand other communications hereunder are to be delivered by giving the otherparty notice in the manner herein set forth. 8.2 ASSIGNMENT. This Agreement and the benefits hereunder are personal to the Company and are not assignable or transferable, nor may be the services to be performed hereunder be assigned by the Company to any person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the benefits hereunder may be assigned by the Company to any corporation into which the Company may be merged or consolidated, and this Agreement and the benefits hereunder will automatically be deemed assigned to any such corporation, subject, however, to Executive's right to terminate this Agreement to the extent provided herein. Page 5 8.3 COMPLETE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes and cancels any and all previous written or oral negotiations, commitments, understandings, agreements and any other writings or communications in respect of such subject matter. 8.4 AMENDMENTS. This Agreement may be modified, amended, superseded or terminated only by a writing duly signed by both parties. 8.5 SEVERABILITY. Any provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. 8.6 NO WAIVER. Any waiver by either party of a breach of any provisions of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of either party to insist upon strict adherence to any term of this Agreement on one or more occasions shall be considered a waiver or to deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 8.7 BINDING EFFECT. This Agreement shall be binding on, and shall inure to the benefit of, the parties hereto and their permitted assigns, successors and legal representatives. 8.8 COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same document. 8.9 GOVERNING LAW. This Agreement has been negotiated and entered into in the State of California and shall be construed in accordance with the laws of the State of California. 8.10 ARBITRATION. The parties hereby expressly agree that any controversy or claim relating to this Agreement, including the construction, enforcement or application of the terms hereof, shall be submitted to arbitration in Los Angeles, California by the American Arbitration Association in accordance with the Commercial Arbitration Rules of such association. The arbitrator shall be a retired judge of the Los Angeles Superior Court or other party acceptable to the parties and the rules of evidence shall apply. The costs of the arbitrator shall be borne equally. Each party shall be responsible for its own attorneys' fees and costs. However, the arbitrator shall have the right to award costs and expenses (including actual attorneys' fees) to the prevailing party as well as equitable relief. The award of the arbitrator shall be final and binding and shall be enforceable in any court of competent jurisdiction. Page 6 Nothing in this paragraph shall preclude the parties from seeking an injunction or other equitable relief from a court of competent jurisdiction under appropriate circumstances. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and Executive has executed the same as of the day and year first above written. IWERKS ENTERTAINMENT, INC. By: /s/ Roy A. Wright ------------------------- Its: Chairman and CEO /s/ William J. Battison -------------------------- William J. Battison Page 7 EXHIBIT A WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard to any claims which may exist or arise out of the Executive's current or any prior affiliation with the Company (the "Disputes"), Executive expressly waives all claims against the Company, including, without limitation, any and all rights under Section 1542 of the Civil Code of the State of California which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Executive waives and releases any right or benefit which he has or may have under any similar law or rule of any other jurisdiction pertaining to the Disputes. It is the intention of Executive, through this Agreement, fully, finally, and forever to settle and release all such matters and claims relative thereto which have existed, do now exist or may exist between the parties arising out of or related to the Disputes. In furtherance of such intention, the release herein given shall be, and remain in effect as, a full and complete release of such matters notwithstanding the discovery of the existence of any additional claims or facts relating thereto. EX-10.4 5 EXHIBIT 10.4 SEPARATION AGREEMENT SEPARATION AGREEMENT -------------------- This Separation Agreement (this "Agreement") is made and entered into as of October 31, 1997 by and between Iwerks Entertainment, Inc., a Delaware corporation (the "Company"), and, Catherine Giffen, an individual ("Executive"). RECITALS: A. Iwerks Entertainment Inc. (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection with this, the Corporation's Board of Directors (the "Board") recognizes the possibility of a change in management personnel or a change in control of the Corporation may exist and that such possibility, and that such uncertainty and questions that it may raise among management, could result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders. B. The Board has decided to reinforce and encourage the continued attention and dedication of members of the Corporation's managment to their assigned duties without distraction arising from the possibility of a change in management of control of the Corporation. C. In order to induce Executive to remain in its employ, the Corporation has entered into this Agreement with Executive. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive agree as set forth below. 1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY EXECUTIVE. The Company may terminate Executive's employment at any time with or without Cause, and Executive may terminate his or her employment at any time for any reason, in each case by delivery of written notice to the other party. If the Company terminates Executive's employment with the Company for Cause or if Executive terminates such employment by reason of disability, death or voluntary resignation, then Executive shall be entitled to receive all salary and benefits (including vacation, death, disability and medical benefits, if any, to the extent such benefits are accorded to Executive under the Company's benefit plans maintained for employees generally) accrued and payable to him or her with respect to services rendered through the date of termination and shall be entitled to no additional separation or severance payment hereunder. Further, in such case, this Agreement shall have no effect on, and shall not be deemed to amend or modify, any of the terms of any stock option granted to Executive by the Company through the date of termination (collectively, the "Options") and Executive's rights thereunder shall be limited to the terms and conditions set forth in the applicable stock option agreement evidencing such Options. