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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996.
COMMISSION FILE NUMBER 0-15939
SHOWSCAN ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3940004
(State of incorporation) (I.R.S. Employer Identification No.)
3939 LANDMARK STREET, CULVER CITY, CALIFORNIA 90232
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 558-0150
Securities registered pursuant to
Section 12(b) of the Act: NONE
Securities registered pursuant to
Section 12(g) of the Act: TITLE OF EACH CLASS
Common Stock,
$.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 20, 1996 was approximately $32,262,224 (based on last
NASDAQ-reported sale price of $6.50 per share of Common Stock on that date).
There were 5,563,799 shares of registrant's common stock outstanding as of June
20, 1996.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1996 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days after the close of registrant's fiscal year, are incorporated herein by
reference in Part III of this Report.
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TABLE OF CONTENTS
<TABLE>
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Item Page
Part I
<S> <C> <C>
1. Business............................................................................................... 3
2. Properties............................................................................................ 18
3. Legal Proceedings.................................................................................... 18
4. Submission of Matters to a Vote of Security Holders.................................................. 19
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 20
6. Selected Financial Data............................................................................. 21
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................... 22
8. Financial Statements and Supplementary Data.......................................................... 29
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................................ 29
Part III
10. Directors and Executive Officers of the Registrant.................................................... 30
11. Executive Compensation................................................................................ 30
12. Security Ownership of Certain Beneficial Owners and Management........................................ 30
13. Certain Relationships and Related Transactions........................................................ 30
Part IV
14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K............................................................................ 31
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Showscan Entertainment Inc. (the "Company") is a leading provider of
movie-based motion simulation theatre attractions to the rapidly expanding
out-of-home entertainment market. The Company's motion simulation theatre
attractions ("Showscan Attractions") combine the exhibition of a short action
Showscan film with multi-channel sound systems and synchronized theatre seat
movement to produce an immersive entertainment experience in which the theatre
patron has the perception of actually participating in the on-screen action. The
entertainment creates the experience of "thrill ride" or action entertainment
(such as riding a run-away train or racing through outer space). The Company's
attractions incorporate various proprietary technologies, including the award
winning and patented 70mm filming and projection process known as Showscan(R).
The Company believes that films made and exhibited in the Showscan process
create a visual effect of depth, clarity and realism that is superior to any
other film format. The Showscan process is also used for the exhibition of films
in large screen special format movie theatres. The Company's films have been
exhibited in such specialty theatres at world fairs, tourist destinations, trade
conventions and other locations where the operator desires the impact of the
large-screen, intense image that a Showscan film provides. Recently, the Company
entered another expanding market with the introduction of its new "ShowMax(TM)"
15/70 format giant screen theatre package.
As of June 20, 1996, the Company had 54 Showscan Attractions operating
in 20 countries, had 11 additional Showscan Attractions in its delivery and
installation backlog, and has contractual commitments for an additional 27
Showscan Attractions in its backlog. The Company includes in its backlog all
sales for which it has a signed agreement or letter of intent, in each case
supported by a letter of credit, cash deposits or damage provisions. Until
November 1993, all Showscan Attractions were owned and operated by unaffiliated
third parties. Since then, ventures in which the Company has a 25% to 50%
ownership interest have opened motion simulation theatres ("O&O Theatres") at
Universal CityWalk, Universal City, California; in the Trocadero Arcade at
Piccadilly Circus, in London, England; at General Cinema's 14-screen theatre
multiplex in Framingham, Massachusetts; on the Riverwalk in San Antonio, Texas
and at the Asian Trade Center in Osaka, Japan.
As part of its business, the Company produces and licenses specialty
films in the Showscan process which are then exhibited in conventional theatres
equipped to show Showscan films. The Company also develops and markets all of
the cameras, projectors, motion bases and other equipment necessary to establish
and operate Showscan Attractions and Showscan specialty theatres. The Company
has 5 permanent specialty theatres operating as of June 20, 1996.
The Company was incorporated in Delaware in August 1984 under the name
Showscan Film Corporation. In August 1990, the Company's name was changed to
Showscan Corporation, and in August 1994 the name was changed again to Showscan
Entertainment Inc. The Company's principal executive office is located at 3939
Landmark Street, Culver City, California 90232. The Company's telephone number
at its executive office is (310) 558-0150. Unless the context otherwise
requires, the term "Company" as used in this Report refers to Showscan
Entertainment Inc. and its wholly owned subsidiaries, Showscan Productions,
Inc., Showscan CityWalk, Inc., Showscan Attractions, Inc., Showscan Framingham,
Inc. and Showscan Entertainment B.V.
BUSINESS STRATEGY
The Company believes that there is a rapidly increasing worldwide
consumer demand for a variety of out- of-home entertainment options. The Company
plans to capitalize on its position as a leader in the entertainment motion
simulation attraction business and on the growing demand for entertainment
alternatives by making its movie-based products available to consumers worldwide
at high-visibility and high-traffic locations, such as urban
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entertainment complexes, tourist destinations, family entertainment centers,
amusement/theme parks, movie theatre complexes, gaming casinos, and shopping
centers.
The Company has focused its primary business strategy on the
development of high-margin recurring revenues from licensing and distributing
movie-based software to third-party owner/operators of Showscan Attractions and
from ticket sales at, and licensing of its movie-based software to, O&O
Theatres. The Company is also committed to enhancing the recognition of the
Showscan(R) brand name worldwide. The Company's current strategies to achieve
this objective are as follows:
INCREASE FILM RENTALS AND ROYALTIES BY INCREASING THE INSTALLED BASE OF
SHOWSCAN ATTRACTIONS. The Company seeks to increase the revenues derived from
licensing its Showscan films by enlarging the installed base of Showscan
Attractions and specialty theatres. As this installed base grows, each Showscan
film will be licensed to a greater number of exhibitors thereby increasing
revenue, while amortizing the fixed film production costs over a larger revenue
base. To increase the installed base of Showscan Attractions, the Company is:
(i) Marketing to a wide range of potential customers
worldwide while maintaining reasonable profit
margins;
(ii) Enhancing and expanding its film library utilizing a
combination of internal production resources,
contract production and partnership arrangements;
(iii) Enhancing its proprietary projection and motion base
technology;
(iv) Entering into additional strategic sales arrangements
in Europe, Southeast Asia and certain other countries
to supplement existing strategic agreements which
cover Japan, Hong Kong and selected portions of
China; and
(v) Emphasizing sales having multi-location
possibilities. (To date, the Company has sold 16
Showscan Attractions to Imagine Japan, 10 Showscan
Attractions in Taiwan to Kings Entertainment Co.,
Ltd., four Showscan Attractions in China to Jenor
International, 24 Showscan Attractions to United
Artists Theatre Circuit, Inc. ("UA"), two Showscan
Attractions to Boomtown Hotel and Casino, two
Showscan Attractions to Ster-Kinekor in South Africa,
two Showscan Attractions to Lotte World in Korea and
two Showscan Attractions to Parc du Futuroscope in
France.)
ESTABLISHING ADDITIONAL O&O THEATRES. The Company plans to participate
directly in the recurring revenues from ticket sales and film distribution and
licensing by increasing its ownership of Showscan Attractions. Although the
start-up and the pre-opening marketing and advertising costs of O&O Theatres are
sometimes high (which costs the Company intends to defray in part through
strategic alliances), the variable costs of ticket sales are low. The Company
plans to increase its number of O&O Theatre sites by continuing to enter into
venture agreements to open O&O Theatres in high traffic, high visibility
locations around the world.