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Executive involving the Company; or (ii) any action by Executive involving the arrest of Executive for violation of any criminal statute constituting a felony or a misdemeanor involving moral turpitude if the Board reasonably determines that the continuation of Executive's employment after such event would have an adverse impact on the operations or reputation of the Company in the Financial community; or (iii) gross misconduct or habitual negligence in the performance of Executive's duties, or (iv) an act constituting a breach of Executive's fiduciary duty to the Corporation under the Delaware General Corporation Law, or (v) a continuing, repeated willful failure or refusal by Executive to perform his duties; PROVIDED, HOWEVER, that termination shall not be deemed to be for Cause under this subclause (v) unless Executive shall have first received written notice from the Board advising Executive of the specific acts or omissions alleged to constitute a failure or refusal to perform and such failure or refusal to perform continues after Executive shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. 2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the provisions of Section 4 below, if the Company terminates Executive's employment with the Company other than for Cause or if the Company causes a Defacto Termination of Executive (as defined below) (each a "Separation Termination"), Executive shall receive the "Separation Package." As used herein, the "Separation Package" shall consist of (i) a cash amount equal to the base salary which would have been payable to Executive over six months (computed at the annual rate in effect at the date of the Separation Termination), plus (ii) a cash amount equal to the pro rated portion of the performance bonus (computed by reference to the actual number of days Executive is employed during the applicable fiscal year) which would have been paid to Executive under the Company's performance bonus plan for the fiscal year in which the Separation Termination occurs (if any such plan is then in effect) if Executive's employment had continued through the end of the fiscal year and the Company had achieved 100% of its scheduled performance goals, plus (iii) paid up COBRA benefits for Executive and his or her family for the 12 months following the date of the Separation Termination. Further, notwithstanding any contrary provision in the applicable stock option agreement, all Options which are not vested as of the date of the Separation Termination shall become vested and immediately exercisable and all Options held by Executive as of the date of the Separation Termination (including those which become exercisable solely as a result of the provisions of this sentence) shall remain exercisable for a period of 12 months following the date of the Separation Termination. For purposes of this paragraph, "Defacto Termination" shall include any of the following events: (i) the Company shall reduce the Executive's 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 executive officers compensation in general; (ii) the Company shall fail to cause Executive to remain an executive officer of the Company; (iii) Executive shall not be afforded the authority, powers, responsibilities and privileges customarily accorded to an executive with his or her title; or (iv) the Company shall require Executive's primary services to be rendered in an area other than the Company's principal offices in the greater Los Angeles metropolitan area. Page 2 3. CHANGE IN CONTROL. The following provisions shall be applicable in the case of an occurrence of a Change in Control of the Company: 3.1 Executive may (but shall not be obligated to) terminate his or her employment with the Company effective 30 days after the giving of such notice given at any time commencing with the sixth month anniversary of such Change in Control and terminating on the one year anniversary of the Change in Control, and receive the payments provided for in Section 3.3 hereof. 3.2 If the Company terminates Executive's employment for any reason (including death, disability, Cause, without Cause or in the case of a Defacto Termination) at any time within the one year period following the date of a Change in Control, then Executive shall be entitled to the payments provided for in Section 3.3 hereof. 3.3 In the circumstances described in Sections 3.1 and 3.2 above, Executive shall be entitled to and receive the Separation Package. 3.4 In addition to any amounts payable to Executive pursuant to Sections 3.1 and 3.2 above, and without regard to whether Executive's employment is terminated following a Change in Control, upon the occurrence of a Change in Control, all Options then held by Executive which are not yet vested shall vest as of the date of a Change in Control and shall become immediately exercisable. Further, all Options that are exercisable as of the date of such Change in Control (including those which do so as a result of the provisions of the preceding sentence) shall remain so for 12 months following the date of such Change in Control. 3.5 For purposes of this Agreement, a Change in Control shall mean: 3.5.1 The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of more than 25% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that neither of the following acquisitions shall constitute a Change in Control: (i) any acquisition by the Company or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or 3.5.2 Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the stockholders of the Company, shall be approved by a vote of at least a majority of the directors Page 3 then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or 3.5.3 Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation: (i) more than 60% of the combined voting power of the then outstanding voting securities of the corporation resulting from such reorganization, merger, or consolidation, which may be the Company (the "Resulting Corporation") entitled to vote generally in the election of directors (the "Resulting Corporation Voting Securities") shall then be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of Outstanding Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions as their respective ownership of Outstanding Voting Securities immediately prior to such reorganization, merger, or consolidation; (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, the Resulting Corporation, and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities) shall own beneficially, directly or indirectly 25% or more of the combined voting power of the Resulting Corporation Voting Securities; and (iii) at least a majority of the members of the Board shall have been members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or 3.5.4 Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation (the "Buyer") with respect to which (i) following such sale or other disposition, more than 60% of the combined voting power of securities of Buyer entitled to vote generally in the election of directors ("Buyer Voting Securities"), shall be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of the Outstanding Voting Securities immediately prior to such sale or other disposition, in substantially the same proportion as their respective ownership of Outstanding Voting Securities, immediately prior to such sale or other disposition; (ii) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or Buyer and any Person that shall immediately prior to such sale or other disposition own beneficially, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities), shall own beneficially, directly or indirectly, 25% or more of the combined voting power or, Buyer Voting Securities; and (z) at least a majority of the members of the board of directors of Buyer shall have been members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition or assets of the Company. 4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump sum on the second business day following termination of Executive's employment with the Company. Page 4 5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and exercise dates of Options as set forth in other Sections of this Agreement, Executive's rights under any other agreement or plan under which stock options, restricted stock or similar awards are granted shall be determined in accordance with the terms and provisions of such plans or agreements. 6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement shall not be subject to any claim of mitigation nor shall the Company be entitled to any right of offset with respect thereto. 7. GENERAL RELEASE. As a condition to the payment of the Separation Package, Executive shall execute and deliver a general release to the Company in the form attached as Exhibit A attached hereto. 8. GENERAL PROVISIONS. 8.1 NOTICES. All notices, requirements, requests, demands, claims or other communications hereunder shall be in writing. Any notice, requirement, request, demand, claim or other communication hereunder shall be deemed duly given (i) if personally delivered, when so delivered, (ii) if mailed, two (2) business days after having been set by registered or certified mail, return-receipt requested, postage prepaid and addressed to the intended recipient as set forth below, (iii) if given by telecopier, once such notice or other communication is transmitted to the telecopier number specified below, and the appropriate telephonic confirmation is received, provided that such notice or other communication is promptly thereafter mailed in accordance with the provisions of clause (ii) above or (iv) if sent through an overnight delivery service under circumstances by which such service guarantees next day delivery, the date following the date so sent: IF TO THE COMPANY, TO: 4540 W. Valerio Street Burbank, CA 91505 IF TO EXECUTIVE TO: Catherine Kwong Giffen 11901 Eddleston Drive Northridge, CA 91326 Any party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 8.2 ASSIGNMENT. This Agreement and the benefits hereunder are personal to the Company and are not assignable or transferable, nor may be the services to be performed hereunder be assigned by the Company to any person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the benefits hereunder may be assigned by the Company to any corporation into which the Company may be merged or consolidated, and this Agreement and the benefits hereunder will automatically be deemed assigned to any such corporation, subject, however, to Executive's right to terminate this Agreement to the extent provided herein. Page 5 8.3 COMPLETE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes and cancels any and all previous written or oral negotiations, commitments, understandings, agreements and any other writings or communications in respect of such subject matter. 8.4 AMENDMENTS. This Agreement may be modified, amended, superseded or terminated only by a writing duly signed by both parties. 8.5 SEVERABILITY. Any provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. 8.6 NO WAIVER. Any waiver by either party of a breach of any provisions of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of either party to insist upon strict adherence to any term of this Agreement on one or more occasions shall be considered a waiver or to deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 8.7 BINDING EFFECT. This Agreement shall be binding on, and shall inure to the benefit of, the parties hereto and their permitted assigns, successors and legal representatives. 8.8 COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same document. 8.9 GOVERNING LAW. This Agreement has been negotiated and entered into in the State of California and shall be construed in accordance with the laws of the State of California. 8.10 ARBITRATION. The parties hereby expressly agree that any controversy or claim relating to this Agreement, including the construction, enforcement or application of the terms hereof, shall be submitted to arbitration in Los Angeles, California by the American Arbitration Association in accordance with the Commercial Arbitration Rules of such association. The arbitrator shall be a retired judge of the Los Angeles Superior Court or other party acceptable to the parties and the rules of evidence shall apply. The costs of the arbitrator shall be borne equally. Each party shall be responsible for its own attorneys' fees and costs. However, the arbitrator shall have the right to award costs and expenses (including actual attorneys' fees) to the prevailing party as well as equitable relief. The award of the arbitrator shall be final and binding and shall be enforceable in any court of competent jurisdiction. Page 6 Nothing in this paragraph shall preclude the parties from seeking an injunction or other equitable relief from a court of competent jurisdiction under appropriate circumstances. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and Executive has executed the same as of the day and year first above written. IWERKS ENTERTAINMENT, INC. By: /s/ Roy A. Wright --------------------------- Its: Chairman & CEO By: /s/ Catherine Giffen 10/31/97 --------------------------- Catherine Giffen Page 7 EXHIBIT A WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard to any claims which may exist or arise out of the Executive's current or any prior affiliation with the Company (the "Disputes"), Executive expressly waives all claims against the Company, including, without limitation, any and all rights under Section 1542 of the Civil Code of the State of California which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Executive waives and releases any right or benefit which he has or may have under any similar law or rule of any other jurisdiction pertaining to the Disputes. It is the intention of Executive, through this Agreement, fully, finally, and forever to settle and release all such matters and claims relative thereto which have existed, do now exist or may exist between the parties arising out of or related to the Disputes. In furtherance of such intention, the release herein given shall be, and remain in effect as, a full and complete release of such matters notwithstanding the discovery of the existence of any additional claims or facts relating thereto. EX-10.5 6 EXHIBIT 10.5 SEPARATION AGREEMENT SEPARATION AGREEMENT --------------------- This Separation Agreement (this "Agreement") is made and entered into as of October 31, 1997 by and between Iwerks Entertainment, Inc., a Delaware corporation (the "Company"), and, Jon Corfino, an individual ("Executive"). RECITALS: A. Iwerks Entertainment Inc. (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection with this, the Corporation's Board of Directors (the "Board") recognizes the possibility of a change in management personnel or a change in control of the Corporation may exist and that such possibility, and that such uncertainty and questions that it may raise among management, could result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders. B. The Board has decided to reinforce and encourage the continued attention and dedication of members of the Corporation's management to their assigned duties without distraction arising from the possibility of a change in management of control of the Corporation. C. In order to induce Executive to remain in its employ, the Corporation has entered into this Agreement with Executive. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive agree as set forth below. 1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY EXECUTIVE. The Company may terminate Executive's employment at any time with or without Cause, and Executive may terminate his or her employment at any time for any reason, in each case by delivery of written notice to the other party. If the Company terminates Executive's employment with the Company for Cause or if Executive terminates such employment by reason of disability, death or voluntary resignation, then Executive shall be entitled to receive all salary and benefits (including vacation, death, disability and medical benefits, if any, to the extent such benefits are accorded to Executive under the Company's benefit plans maintained for employees generally) accrued and payable to him or her with respect to services rendered through the date of termination and shall be entitled to no additional separation or severance payment hereunder. Further, in such case, this Agreement shall have no effect on, and shall not be deemed to amend or modify, any of the terms of any stock option granted to Executive by the Company through the date of termination (collectively, the "Options") and Executive's rights thereunder shall be limited to the terms and conditions set forth in the applicable stock option agreement evidencing such Options. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Executive involving the Company; or (ii) any action by Executive involving the arrest of Executive for violation of any criminal statute constituting a felony or a misdemeanor involving moral turpitude if the Board reasonably determines that the continuation of Executive's employment after such event would have an adverse impact on the operations or reputation of the Company in the financial community; or (iii) gross misconduct or habitual negligence in the performance of Executive's duties, or (iv) an act constituting a breach of Executive's fiduciary duty to the Corporation under the Delaware General Corporation Law, or (v) a continuing, repeated willful failure or refusal by Executive to perform his duties; PROVIDED, HOWEVER, that termination shall not be deemed to be for Cause under this subclause (v) unless Executive shall have first received written notice from the Board advising Executive of the specific acts or omissions alleged to constitute a failure or refusal to perform and such failure or refusal to perform continues after Executive shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. 2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the provisions of Section 4 below, if the Company terminates Executive's employment with the Company other than for Cause or if the Company causes a Defacto Termination of Executive (as defined below) (each a "Separation Termination"), Executive shall receive the "Separation Package." As used herein, the "Separation Package" shall consist of (i) a cash amount equal to the base salary which would have been payable to Executive over six months (computed at the annual rate in effect at the date of the Separation Termination), plus (ii) a cash amount equal to the pro rated portion of the performance bonus (computed by reference to the actual number of days Executive is employed during the applicable fiscal year) which would have been paid to Executive under the Company's performance bonus plan for the fiscal year in which the Separation Termination occurs (if any such plan is then in effect) if Executive's employment had continued through the end of the fiscal year and the Company had achieved 100% of its scheduled performance goals, plus (iii) paid up COBRA benefits for Executive and his or her family for the 12 months following the date of the Separation Termination. Further, notwithstanding any contrary provision in the applicable stock option agreement, all Options which are not vested as of the date of the Separation Termination shall become vested and immediately execisable and all Options held by Executive as of the date of the Separation Termination (including those which become exercisable solely as a result of the provisions of this sentence) shall remain exercisable for a period of 12 months following the date of the Separation Termination. For purposes of this paragraph, "Defacto Termination" shall include any of the following events: (i) the Company shall reduce the Executive's 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 executive officers compensation in general; (ii) the Company shall fail to cause Executive to remain an executive officer of the Company; (iii) Executive shall not be afforded the authority, powers, responsibilities and privileges customarily accorded to an executive with his or her title; or (iv) the Company shall require Executive's primary services to be rendered in an area other than the Company's principal offices in the greater Los Angeles metropolitan area. 3. CHANGE IN CONTROL. The following provisions shall be applicable in the case of an occurrence of a Change in Control of the Company: 3.1 Executive may (but shall not be obligated to) terminate his or her employment with the Company effective 30 days after the giving of such notice given at any time Page 2 commencing with the sixth month anniversary of such Change in Control and terminating on the one year anniversary of the Change in Control, and receive the payments provided for in Section 3.3 hereof. 3.2 If the Company terminates Executive's employment for any reason (including death, disability, Cause, without Cause or in the case of a Defacto Termination) at any time within the one year period following the date of a Change in Control, then Executive shall be entitled to the payments provided for in Section 3.3 hereof. 3.3 In the circumstances described in Sections 3.1 and 3.2 above, Executive shall be entitled to and receive the Separation Package. 3.4 In addition to any amounts payable to Executive pursuant to Sections 3.1 and 3.2 above, and without regard to whether Executive's employment is terminated following a Change in Control, upon the occurrence of a Change in Control, all Options then held by Executive which are not yet vested shall vest as of the date of a Change in Control and shall become immediately exercisable. Further, all Options that are exercisable as of the date of such Change in Control (including those which do so as a result of the provisions of the preceding sentence) shall remain so for 12 months following the date of such Change in Control. 