The first O&O Theatre opened at Universal CityWalk in Universal City,
California in late November 1993; the second O&O Theatre (which contains two
separate screens) opened in late September 1994 at the Trocadero Arcade at
Piccadilly Circus, London, England; the third O&O Theatre (which contains two
separate screens) opened in late May 1995 at a General Cinema 14-screen theatre
multiplex in a suburb of Boston, Massachusetts; the fourth O&O Theatre (a joint
venture with Imagine Japan) opened in August, 1995 at the Asian Trade Center in
Osaka, Japan; and the fifth O&O Theatre opened in March, 1996 on the Riverwalk
in San Antonio, Texas. UA has agreed to offer to the UA Venture (as defined
below) up to 24 sites at anytime prior to August 19, 1999 as locations for O&O
Theaters. On behalf of the UA Venture, the Company has the right to accept or
reject any such potential site. The Company also has entered into an agreement
with UA that gives the Company (on behalf of the UA Venture) the right of first
negotiation with respect to any additional Showscan Attraction to be installed
in any UA theatre
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complexes. See "Item 1. Business -- Motion Simulation Attractions -- Owned and
Operated Theatres -- The United Artists Venture," below.
The Company intends to continue forming strategic alliances for the
financing of its O&O Theatres in order to leverage its own capital into an
increased number of O&O Theatres. In order to pursue the strategic alliances
portion of its new business strategy, the Company has entered into several
alliances that provide the Company with the capability of acquiring and
financing Showscan Attractions for its own account. See "Item 1. Business --
Motion Simulation Attractions -- Owned and Operated Theatres," below.
PURSUE OTHER BUSINESS OPPORTUNITIES. In addition to increasing the base
of Showscan Attractions and specialty theatres, another objective of the Company
is to explore and exploit other commercial and entertainment opportunities and
revenue sources.
During late Fiscal 1996, the Company introduced a new product line
called "ShowMax(TM)," a complete 15/70 film format giant screen theatre package
that includes state-of-the-art rolling loop projectors, screens, sound systems,
synchronization, show control and theatre design. It is anticipated that the
ShowMax product line will have a positive impact on revenue in future years.
In addition, the Company believes that its current and future library
of motion simulation and specialty films will become increasingly more valuable.
Accordingly, the Company plans to significantly increase the number of films it
produces, distributes and owns by producing at least three new films annually.
During the past fiscal year, the Company released three motion simulation films,
and the Company has completed principal photography on one film and has another
in production, seven additional simulation films under active development and
numerous other simulation films in various stages of development. The Company
also is actively pursuing various financing alternatives, including limited
partnerships and other similar arrangements to finance the production of
additional Showscan motion simulation attraction films. In addition, the Company
may produce and/or acquire films that were not filmed using the Showscan process
for exhibition in the Company's high definition motion simulation theatre
attractions and for distribution to non-Showscan motion simulation attractions.
The Company believes that the Showscan process can also be used to
enhance the effectiveness, appeal and commercial potential of other filmed
products, including feature-length motion pictures, specialty films, commercial
and corporate presentations, educational films, documentaries and other forms of
entertainment, such as interactive and virtual reality attractions. In addition,
the Company is exploring potential additional entertainment applications of the
Showscan process, including the development of video games based on its existing
and future film products.
The Company plans to enter into additional strategic alliances, joint
ventures and other similar arrangements (i) to facilitate the production of its
motion-based software, (ii) to expand the out-of-home entertainment venues in
which its products can be exhibited, (iii) to reduce financial risks, and (iv)
to expand the Company's access to distribution networks, urban entertainment
locations and destination centers, and technological innovations. The Company is
currently considering alliances with motion picture exhibitors, retail shopping
center developers and operators, and others for the establishment of additional
Showscan Attractions and specialty theatres in motion picture multiplexes,
shopping malls, casinos and other gaming venues, and other high-traffic
locations and destinations. Furthermore, the Company may consider the
acquisition of other companies in its line of business or in other businesses.
THE MOTION SIMULATION AND SPECIALTY FILM LIBRARY
The Company derives revenues in the following ways from its film
library: (i) a royalty fee for use of the patented Showscan filming and
projection process, (ii) a distribution fee based on the revenues derived from
all films that are not solely owned by the Company; and (iii) receipt of all or
a percentage of the licensing revenues remaining after the payment of any
distribution fees or expenses. The amount the Company receives from co-owned
films varies, and is based on the participation agreements negotiated with the
other owners of the films.
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The Company's film library consists of two film libraries -- a motion
simulation film library and a specialty film library. The motion simulation film
library is one of the world's largest entertainment motion simulation film
libraries and currently contains 22 action/thrill-ride films available for use
by operators of Showscan Attractions, and the specialty film library contains 16
Showscan specialty films available for exhibition in specialty theatres. The
Company is the sole owner of thirteen of the motion simulation films, a joint
owner of seven motion simulation films and the distributor of two motion
simulation films wholly-owned by an unaffiliated Showscan Attraction operator.
Of the 16 Showscan specialty films, seven are owned by the Company.
The Company finished production of the motion simulation film
"Dracula's Haunted Castle" (a ride through an old, ghost-infested castle)
during the past fiscal year. The film library also consists of such films as
"Cosmic Pinball" (depicting a race through a giant, futuristic pinball park),
and the highly-acclaimed "Devil's Mine Ride" (a ride through an abandoned
mine on a runaway rail car), and such live-action films as "Hong Kong Havoc"
(involving a speedboat chase through Hong Kong Harbor). The Company now owns
100% of "Cosmic Pinball" and increased its ownership of "Devil's Mine Ride"
from 43% to 57% pursuant to acquisitions from certain of the films' producers
during the fiscal year ended March 31, 1996.
The films that the Company produces are either fully financed by third
parties or produced and financed by the Company. When the Company produces
films, it typically hires a production company or team of talent specialists on
a project-by-project basis, similar to the major movie studios. This allows the
Company to retain creative and quality control without the burden of significant
ongoing production overhead expenses. As the film's producer, the Company
typically has control over the creative and technical aspects of the production
and is designated as the film's exclusive distributor.
The Company has obtained the exclusive, perpetual worldwide right to
distribute in the Showscan format all of the Showscan motion simulation films
and specialty films that are not owned by the Company, except that in certain
circumstances the Company does not own the right to distribute such films in the
country in which the owner of the distributed film is located.
The Company has transferred 14 of the Showscan motion simulation films
to high-definition video for exhibition in HD Simulation Attractions.
The Company's specialty film library consists of such films as "Niagara
Wonders", a 23-minute Showscan film produced for exhibition in a permanently
erected 300-seat theatre in Niagara Falls, New York; "France", a 40-minute
Showscan film that was produced by Source Perrier for the 1989 bicentennial
celebration of the French revolution and exhibited in a first-run theatre in
Paris, France; and "Discovery", a 16-minute Showscan film produced by the
government of British Columbia and exhibited in a temporary specialty theatre at
the Expo '86 World's Fair in Vancouver, Canada. Two Showscan specialty films,
"Nature Rediscovered" and "Concerto for the Earth", were in exhibition at
temporary Showscan specialty theatres at the Expo '92 World's Fair in Seville,
Spain. Both films explore biodiversity, ecological awareness and the fragile
balance of nature. "Concerto for the Earth" is the first Showscan film in 3-D;
however, the film can be exhibited in the standard 2-D format.