3.5 For purposes of this Agreement, a Change in Control shall mean: 3.5.1 The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of more than 25% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that neither of the following acquisitions shall constitute a Change in Control: (i) any acquisition by the Company or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or 3.5.2 Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the stockholders of the Company, shall be approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or 3.5.3 Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation: (i) more than 60% of the combined voting power of the then outstanding voting securities of the corporation resulting from such reorganization, merger, or consolidation, which may be the Company (the "Resulting Corporation") entitled to vote generally in the election of directors (the "Resulting Corporation Voting Securities") shall then be owned beneficially, directly Page 3 or indirectly, by all or substantially all of the Persons who were the beneficial owners of Outstanding Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions as their respective ownership of Outstanding Voting Securities immediately prior to such reorganization, merger, or consolidation; (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, the Resulting Corporation, and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities) shall own beneficially, directly or indirectly 25% or more of the combined voting power of the Resulting Corporation Voting Securities; and (iii) at least a majority of the members of the Board shall have been members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or 3.5.4 Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation (the "Buyer") with respect to which (i) following such sale or other disposition, more than 60% of the combined voting power of securities of Buyer entitled to vote generally in the election of directors ("Buyer Voting Securities"), shall be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of the Outstanding Voting Securities immediately prior to such sale or other disposition, in substantially the same proportion as their respective ownership of Outstanding Voting Securities, immediately prior to such sale or other disposition; (ii) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or Buyer and any Person that shall immediately prior to such sale or other disposition own beneficially, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities), shall own beneficially, directly or indirectly, 25% or more of the combined voting power or, Buyer Voting Securities; and (z) at least a majority of the members of the board of directors of Buyer shall have been members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition or assets of the Company. 4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump sum on the second business day following termination of Executive's employment with the Company. 5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and exercise dates of Options as set forth in other Sections of this Agreement, Executive's rights under any other agreement or plan under which stock options, restricted stock or similar awards are granted shall be determined in accordance with the terms and provisions of such plans or agreements. 6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement shall not be subject to any claim of mitigation nor shall the Company be entitled to any right of offset with respect thereto. Page 4 7. GENERAL RELEASE. As a condition to the payment of the Separation Package, Executive shall execute and deliver a general release to the Company in the form attached as Exhibit A attached hereto. 8. GENERAL PROVISIONS. 8.1 NOTICES. All notices, requirements, requests, demands, claims or other communications hereunder shall be in writing. Any notice, requirement, request, demand, claim or other communication hereunder shall be deemed duly given (i) if personally delivered, when so delivered, (ii) if mailed, two (2) business days after having been set by registered or certified mail, return-receipt requested, postage prepaid and addressed to the intended recipient as set forth below, (iii) if given by telecopier, once such notice or other communication is transmitted to the telecopier number specified below, and the appropriate telephonic confirmation is received, provided that such notice or other communication is promptly thereafter mailed in accordance with the provisions of clause (ii) above or (iv) if sent through an overnight delivery service under circumstances by which such service guarantees next day delivery, the date following the date so sent: IF TO THE COMPANY, TO: 4540 W. Valerio Street Burbank, CA 91505 IF TO EXECUTIVE TO: Jon Corfino 25597 Via Velador Valencia, CA 91355 Any party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 8.2 ASSIGNMENT. This Agreement and the benefits hereunder are personal to the Company and are not assignable or transferable, nor may be the services to be performed hereunder be assigned by the Company to any person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the benefits hereunder may be assigned by the Company to any corporation into which the Company may be merged or consolidated, and this Agreement and the benefits hereunder will automatically be deemed assigned to any such corporation, subject, however, to Executive's right to terminate this Agreement to the extent provided herein. 8.3 COMPLETE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes and cancels any and all previous written or oral negotiations, commitments, understandings, agreements and any other writings or communications in respect of such subject matter. 8.4 AMENDMENTS. This Agreement may be modified, amended, superseded or terminated only by a writing duly signed by both parties. Page 5 8.5 SEVERABILITY. Any provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. 8.6 NO WAIVER. Any waiver by either party of a breach of any provisions of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of either party to insist upon strict adherence to any term of this Agreement on one or more occasions shall be considered a waiver or to deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 8.7 BINDING EFFECT. This Agreement shall be binding on, and shall inure to the benefit of, the parties hereto and their permitted assigns, successors and legal representatives. 8.8 COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same document. 8.9 GOVERNING LAW. This Agreement has been negotiated and entered into in the State of California and shall be construed in accordance with the laws of the State of California. 8.10 ARBITRATION. The parties hereby expressly agree that any controversy or claim relating to this Agreement, including the construction, enforcement or application of the terms hereof, shall be submitted to arbitration in Los Angeles, California by the American Arbitration Association in accordance with the Commercial Arbitration Rules of such association. The arbitrator shall be a retired judge of the Los Angeles Superior Court or other party acceptable to the parties and the rules of evidence shall apply. The costs of the arbitrator shall be borne equally. Each party shall be responsible for its own attorneys' fees and costs. However, the arbitrator shall have the right to award costs and expenses (including actual attorneys' fees) to the prevailing party as well as equitable relief. The award of the arbitrator shall be final and binding and shall be enforceable in any court of competent jurisdiction. Nothing in this paragraph shall preclude the parties from seeking an injunction or other equitable relief from a court of competent jurisdiction under appropriate circumstances. Page 6 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and Executive has executed the same as of the day and year first above written. IWERKS ENTERTAINMENT, INC. By: /s/ Roy A. Wright ----------------------- Its: Chairman and CEO /s/ Jon Corfino --------------------------- Jon Corfino Page 7 EXHIBIT A WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard to any claims which may exist or arise out of the Executive's current or any prior affiliation with the Company (the "Disputes"), Executive expressly waives all claims against the Company, including, without limitation, any and all rights under Section 1542 of the Civil Code of the State of California which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Executive waives and releases any right or benefit which he has or may have under any similar law or rule of any other jurisdiction pertaining to the Disputes. It is the intention of Executive, through this Agreement, fully, finally, and forever to settle and release all such matters and claims relative thereto which have existed, do now exist or may exist between the parties arising out of or related to the Disputes. In furtherance of such intention, the release herein given shall be, and remain in effect as, a full and complete release of such matters notwithstanding the discovery of the existence of any additional claims or facts relating thereto. EX-10.6 7 EXHIBIT 10.6 SEPARATION AGREEMENT SEPARATION AGREEMENT -------------------- This Separation Agreement (this "Agreement") is made and entered into as of October 31, 1997 by and between Iwerks Entertainment, Inc., a Delaware corporation (the "Company"), and, Curt Thornton, an individual ("Executive"). RECITALS: A. Iwerks Entertainment Inc. (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection with this, the Corporation's Board of Directors (the "Board") recognizes the possibility of a change in management personnel or a change in control of the Corporation may exist and that such possibility, and that such uncertainty and questions that it may raise among management, could result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders. B. The Board has decided to reinforce and encourage the continued attention and dedication of members of the Corporation's management to their assigned duties without distraction arising from the possibility of a change in management of control of the Corporation. C. In order to induce Executive to remain in its employ, the Corporation has entered into this Agreement with Executive. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive agree as set forth below. 1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY EXECUTIVE. The Company may terminate Executive's employment at any time with or without Cause, and Executive may terminate his or her employment at any time for any reason, in each case by delivery of written notice to the other party. If the Company terminates Executive's employment with the Company for Cause or if Executive terminates such employment by reason of disability, death or voluntary resignation, then Executive shall be entitled to receive all salary and benefits (including vacation, death, disability and medical benefits, if any, to the extent such benefits are accorded to Executive under the Company's benefit plans maintained for employees generally) accrued and payable to him or her with respect to services rendered through the date of termination and shall be entitled to no additional separation or severance payment hereunder. Further, in such case, this Agreement shall have no effect on, and shall not be deemed to amend or modify, any of the terms of any stock option granted to Executive by the Company through the date of termination (collectively, the "Options") and Executive's rights thereunder shall be limited to the terms and conditions set forth in the applicable stock option agreement evidencing such Options. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Executive involving the Company; or (ii) any action by Executive involving the arrest of Executive for violation of any criminal statute constituting a felony or a misdemeanor involving moral turpitude if the Board reasonably determines that the continuation of Executive's employment after such event would have an adverse impact on the operations or reputation of the Company in the financial community; or (iii) gross misconduct or habitual negligence in the performance of Executive's duties, or (iv) an act constituting a breach of Executive's fiduciary duty to the Corporation under the Delaware General Corporation Law, or (v) a continuing, repeated willful failure or refusal by Executive to perform his duties; PROVIDED, HOWEVER, that termination shall not be deemed to be for Cause under this subclause (v) unless Executive shall have first received written notice from the Board advising Executive of the specific acts or omissions alleged to constitute a failure or refusal to perform and such failure or refusal to perform continues after Executive shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. 2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the provisions of Section 4 below, if the Company terminates Executive's employment with the Company other than for Cause or if the Company causes a Defacto Termination of Executive (as defined below) (each a "Separation Termination"), Executive shall receive the "Separation Package." As used herein, the "Separation Package" shall consist of (i) a cash amount equal to the base salary which would have been payable to Executive over six months (computed at the annual rate in effect at the date of the Separation Termination), plus (ii) a cash amount equal to the pro rated portion of the performance bonus (computed by reference to the actual number of days Executive is employed during the applicable fiscal year) which would have been paid to Executive under the Company's performance bonus plan for the fiscal year in which the Separation Termination occurs (if any such plan is then in effect) if Executive's employment had continued through the end of the fiscal year and the Company had achiever 100% of its scheduled performance goals, plus (iii) paid up COBRA benefits for Executive and his or her family for the 12 months following the date of the Separation Termination. Further, notwithstanding any contrary provision in the applicable stock option agreement, all Options which are not vested as of the date of the Separation Termination shall become vested and immediately exercisable and all Options held by Executive as of the date of the Separation Termination (including those which become exercisable solely as a result of the provisions of this sentence) shall remain exercisable for a period of 12 months following the date of the Separation Termination. For purposes of this paragraph, "Defacto Termination" shall include any of the following events: (i) the Company shall reduce the Executive's 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 executive officers compensation in general; (ii) the Company shall fail to cause Executive to remain an executive officer of the Company; (iii) Executive shall not be afforded the authority, powers, responsibilities and privileges customarily accorded to an executive with his or her title; or (iv) the Company shall require Executive's primary services to be rendered in an area other than the Company's principal offices in the greater Los Angeles metropolitan area. Page 2 3. CHANGE IN CONTROL. The following provisions shall be applicable in the case of an occurrence of a Change in Control of the Company: 3.1 Executive may (but shall not be obligated to) terminate his or her employment with the Company effective 30 days after the giving of such notice given at any time commencing with the sixth month anniversary of such Change in Control and terminating on the one year anniversary of the Change in Control, and receive the payments provided for in Section 3.3 hereof. 