MOTION SIMULATION ATTRACTIONS
A Showscan Attraction is a theatre (typically 18 to 84 seats) in which
the on-screen action of a short Showscan film is synchronized with the motion of
the theatre seats to simulate various realistic or action experiences. The
Showscan Attraction "rides" are short, approximately four-to-five-minute
entertainment experiences. Each Showscan Attraction is equipped with a
high-quality, multi-channel sound system and a seat motion system (motion base).
Motion bases are available in various theatre configurations to suit the needs
of the various locations, and are manufactured by Intamin, A.G., McFadden
Systems, Inc., Thomson Training and Simulation, and others. The potential market
for motion simulation theatre attractions includes any location with high
pedestrian traffic, including tourist attractions, amusement parks, theme parks,
resorts, large regional shopping centers, motion-picture multiplexes, urban
entertainment centers, and hotel casinos.
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Showscan Attractions are either the standard film-based theatres in
which the Company's 70mm motion simulation films are exhibited using the
Company's patented projector, or are HD Simulation Attractions in which the
motion simulation films are projected using standard, commercially available
high-definition video projection equipment. To date, most Showscan Attractions
have exhibited Showscan motion simulation films using 70mm film and the
Company's projectors. However, the Company has seen increasing demand for its HD
Simulation Attractions in which the Showscan films are transferred to a
high-definition video format on laser discs and projected using high definition
video projectors. See "Item 1. Business -- Equipment," below. Because the
Showscan film is transferred directly frame-to-field to high-definition video,
the Company believes that the image projected is the sharpest image available in
that format. The HD Simulation Attractions, when combined with any of the
available motion bases, utilize less space than the standard film-based Showscan
Attractions. Due to the lesser space requirements of HD Simulation Attractions,
such Showscan Attractions can be installed in locations previously not feasible.
The Company licenses its films and, in standard film-based motion
simulation theatre attractions, sells its Showscan projection equipment to third
party owners and operators of Showscan Attractions. The Company is the sole
source of both the film projectors used to exhibit Showscan motion simulation
films and the show control system. In addition, the Company generally sells the
motion bases, control panels, video equipment and other equipment used in the
Showscan Attractions and assists in installing the attraction. Licensees of the
Company's motion simulation films are not obligated to purchase the motion bases
or the other equipment and services offered by the Company. Other than the
patented Showscan film projectors and the Company's show control system, all
motion simulation equipment, including the various motion bases, the sound
system and the video projection equipment, can be purchased by the third party
owner/operator from other sources. The initial term of the Company's licensing
agreements generally range from two to five years (normally with fixed or
minimum annual royalty payments and film rental obligations).
Historically, Showscan Attraction installations outside North America
have represented a significant portion of the Company's revenues (constituting
61%, 68% and 75% of the Company's revenues for the fiscal years ending March 31,
1996, 1995 and 1994, respectively). The Company's goal is to balance the number
of North American and international Showscan Attractions installed worldwide by
increasing sales of Showscan Attractions in North America.
As of March 31, 1996, Showscan Attractions have been sold or licensed
in the United Kingdom, Denmark, Spain, Hong Kong, People's Republic of China,
United States, Canada, Argentina, Japan, South Korea, Taiwan, Indonesia,
Singapore, France, Belgium, Italy, South Africa, United Arab Emirates, the
Philippines and Germany. The Showscan Attractions sold in Japan have been
purchased or distributed by Imagine Japan, Inc. ("Imagine"), which has exclusive
distribution rights to Showscan Attractions in Japan through December 31, 1996.
See "Item 1. Business -- Sales and Marketing," below.
OWNED AND OPERATED THEATRES. In 1993, the Company began developing and
operating Showscan Attractions in which the Company has an ownership interest.
These O&O Theatres have, to date, been established through various strategic
alliances, as follows:
The United Artists Venture. Under the terms of a Joint Venture
Agreement dated as of August 19, 1994 (the "Joint Venture Agreement"), the
Company and UA have agreed to be equal partners in a venture called
Showscan/United Artists Theatres Joint Venture (the "UA Venture"). The dates for
the capital contributions are to be agreed upon by the venture partners, which
dates will depend on the actual build-out schedule of each project. UA and the
Company are required to equally contribute additional capital as necessary for
all projects undertaken by the UA Venture.
The Company is managing partner of the UA Venture while UA is the
administrative partner. The Company, as managing partner, will implement all
decisions of the UA Venture and, together with UA, develop the
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business plan and long-term strategic plans for the UA Venture. UA, as
administrative partner, will be responsible for all financial aspects of the UA
Venture, including overseeing record keeping and other financial matters.
Pursuant to a Theater Rights Agreement dated as of August 19, 1994, as
amended (the "Theater Rights Agreement"), UA has agreed to offer to the UA
Venture for ownership and operation by the UA Venture, up to 24 theatre sites at
any time prior to August 19, 1999 for the installation of Showscan Attractions
in existing or to-be-built UA theatre complexes. If the UA Venture declines to
acquire a particular location, then UA must install a Showscan motion simulation
attraction theatre at the first 24 sites that the UA Venture declines to
acquire. Whenever UA or the UA Venture builds a Showscan Attraction theatre,
such entity will have the exclusive rights to exhibit Showscan motion simulation
attraction films within a pre-agreed area surrounding such location. Also,
pursuant to a Master Management and Development Agreement, dated as of August
19, 1994, by and among the Company, UA and the UA Venture (the "Master
Management Agreement"), UA will develop and coordinate the construction of new
and/or the conversion of existing theatres to Showscan Attractions and will
manage each theatre pursuant to pre-negotiated terms. The Master Management
Agreement expires on August 19, 1999, unless the Theater Rights Agreement is
extended, in which case the Master Management Agreement will be extended for the
same period. The UA Venture, in turn, has agreed to accept prior to August 19,
1999 at least one of the theatre sites offered to it by UA. The Company has
agreed to pre-negotiated terms for the sale of Showscan equipment, installation,
servicing and the licensing of Showscan motion simulator films. The Company will
also make available to both the UA Venture and UA its library of specialty films
which utilize the patented Showscan process, to the extent that either the UA
Venture or UA builds or converts existing theatres into specialty theatres for
the exhibition of specialty films. The Theater Rights Agreement contains certain
provisions that require UA to make payments to the Company if UA is unable to
meet its obligations and that require the Company to make payments to UA if the
UA Venture is unable to meet certain of its obligations.
To date, UA has offered to the UA Venture two sites at new or existing
UA movie theatre multiplexes. The UA Venture has declined the two sites, and
therefore, UA is currently in the process of constructing for its own account
Showscan Attractions at the two sites and is also in the process of preparing
offers for six additional sites to the UA Venture.
Moss/DiBenedetto Ventures. The Company and affiliates of
certain of its directors entered into (i) the Showscan CityWalk Venture (the
"CityWalk Venture"), a venture formed solely to own and operate an O&O Theatre
in Universal City, California and (ii) the Showscan Attractions Venture, a
venture formed for the purpose of, directly or through other jointly-owned
entities, developing, owning and operating additional O&O Theatres throughout
the world (the "Attractions Venture", and together with the CityWalk Venture,
the "Moss/DiBenedetto Ventures").