3.2 If the Company terminates Executive's employment for any reason (including death, disability, Cause, without Cause or in the case of a Defacto Termination) at any time within the one year period following the date of a Change in Control, then Executive shall be entitled to the payments provided for in Section 3.3 hereof. 3.3 In the circumstances described in Sections 3.1 and 3.2 above, Executive shall be entitled to and receive the Separation Package. 3.4 In addition to any amounts payable to Executive pursuant to Sections 3.1 and 3.2 above, and without regard to whether Executive's employment is terminated following a Change in Control, upon the occurrence of a Change in Control, all Options then held by Executive which are not yet vested shall vest as of the date of a Change in Control and shall become immediately exercisable. Further, all Options that are exercisable as of the date of such Change in Control (including those which do so as a result of the provisions of the preceding sentence) shall remain so for 12 months following the date of such Change in Control. 3.5 For purposes of this Agreement, a Change in Control shall mean: 3.5.1 The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of more than 25% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that neither of the following acquisitions shall constitute a Change in Control: (i) any acquisition by the Company or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or 3.5.2 Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the stockholders of the Company, shall be approved by a vote of at least a majority of the directors Page 3 then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or 3.5.3 Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation: (i) more than 60% of the combined voting power of the then outstanding voting securities of the corporation resulting from such reorganization, merger, or consolidation, which may be the Company (the "Resulting Corporation") entitled to vote generally in the election of directors (the "Resulting Corporation Voting Securities") shall then be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of Outstanding Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions as their respective ownership of Outstanding Voting Securities immediately prior to such reorganization, merger, or consolidation; (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, the Resulting Corporation, and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities) shall own beneficially, directly or indirectly 25% or more of the combined voting power of the Resulting Corporation Voting Securities; and (iii) at least a majority of the members of the Board shall have been members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or 3.5.4 Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation (the "Buyer") with respect to which (i) following such sale or other disposition, more than 60% of the combined voting power of securities of Buyer entitled to vote generally in the election of directors ("Buyer Voting Securities"), shall be owned beneficially, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of the Outstanding Voting Securities immediately prior to such sale or other disposition, in substantially the same proportion as their respective ownership of Outstanding Voting Securities, immediately prior to such sale or other disposition; (ii) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or Buyer and any Person that shall immediately prior to such sale or other disposition own beneficially, directly or indirectly, 25% or more of the combined voting power of Outstanding Voting Securities), shall own beneficially, directly or indirectly, 25% or more of the combined voting power or, Buyer Voting Securities; and (z) at least a majority of the members of the board of directors of Buyer shall have been members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition or assets of the Company. 4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump sum on the second business day following termination of Executive's employment with the Company. Page 4 5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and exercise dates of Options as set forth in other Sections of this Agreement, Executive's rights under any other agreement or plan under which stock options, restricted stock or similar awards are granted shall be determined in accordance with the terms and provisions of such plans or agreements. 6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement shall not be subject to any claim of mitigation nor shall the Company be entitled to any right of offset with respect thereto. 7. GENERAL RELEASE. As a condition to the payment of the Separation Package, Executive shall execute and deliver a general release to the Company in the form attached as Exhibit A attached hereto. 8. GENERAL PROVISIONS. 8.1 NOTICES. All notices, requirements, requests, demands, claims or other communications hereunder shall be in writing. Any notice, requirement, request, demand, claim or other communication hereunder shall be deemed duly given (i) if personally delivered, when so delivered, (ii) if mailed, two (2) business days after having been set by registered or certified mail, return-receipt requested, postage prepaid and addressed to the intended recipient as set forth below, (iii) if given by telecopier, once such notice or other communication is transmitted to the telecopier number specified below, and the appropriate telephonic confirmation is received, provided that such notice or other communication is promptly thereafter mailed in accordance with the provisions of clause (ii) above or (iv) if sent through an overnight delivery service under circumstances by which such service guarantees next day delivery, the date following the date so sent: IF TO THE COMPANY, TO: 4540 W. Valerio Street Burbank, CA 91505 IF TO EXECUTIVE TO: Curt Thornton 3149 Divernon Avenue Simi Valley, CA 93063 Any party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 8.2 ASSIGNMENT. This Agreement and the benefits hereunder are personal to the Company and are not assignable or transferable, nor may be the services to be performed hereunder be assigned by the Company to any person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the benefits hereunder may be assigned by the Company to any corporation into which the Company may be merged or consolidated, and this Agreement and the benefits hereunder will automatically be deemed assigned to any such corporation, subject, however, to Executive's right to terminate this Agreement to the extent provided herein. Page 5 8.3 COMPLETE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes and cancels any and all previous written or oral negotiations, commitments, understandings, agreements and any other writings or communications in respect of such subject matter. 