The CityWalk Venture. The first O&O Theatre opened in November
1993 at Universal CityWalk, adjacent to Universal Studios in Universal City,
California. This O&O Theatre is owned by the CityWalk Venture, a venture 50%
owned by Showscan CityWalk, Inc. (a wholly owned subsidiary of the Company), 25%
owned by Moss Family LA Corp., a California corporation, and 25% owned by
DiBenedetto CityWalk Limited Partnership, a Delaware limited partnership
(collectively, the "Investors"). Moss Family LA Corp. and DiBenedetto CityWalk
Limited Partnership are controlled by Mr. Charles B. Moss, Jr. and Mr. Thomas R.
DiBenedetto, respectively. Mr. Moss and Mr. DiBenedetto are directors and
stockholders of the Company. See "Item 10. Directors and Executive Officers of
the Registrant," below. The term of the CityWalk Venture expires on December 31,
2050.
Universal CityWalk is a diversified-use entertainment/shopping facility
that is owned by MCA Development Company, a division of MCA Inc. ("MCA"). The
facilities are leased from MCA pursuant to a profit sharing lease (the "Lease")
under which MCA paid approximately one-half of the total tenant costs of the
theatre (as defined), which costs included the projection equipment and the
motion bases. The Lease expires in November 2002, subject to options to extend
the Lease for three five-year periods. In general, the CityWalk Venture is
obligated to pay a base rent plus 50% of the cash flow (as defined) from the
operations of the theatre. Accordingly, the CityWalk Venture will retain 50% of
the cash flow from the theatre's operations. The base rent will be adjusted
annually
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based on the percentage increase in the consumer price index up to a maximum of
5% per year. Of the 50% of cash flow retained by CityWalk Venture, 50% will be
retained by the Company and 50% will be paid to the Investors. Thus, the
Company's share of the total cash flow from the theatre's operations will be 25%
plus the annual film rentals, royalties and management fees that the CityWalk
Venture is separately required to pay the Company, each of which is subject to
annual increases based on the consumer price index up to a maximum of 5% per
year.
The Attractions Venture. The parties to the Attractions
Venture are (i) Showscan Attractions, Inc., a wholly owned California subsidiary
of the Company and the managing partner of the Attractions Venture, (ii) Moss
Family O&O Corp., a California corporation controlled by Mr. Moss (the "Moss
Partner"), and (iii) DiBenedetto O&O Limited Partnership, a Delaware limited
partnership controlled by Mr. DiBenedetto (the "DiBenedetto Partner").
The Attractions Venture agreement states that the parties intend to
develop, own and operate O&O Theatres through the Attractions Venture or through
other corporations, joint ventures, partnerships or other entities to be owned
by the parties to the Attractions Venture. The agreement further provides that
if any O&O Theatre is owned by any such other corporation, venture, partnership
or other entity, the partners to the Attractions Venture shall own and operate
such other entity on the same terms and conditions as the agreement of the
Attractions Venture.
Pursuant to a Proprietary Property Acquisition and Management
Agreement, dated as of September 27, 1993, between the Company and the
Attractions Venture, the Company granted to the Attractions Venture rights to
utilize proprietary property and rights of the Company in connection with the
development and operation of additional O&O Theatres. Under the terms of this
agreement, the Company will manage any and all Showscan Attractions developed
and operated by the Attractions Venture. The Attractions Venture is required to
purchase simulation equipment and license Showscan motion simulation films from
the Company on terms and conditions that are substantially the same as those
offered to unaffiliated third parties, except that the Attractions Venture
receives a discount on certain equipment prices and film rental and royalty
fees. Moss Entertainment Corp., a corporation controlled by Moss, and
DiBenedetto Corp., an affiliate of DiBenedetto, were retained by the Attractions
Venture to provide certain services in connection with the acquisition of
properties for the additional O&O Theatres and the disposition of those
theatres. For such services, Moss Entertainment Corp. and DiBenedetto Corp. are
to receive fees upon the sale or other disposition of certain of the O&O
Theatres developed by the Attractions Venture. The term of the Attractions
Venture expires on December 31, 2050.
The Attractions Venture agreement further provides that neither the
Company, the Moss Partner, nor the DiBenedetto Partner may develop, own or
operate any additional Showscan Attractions without first offering all of the
other parties to the Attractions Venture the opportunity to invest in such
additional Showscan Attractions in proportion to each party's Percentage
Interest (as defined below). No party is, however, obligated to invest in any
such additional Showscan Attractions. If the parties to the Attractions Venture
do not collectively contribute all funds necessary to establish and operate any
such additional Showscan Attraction, the parties may admit additional
unaffiliated investors as part owners of the additional Showscan Attraction.
Showscan Attractions, Inc. currently owns a 50% interest in the
Attractions Venture, and each of the Moss Partner and the DiBenedetto Partner
owns a 25% interest in the Attractions Venture (the "Percentage Interests"). In
the event that the Company and the Moss Partner and/or the DiBenedetto Partner
elect to jointly invest in any additional Showscan Attraction, the parties will
share all profits, loss and distributions of cash, if any, derived from the
operation and ultimate disposition of each additional Showscan Attraction in
proportion to the capital contributions made by the partners (and any
unaffiliated investor) into the account established for the additional Showscan
Attraction.
The first O&O Theatre owned by the parties to the Attractions Venture
is the twin O&O Theatre that opened in late September 1994 in the Trocadero
Arcade at Piccadilly Circus, London, England. As permitted by the Attractions
Venture agreement, the London O&O Theatre is owned by the partners of the
Attractions Venture through a corporation formed under the laws of England
rather than directly through the Attractions Venture.
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Cinemania (U.K.) Limited, the corporation formed to own the London O&O theatre,
is owned by Showscan Attractions, Inc., the Moss Partner and the DiBenedetto
Partner in proportion to their Percentage Interests.
In connection with the UA Venture, the Attractions Venture agreement
was amended to exclude from the territories in which the Attractions Venture can
operate certain specific areas that are made available to UA under the Theater
Rights Agreement. In exchange for such amendment, the Company agreed to pay each
of Messrs. Moss and DiBenedetto a specified amount upon the opening of each new
O&O Theatre that is owned by the UA Venture and to pay Messrs. Moss and
DiBenedetto a percentage of certain profits (as defined) from the Company's
share of profits from each Showscan Attraction owned by the UA Venture.
The Framingham Venture. In April 1995, Showscan Framingham,
Inc., a wholly owned Delaware subsidiary of the Company, and General Cinema of
Framingham Inc. ("GCF"), a wholly owned Massachusetts subsidiary of General
Cinema Corp. of Massachusetts ("GCC"), entered into a venture (the "Framingham
Venture") to own and operate twin Showscan Attractions at a newly opened,
14-screen movie theatre multiplex owned and operated by GCC in Framingham,
Massachusetts, a suburb of Boston.
Showscan Framingham, Inc. and GCF agreed to be equal partners in the
Framingham Venture and to manage the venture by a four-person management
committee composed of two representatives from each party. Day-to-day management
of the twin theatres owned by the Framingham Venture is handled by GCF as
operating partner, for which it receives a management fee. The Company receives
film rentals and royalties from the Framingham Venture based on a formula tied
to the gross box office receipts from the twin Showscan Attractions against a
minimum.
The term of the Framingham Venture will expire five years from the date
the Showscan Attractions were opened unless extended by mutual agreement for
successive periods of five years. Either partner to the Framingham Venture shall
have the right to terminate the partnership any time after the first two years,
if certain prerequisites, as defined, are not met. In any event, the term of the
Framingham Venture expires on December 31, 2025. Upon termination, GCF shall
have the option of purchasing the Showscan Attractions by paying to Showscan
Framingham, Inc. one-half of the value of such Showscan Attractions as
determined by a formula tied to the capital contributions made by the partners.