8.4 AMENDMENTS. This Agreement may be modified, amended, superseded or terminated only by a writing duly signed by both parties. 8.5 SEVERABILITY. Any provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. 8.6 NO WAIVER. Any waiver by either party of a breach of any provisions of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of either party to insist upon strict adherence to any term of this Agreement on one or more occasions shall be considered a waiver or to deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 8.7 BINDING EFFECT. This Agreement shall be binding on, and shall inure to the benefit of, the parties hereto and their permitted assigns, successors and legal representatives. 8.8 COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same document. 8.9 GOVERNING LAW. This Agreement has been negotiated and entered into in the State of California and shall be construed in accordance with the laws of the State of California. 8.10 ARBITRATION. The parties hereby expressly agree that any controversy or claim relating to this Agreement, including the construction, enforcement or application of the terms hereof, shall be submitted to arbitration in Los Angeles, California by the American Arbitration Association in accordance with the Commercial Arbitration Rules of such association. The arbitrator shall be a retired judge of the Los Angeles Superior Court or other party acceptable to the parties and the rules of evidence shall apply. The costs of the arbitrator shall be borne equally. Each party shall be responsible for its own attorneys' fees and costs. However, the arbitrator shall have the right to award costs and expenses (including actual attorneys' fees) to the prevailing party as well as equitable relief. The award of the arbitrator shall be final and binding and shall be enforceable in any court of competent jurisdiction. Page 6 Nothing in this paragraph shall preclude the parties from seeking an injunction or other equitable relief from a court of competent jurisdiction under appropriate circumstances. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and Executive has executed the same as of the day and year first above written. IWERKS ENTERTAINMENT, INC. By: /s/ Roy A. Wright -------------------------- Its: Chairman and CEO /s/ Curt Thornton -------------------------- Curt Thornton Page 7 EXHIBIT A WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard to any claims which may exist or arise out of the Executive's current or any prior affiliation with the Company (the "Disputes"), Executive expressly waives all claims against the Company, including, without limitation, any and all rights under Section 1542 of the Civil Code of the State of California which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Executive waives and releases any right or benefit which he has or may have under any similar law or rule of any other jurisdiction pertaining to the Disputes. It is the intention of Executive, through this Agreement, fully, finally, and forever to settle and release all such matters and claims relative thereto which have existed, do now exist or may exist between the parties arising out of or related to the Disputes. In furtherance of such intention, the release herein given shall be, and remain in effect as, a full and complete release of such matters notwithstanding the discovery of the existence of any additional claims or facts relating thereto. EX-11.1 8 EXHIBIT 11.1 EARNINGS PER SHARE EXHIBIT 11.1 IWERKS ENTERTAINMENT, INC. EARNINGS PER SHARE (in thousands, except per share amounts)
For the Three Months For the Six Months Ended December 31, Ended December 31, ---------------------- --------------------- 1997 1996 1997 1996 --------- ------- -------- -------- Denominator for Basic Earnings per Share - Weighted average shares outstanding 12,161 11,715 12,160 11,675 Effect of dilutive securities: Options and warrants (a) (a) (a) 660 --------- -------- -------- -------- Denominator for Diluted Earnings per Share 12,161 11,715 12,160 12,335 ========= ======== ======== ======== Net income (loss) $ (3,500) $ (57) $(4,006) $ 117 ========= ======= ======== ======== Basic income (loss) per share $ (0.29) $ 0.00 $ (0.33) $ 0.01 ========= ======= ======== ======== Diluted income (loss) per share $ (0.29) $ 0.00 $ (0.33) $ 0.01 ========= ======== ======== ========
(a) These common equivalent shares were antidilutive. EX-15.1 9 EXHIBIT 15.1 AUDITOR'S CONSENT EXHIBIT 15.1 February 10, 1998 The Board of Directors Iwerks Entertainment, Inc. We are aware of the incorporation by reference in the Registration Statement (Form S-8 No. 33-77816) pertaining to the Employees' incentive stock options and other stock option and warrant agreements of Iwerks Entertainment, Inc. of our report dated February 10, 1998 relating to the unaudited condensed consolidated interim financial statements of Iwerks Entertainment, Inc. that are included in its Form 10-Q for the quarter ended December 31, 1997. /S/ERNST & YOUNG LLP EX-27.1 10 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. (AMOUNTS IN THOUSANDS) 1,000 6-MOS JUN-30-1998 JUL-01-1997 DEC-31-1997 3,662 13,718 4,135 (1,095) 3,195 27,057 39,131 (26,577) 57,850 11,959 1,511 0 0 78,073 (33,693) 57,850 14,041 14,532 9,957 9,957 8,447 418 134 (4006) 0 (4006) 0 0 0 (4,006) (0.33) (0.33) Includes Costs and estimated earnings in excess of billings on uncompleted contracts of $2,738 and other current assets of $704. Includes portable simulation theaters and film inventory. Includes portable simulation theaters and film inventory Includes the non-current portions of capital leases. Accumulated deficit. Includes interest income of $491.
EX-99.1 11 EXHIBIT 99.1 INDEPENDENT ACCOUNTANTS' REVIEW REPORT EXHIBIT 99.1 Independent Accountants' Review Report The Board of Directors Iwerks Entertainment, Inc. We have reviewed the accompanying unaudited condensed consolidated balance sheet of Iwerks Entertainment, Inc. and subsidiaries as of December 31, 1997, and the related unaudited condensed consolidated statements of operations for the three and six month periods ended December 31, 1997 and 1996, and the unaudited condensed consolidated statements of cash flows for the six-month periods ended December 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Iwerks Entertainment, Inc. as of June 30, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended not presented herein and in our report dated August 5, 1997 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 1997 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. February 10, 1998, except for Note 8 as to which the date is February 20, 1998 /S/ ERNST & YOUNG LLP -----END PRIVACY-ENHANCED MESSAGE-----