If GCF does not so elect to purchase the Showscan Attractions, then Showscan
Framingham, Inc. is required to remove the Company equipment from the GCC movie
multiplex and pay to GCF one-half of the net proceeds received upon the resale
of such equipment, or if the Company elects to retain such equipment, one-half
of the value of such equipment as determined by a formula tied to the value of
such equipment at the formation of the Framingham Venture.
The Osaka Venture. In June, 1995, Showscan Entertainment B.V.,
a wholly owned subsidiary of the Company, organized under the laws of the
Netherlands, and Imagine Japan, Inc., a company organized under the laws of
Japan, entered into a venture (the "Osaka Venture") to own and operate a
Showscan Attractions theatre at the Asia Trade Center in Osaka, Japan.
Showscan Entertainment B.V. and Imagine Japan, Inc. agreed to be equal
partners in the Osaka Venture. Day-to-day operations of the theatre are managed
by Sega Enterprises, Ltd. As theatre manager, Sega receives a percentage of the
gross box office receipts of the theatre as a combined rent/management fee, as
well as reimbursement of its operating expenses. The Company separately receives
film rental and royalty fees from the Osaka Venture. The term of the Osaka
Venture is for five years from June, 1995 and can be extended for an additional
five years at the option of Showscan Entertainment B.V. at the end of the
initial term. Because of the structure of the Osaka Venture under Japanese law,
ownership and title of all property is held by Imagine Japan.
The Maloney Venture. In August, 1995, the Attractions Venture
and Maloney Development Partnership Ltd. ("Maloney"), an unaffiliated Texas
limited partnership, formed a Texas limited liability company called Showscan
Maloney, LLC to own and operate a Showscan Attraction theatre in the San Antonio
Riverwalk District, in San Antonio, Texas.
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The Attractions Venture and Maloney own equal interests in Showscan
Maloney, LLC, thus the Company's share in the cash flow from the theatre shall
be 25% plus the annual film rentals, royalties and management fees that Showscan
Maloney, LLC is separately required to pay to the Company. Day-to-day management
of the theatre is handled by the Company as the sole manager of Showscan
Maloney, LLC. The term of Showscan Maloney, LLC will expire on December 31,
2045.
MCA Agreement. Pursuant to the Lease entered into with MCA in
connection with the CityWalk Venture, MCA has the right, exercisable at MCA's
election, to participate in the Company's share of any future O&O Theatres
located in California. If MCA makes any such election, MCA will be entitled to
receive one-half of the Company's rights in such O&O Theatre and will assume
one-half of the Company's obligations related to such O&O Theatre.
SPECIALTY THEATRES
The Company also receives revenues from the production, licensing and
exhibition of specialty films. These films are typically 15 to 40 minutes in
duration, are produced in the Showscan process and are exhibited at expositions,
theme parks, major fairs and festivals and other larger tourist areas. Specialty
theatres are either theatres permanently dedicated to the exhibition of Showscan
specialty films or temporary theatres erected for such purposes. Often,
specialty theatres exhibit Showscan specialty films that are produced
specifically for the theatre or the exhibition. Examples of specialty theatres
and specialty films include the two films produced for and exhibited at the Expo
'92 World's Fair held in Seville, Spain.
Typically, the Company finances its specialty film production through a
third party who usually is the owner and operator of the specialty theatre
venue. Showscan receives production fees for its services, revenues from the
sale of Showscan projector equipment (and possibly the theatre installation,
sound system and seats, etc.) and worldwide distribution rights to the specific
films. As of June 20, 1996, nine permanent and 12 temporary specialty theatres
had been sold by the Company. Of the nine permanent theatres, five are currently
operating.
The Company has agreed to make available, for a fee, to both the UA
Venture and UA its library of specialty films which utilize the patented
Showscan process, to the extent that either the UA Venture or UA builds or
converts existing theatres into specialty theatres for the exhibition of
specialty films.
THE SHOWSCAN PROCESS
Standard films are currently projected at 24 frames per second (fps) on
35mm film with each frame being shown twice. In contrast to conventional filming
and projection systems, a Showscan motion picture is photographed on 65mm film
at a rate of 60 fps and is projected using 70mm film at a rate of 60 fps and at
a higher illumination level (the 65mm film is projected using 70mm film in order
to accommodate the sound track, which occupies approximately 5mm of the film
strip). In addition, each frame in a Showscan film is shown only once. The
Company believes that the bigger image and increased visual cues perceived by
the viewer of a Showscan film result in greater picture clarity and an enhanced
sense of depth and realism.
Photography of 65mm film at a frame rate of 60 fps offers a number of
improvements to the quality of a motion picture image and permits the screen
size to be substantially enlarged without significant degradation of the image.
The images are significantly brighter with more saturated and vibrant colors.
Because of the frame rate of Showscan film, the motion of the cameras and the
subject can be substantially increased without noticeable distortion, greatly
heightening the impact of action scenes. The larger 70mm format and faster
exposure time also greatly reduce blurring, thus recording images more
accurately and in finer detail. To enhance the visual impact, and to take
maximum advantage of the realism and detail of the Showscan process, Showscan
film is usually projected onto a specially designed, curved screen.
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Showscan motion pictures can be transferred to conventional 35mm/24 fps
format for use in conventional movie theatres and to all standard video formats.
Showscan motion pictures can also be directly transferred (one frame to each
field) to high-definition video for exhibition with standard high-definition
video projectors. Although a Showscan film transferred to alternative formats,
including to the high-definition laser projection system used by the Company,
does not contain the clarity, depth and realism of the original Showscan film
projected in 70mm film at 60 fps, the Company believes that the visual quality
of Showscan film transferred to such alternative film formats exceeds the
quality that could be obtained in such formats using conventional films.
HIGH-DEFINITION TELEVISION
The Company believes that the Showscan process may in the future be
utilized in programming for high-definition television ("HDTV"). As HDTV is
expected to be adopted in the United States, it will significantly improve the
picture quality of future television. As a result of its higher picture quality,
HDTV will expose certain flaws inherent in conventional film, including problems
with resolution and motion. Based on demonstrations of Showscan film on certain
HDTV formats, the Company believes that the film speed and quality of Showscan
film will largely eliminate both of these problems and, at 60 fps, is directly
compatible with the United States television standard and proposed HDTV standard
of 60 fields per second.
Because the broadcasting requirements of HDTV have not yet been adopted
in the United States, and because hardware and software requirements are still
evolving, there is no assurance that the Showscan technology will have any
commercial application in this area.
MOBILE SHOWSCAN ATTRACTIONS
The Company is currently designing and developing mobile, 12 and
24-seat Showscan Attractions (the "Mobile Simulators") that are expected to be
capable of touring and exhibiting Showscan motion simulation films at various
locations. The 12-seat unit will be of a capsule configuration on a six-axis
motion base with a rear projection system featuring either NTSC or High
Definition video format. The 24-seat Mobile Simulator is expected to feature a
full, 20-foot wide screen, the same high-definition video projector and laser
disc player used in Showscan's HD Simulation Attractions, and six-axis
motion-base systems used in the standard Showscan Attractions. See "Item 1.
Business -- Equipment," below.
The Company currently expects to transport the Mobile Simulators to
motor sports racing events throughout the U.S. and has produced two Showscan
films based on auto racing for exhibition at such events. However, because the
Company also expects to take the Mobile Simulators to state fairs, sporting
events, major exhibitions and other temporary high-traffic locations and
destinations, the Mobile Simulators also will be capable of exhibiting all of
the Company's other motion simulation films. The Company currently anticipates
that the first Mobile Simulator will be owned and operated by the Company.
FEATURE-LENGTH MOTION PICTURES
The Company believes that there is commercial potential in licensing
the Showscan technology for the production, distribution and theatrical
exhibition of feature-length motion pictures. Although the Company is continuing
to explore possible feature-length motion picture opportunities, to date no
feature-length Showscan motion pictures have been produced and no agreements or
licenses to produce such films are in effect. The Company plans to license the
rights to produce, distribute (in both the foreign and domestic markets) and
exhibit Showscan feature-length motion pictures, rather than produce or
distribute such motion pictures itself.
One factor that has limited the acceptance of the Showscan process for
use in producing feature-length motion pictures is the cost of producing and
distributing a typical motion picture in Showscan. The Company estimates that
the use of the Showscan process would add approximately $2,500,000 to $3,500,000
to the cost of producing an average motion picture in the conventional 35mm
format. Most of the additional expense will be
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incurred in connection with the increased amount of film stock and the
additional expense, including laboratory processing costs, of using 70mm film.
Before a Showscan feature-length motion picture can be exhibited in an
existing theatre, the theatre must be converted to accommodate the Showscan
process. The Company believes that the incremental cost of equipping a newly
constructed theatre to accommodate the Showscan process would be less than
$50,000. The Company also believes that most existing theatres can be converted
to accommodate the Showscan process at a cost of approximately $100,000 to
$200,000, depending upon the type of equipment to be replaced or modified. Such
costs could be higher and will depend upon a number of factors, including the
age and size of the theatre and its design and location. Conversely, the
conversion cost for theatres already equipped with 70mm curved screens and
high-quality sound systems, such as THX-enhanced systems, could be lower.
Because of the capabilities of the Showscan projector, theatres
converted to exhibit Showscan motion pictures will continue to be capable of
exhibiting conventional 35mm or 70mm motion pictures. All of the equipment
necessary for Showscan exhibition, including the screens, lamp houses, lenses
and components of the sound systems, is currently available from a number of
unaffiliated vendors. Although projectors that can be converted for use with
Showscan are available from unaffiliated vendors, the Company is the sole source
of supply for the kits that are required to convert such projectors for use in
the exhibition of Showscan film.
Since Showscan motion pictures can be adapted for use in conventional
movie theatres, on cable, pay and commercial television, and for the
videocassette market, the market for a Showscan motion picture is not limited to
Showscan-equipped theatres. A Showscan film converted to a slower frame rate or
another medium would not, however, exhibit the depth, clarity, and realism
attainable with the Showscan technology, although a converted Showscan film will
produce an image that the Company believes is at least as good as that of a
conventional 35mm/24 fps film.
SALES AND MARKETING
The Company's sales and marketing activities are coordinated by the
Company's Vice President of Worldwide Sales, and effected through the Company's
employees, its independent sales representatives worldwide and its strategic
sales alliances. The Company participates in trade shows and regularly
advertises in trade periodicals. The companies that provide Showscan with motion
bases also market motion simulation theatre attractions worldwide that license
the Company's motion simulation attraction films and equipment.
Effective January 1996, the Company extended its agreement with Imagine
Japan, Inc. ("Imagine") through December 31, 1996, which included an extension
of Imagine's exclusive right to sell and acquire Showscan Attractions and
specialty theatres in Japan. The price and other terms on which the Showscan
Attractions are sold to Imagine are substantially the same as the price and
terms offered by the Company to other Showscan Attraction customers. Imagine is
permitted to resell in Japan any and all of the Attractions it purchases from
the Company on terms established by Imagine. However, notwithstanding such
resales, Imagine remains liable to the Company for all annual film rental and
royalty obligations related to all of the Showscan Attractions sold to
Imagine. The Company has also granted Imagine a non-transferable license to
exhibit the Showscan Attraction films in the Company's film library for a rental
fee that is based on the number of Showscan Attractions operating in Japan and
on the films exhibited at the various attractions. This exclusive agreement with
Imagine expires on December 31, 1996 although Imagine will continue to remain
liable thereafter for all annual film rental and royalty obligations.
The Company has entered into certain other sales alliances. The Company
has entered into an agreement with Robins Cinema, a United Kingdom entity that
owns and manages motion picture theatres in England. The agreement with Robins
Cinema designates Robins Cinema as a sales representative for the Company in
Western Europe for both third party Showscan Attractions and for O&O Theatre
sites. Robins Cinema shall also develop and manage all O&O Theatres established
in Western Europe (they currently manage the twin O&O Theatre in the
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Trocadero Arcade at Piccadilly Circus, London, England). Mr. Charles B. Moss
Jr., a director of the Company, is a director of Robins Cinema.
Historically, most of the Company's revenues have been derived from
export sales. The Company sells internationally through independent sales
representatives and its own worldwide sales and marketing staff. The Company's
international sales are subject to customary restrictions on foreign operations,
including restrictions on imports and exports, longer collection periods for
accounts receivable and risks associated with fluctuations in foreign exchange
rates. The Company's contracts for the sale of equipment generally provide for
payment in United States dollars and for letters of credit as the means of
payment. The Company's policy is to require annual film rental and royalty
payments to be made in United States dollars.
EQUIPMENT
The photography and exhibition of Showscan motion pictures require
specially equipped or modified cameras and projectors. In addition, certain
other products and equipment are needed to produce Showscan motion pictures and
to convert Showscan film to the conventional 35mm/24 fps format.
Cinema Products Corporation ("Cinema Products"), a manufacturer and
supplier of professional motion picture cameras and equipment, has developed and
built 65mm high speed cameras for the Company. The camera, known as the CP-65,
is a high-speed crystal-synchronized spinning mirror reflex studio camera. The
camera is available with a full complement of film magazines, lenses and
associated support equipment and is compatible with standard motion picture
industry equipment. The camera can be operated at various speeds from 2 fps to
72 fps and is crystal-synchronized at 24, 30 and 60 fps. In 1993 the Academy of
Motion Picture Arts and Sciences awarded the CP-65 camera the Scientific and
Engineering Award. The CP-65 allows the synchronous recording of sound while
filming at 60 fps and can be used in the same manner as standard 35mm/24 fps
cameras. Cinema Products has manufactured and delivered to the Company five
CP-65 camera systems, all of which have been used in filming and are available
for use. Although the CP-65 camera was specially designed for filming Showscan
motion pictures, a number of existing cameras manufactured by others can be
modified to film in Showscan, and Arnold & Richter Cine Technik GmbH, a
well-known German camera manufacturer, now manufactures the Arriflex 765, a 65mm
camera that can film at 60 fps.
The Company and Intamin, A.G., a Liechtenstein corporation and a
leading manufacturer of amusement park rides, jointly developed the
hydraulically actuated seats that are used in the bench motion simulation
attractions marketed by the Company. The Company and Intamin jointly own three
United States patents on various elements of the motion simulation seats. A
similar patent was approved under the European Patent Convention, which resulted
in the issuance of patents in those European countries in which the Company
elected to seek patent protection. See "Item 1. Business -- Patents and Other
Intellectual Property," below. In addition to the Intamin bench motion bases,
the Company markets the two-passenger and four-passenger pod including a
six-axis motion base manufactured by Intamin.
The Company, in conjunction with McFadden Systems, Inc., jointly
designed and developed a four-person, six-axis motion system (the "Quadra Motion
System") as well as 15-seat and 18-seat, six-axis dynamic platforms. The Company
currently markets the McFadden Quadra Motion System and dynamic platforms as
well as the platform and capsule type motion bases manufactured by Thompson
Training & Simulation Limited. The Company is also working to develop an
electrically-driven (as opposed to hydraulically driven) motion base. This
electrically-driven motion base is currently in the development and testing
stage.
Films made in Showscan can be projected with certain conventional 70mm
projectors that are modified to project a motion picture at 60 fps. The
modification does not entail significant expense or effort and does not have an
adverse effect on the reliability of the projector. In order to facilitate the
projection of Showscan motion simulation films, however, the Company has
developed an automatic electronic projector that uses low-inertia motors to
achieve the intermittent projection of frames of film rather than the
conventional use of gears and geneva-
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drive sprockets. The projector permits computer-controlled automatic cuing,
synchronization and rewinding necessary for the continuous showing of a variety
of short films without requiring that the film be changed or a projectionist
used. The Company owns a patent on certain circuitry included in this projector.
The HD Simulation Attractions use standard, commercially available high
definition video projectors and laser disc players. The video projectors and
laser disc players are manufactured by a number of companies, including NEC,
Sony Corp., Ampro Projection Systems, and Barco Inc.
RESEARCH AND DEVELOPMENT
The Company, directly or in conjunction with other companies, has from
time to time been engaged in a limited program of research and development.
During the fiscal year ended March 31, 1996, the Company's research and
development program did not, however, require a significant expenditure of
funds.
The Company's research and development efforts are currently directed
at developing additional components and "options" frequently requested by the
Company's customers such as special effects, 160(degree) screens, space saving
flat screens, operator consoles, 2-D, 3-D and dome theatre applications to be
used in the Company's "ShowMax(TM)" 15/70 giant-screen theatre package and
revenue confirmation systems that produce per seat usage reports.
The Company is also designing and developing a mobile Showscan
Attraction (See "Item 1 Business - Mobile Showscan Attractions").
COMPETITION
The Company faces intense competition in all of its business
activities. Some of the Company's competitors and potential competitors are
well-established, have substantially greater financial and other resources than
the Company, and have an established reputation for success in the development
and marketing of filmed products. There can be no assurance that the Company
will be able to compete successfully with such other companies.
In addition to competing directly against other firms in the
marketplace of the Company's products, the Company also generally competes for
customers with other location-based entertainment alternatives. The
entertainment business in general is undergoing significant changes in
technology and in consumer demands for more stimulating entertainment both
within the home and outside of the home. As the demand for increasingly
sophisticated forms of technology increases, the Company competes for customers
to some extent with theme parks, traditional motion pictures and other forms of
filmed or computer-related entertainment. As a result of technological advances
and the increased availability of alternative forms of leisure entertainment,
including expanded pay and cable television service and advanced home audio and
video systems, consumer demands and tastes may continue to change. Computer
simulation, interactive and virtual reality products are improving rapidly and
could become competitive with the Company's products. The Company is unable to
predict what effect technological and other changes will have on the future
success of the Company's products and services.
MOTION SIMULATION THEATRE ATTRACTIONS. Although the Company is aware of
a number of other distributors of entertainment motion simulation equipment
worldwide, including Iwerks Entertainment, Inc. ("Iwerks") and Imax Corporation
("Imax"), both of which compete directly with the Company in the motion
simulation attraction market, the Company believes that it is one of the leading
companies in the sale of motion simulation attractions. Both Iwerks and Imax
have significantly greater financial resources than the Company and are both
substantially larger than the Company. Because of the significant costs involved
in the development and promotion of motion simulation attractions, companies
with superior financial resources may have an advantage. However, the Company
also believes that the Company's record of motion simulation attraction
operations to date, the size of its film library and the quality and enhanced
sense of depth and realism of its Showscan motion simulation films permits the
Company to effectively compete in the motion simulation attractions market.
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The most widely-recognized motion simulation theatre attractions are
Star Tours in Disneyland, and Back to the Future in a Universal Studios theme
park. The Company is not aware of any plans by The Walt Disney Company or MCA,
Inc., which operate these parks, to make these motion simulation theatre
attractions available outside of their respective theme parks. In fact, in May
1992, MCA entered into a participating lease with the Company in connection with
the Company's first O&O Theatre located at MCA's CityWalk complex at Universal
City near Hollywood, California. However, any decision by The Walt Disney
Company or MCA, Inc. to market their own motion simulation theatre attractions
outside their respective theme parks could have a material adverse effect on the
Company's business.
SPECIALTY THEATRES. With the introduction of the Company's new
"ShowMax(TM)" 15/70 giant-screen theatre product in January, 1996, the Company
now competes with companies that distribute other well-established large and
giant-screen and special projection systems, including Imax, the developer of
IMAX (for flat-screen projections) and IMAX Dome (for "domed" theatre
projections), and Iwerks. Imax is well-established in the specialty film markets
and has significantly more theatres currently exhibiting films produced in these
formats. In addition, Imax has substantially greater financial and other
resources and an established reputation for developing and marketing products
competitive with the Company's specialty theatres. See "Item 3 -- Legal
Proceedings."
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company owns two United States patents on the Showscan process.
These patents cover the combined process of filming and projecting 35mm or
larger negative film having high resolution images, at a constant frame rate of
at least 50 fps, with the film being projected at a high illumination level.
Both patents expire in October 2001. The patents are important to the Company
because it believes that a frame rate of 50 fps or more is necessary to achieve
the desired degree of depth and realism, and that enforcement of these patents
could prevent others from achieving the same result. Although the Company
believes that its existing patents are valid, there can be no assurance that the
Company's patents, if challenged, will be upheld, nor can there be any assurance
that competitors will not develop a different technology that offers comparable
or better visual effects. Moreover, the Company may elect, for financial or
commercial reasons, not to enforce its rights under its patents.
The Company has obtained additional patents for the Showscan process in
Australia, Canada and Japan. The Company's patent on the Showscan process has
been approved under the European Patent Convention, which resulted in the
issuance of patents in those European countries in which the Company elected to
seek patent protection. To date, most of the Company's motion simulation
attraction sales have been outside the United States and no assurance can be
given that the Company's patents will adequately protect the Company's exclusive
rights to the Showscan process outside the United States or that any additional
foreign patents will be granted.
The Company also has obtained U.S. patents on its electronic projector,
the rapid start-up feature of the CP-65 camera, a system for projecting a
360-degree motion picture image, and a process for converting high frame-rate
film to standard frame-rate film. In addition, the Company, in conjunction with
Intamin, has obtained three U.S. patents on certain aspects of the Showscan
motion simulation attractions and has a joint interest with another party in
another motion simulation patent. The patents expire between the years 2004 and
2006. The Company and Intamin have also obtained a patent under the European
Patent Convention covering certain aspects of the Showscan motion simulation
attractions, which has resulted in the issuance of patents in those European
countries in which the Company elected to seek patent protection. However, there
can be no assurance that these patents, if challenged, will be upheld, nor can
there be any assurance that competitors will not develop a different or more
effective competing technology.
Although the Company believes that its patented and non-patented
products and processes have been independently developed and do not infringe
the patents of others, third parties could claim that the Company's products and
processes infringe the rights of others. If it were determined that the
Company's products or processes did infringe the property rights of third
parties, the Company may be required to modify its design or obtain a license.
No assurance can be given that the Company will be able to do so in a timely
manner or upon acceptable terms and
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conditions; and the failure to do either could have a material adverse effect
upon the Company's business. There are no claims that the Company's products and
processes infringe the rights of others.
The mark "Showscan(R)" has been registered with the United States
Patent and Trademark Office for use with the Showscan process and Showscan
products. Microsoft Corporation had filed an objection to the Company's
application to register "CineMania" as a trademark and resolved the dispute by
licensing rights for use of the "Cinemania" name to the Company. The Company has
also registered "Showscan's The Edge" for use as the name of Company theatres,
and "ShowMax" for use with the Company's new 15/70 format product line.
ROYALTY ARRANGEMENTS
The Company acquired all of the rights to the Showscan process from
Paramount Pictures Corporation ("Paramount") and its subsidiary, FGC, Douglas
Trumbull and WLS Partners ("WLS") in consideration for, among other things,
agreements to pay royalties on future revenues from the exploitation of the
Showscan process. The terms of such royalties are described below.
WLS. Pursuant to a royalty agreement (the "Royalty Agreement") with
WLS, the Company is required to pay WLS a royalty based, in general, on the
gross receipts (as defined) of the Company from the worldwide exploitation of
Showscan motion pictures and any other use of the Showscan process. The royalty
is 3% of such gross receipts until August 31, 1999, or until WLS has been paid
an aggregate of $3,500,000. The Company has paid a total of $2,054,000 in
royalties under the Royalty Agreement through March 31, 1996.
Future General Corporation/Paramount. Pursuant to the agreement with
Paramount and FGC (the "FGC Agreement"), the Company is obligated to pay FGC a
royalty, in perpetuity, equal to 2% of the Company's gross receipts (as defined)
from the worldwide exploitation of the Showscan technology in excess of 180% of
the sum of (i) $21,100,000, (ii) actual cash contributions for debt or equity of
the Company during the period from June 27, 1985 to June 27, 1987, (iii) the
Company's actual cost, if any, of converting and equipping theatres for
exhibition of Showscan motion pictures, and (iii) any Showscan feature-length
motion picture production costs incurred by the Company. For the purpose of
determining FGC's royalty, "gross receipts" are defined as all monies received
by the Company from the exploitation of the Showscan technology, provided that
if the Company is the exhibitor of a Showscan feature-length motion picture,
gross receipts will be deemed to be one-half of box office receipts less taxes
paid. As of March 31, 1996, no royalties have been earned under the FGC
Agreement.
If the Company produces feature-length motion pictures in Showscan and
grants distribution rights to such a film to a third-party distributor,
Paramount will have the right of first negotiation with respect to distribution
of the first three of the Showscan motion pictures produced by the Company.
However, the Company does not currently intend to produce any feature-length
motion pictures itself.
Douglas Trumbull. Pursuant to its agreement with Douglas Trumbull, the
Company is required to pay royalties to Mr. Trumbull until the year 2015,
subject to the maintenance of certain levels of working capital as established
by the Board of Directors of the Company. In general, the payments equal 1% of
revenues (as defined) received by the Company from the worldwide exploitation of
the Showscan technology, except that if the Company operates a full-length
motion picture theatre, Mr. Trumbull is entitled to 1% of the box office
receipts of that theatre. The Company does not currently intend to operate any
full-length motion picture theatres. As of March 31, 1996, the Company had paid
$426,000 to Mr. Trumbull under this agreement, which payments reduced the
principal balance of a $2,000,000 subordinated promissory note issued to Mr.
Trumbull by the Company as part of the acquisition of the Showscan patents. The
balance of the note, together with accrued and unpaid interest, was paid in full
in April, 1995.
17.
<PAGE> 18
EMPLOYEES
As of June 11, 1996, the Company had 58 employees, nine of whom were
employed in management, seven in sales and marketing, fifteen in engineering,
assembly and installation, and six in production, film licensing and
distribution. The remaining full-time employees are administrative and support
staff. Although the Company has not experienced difficulties in obtaining
qualified personnel and anticipates that it will be able to continue to recruit
qualified personnel for its operations, there can be no assurance that such
personnel will be available when required.
The Company considers its relationship with its employees to be
satisfactory.
ITEM 2. PROPERTIES
The Company leases a 37,000-square-foot building in Culver City,
California, pursuant to a lease expiring on June 30, 2003. Under the lease, the
current monthly rental is $32,612, subject to annual cost-of-living adjustments.
The maximum annual rental increase is 7%. The Company is responsible for all
costs and expenses of maintaining the building, including the payment of all
property taxes and insurance premiums. The Company's corporate headquarters,
Showscan demonstration theatre and film studio are located at this site.
The Company considers its facilities adequate to meet its current
needs.
ITEM 3. LEGAL PROCEEDINGS
Since the launch of the Company's new ShowMax(TM) product line on
January 30, 1996, four lawsuits have been brought against either the Company or
its supplier of 15/70 format projectors. Three of the lawsuits involve the use
of the name "ShowMax" in connection with the product line. Imax Corporation sued
the Company on February 8, 1996 in both the United States District Court for the
Southern District of New York and in the Federal Court of Canada alleging that
the ShowMax trademark infringes upon its "IMAX" trademark and certain other
trademarks owned by it. In the third lawsuit involving the name "ShowMax," a
small California corporation named Showmax, Inc. sued the Company on June 12,
1996 in the United States District Court for the Central District of California
alleging that the Company's ShowMax trademark infringes upon its alleged use of
the name. All three of these lawsuits seek unspecified damages and ask that the
Company be enjoined from any continued use of the ShowMax trademark. The Company
disputes each of these claims and has filed and will file all appropriate
defenses in response.
Imax Corporation also brought a fourth lawsuit on February 6, 1996
against World Odyssey Inc. and N.J. Engineering Inc. in the United States
District Court for the Northern District of California. This suit alleges, among
other things, trade secret misappropriation and that the relationship between
World Odyssey Inc. and the Company violates certain provisions of a 1994
Settlement Agreement between Imax Corporation, World Odyssey Inc. and N.J.
Engineering Inc. In this lawsuit, Imax Corporation seeks unspecified damages and
injunctive relief. The Company, World Odyssey Inc. and N.J. Engineering Inc.
dispute each of these claims and are jointly defending the lawsuit.
Due to the foregoing actions by Imax Corporation, as well as other
alleged acts of anticompetitive conduct, the Company and World Odyssey Inc.
filed a lawsuit against Imax Corporation on March 4, 1996 in the United States
District Court for the Central District of California alleging various antitrust
and unfair competition claims including a claim that the lawsuits brought by
Imax Corporation constitute sham litigation brought solely to obstruct the
Company's entry into the market for 15/70 format products and services. The
Company and World Odyssey are seeking treble damages, costs and injunctive
relief.
While the Company intends to vigorously pursue each of these lawsuits,
the outcome is not certain. The presence of this litigation has hindered the
Company's initial entry into the 15/70 format projector market and a negative
determination could further hinder such entry. Since the Company has not yet
derived any revenues from
18.
<PAGE> 19
this product line, the Company believes that any determination in the forgoing
suits that prevents the Company from marketing the World Odyssey products and/or
from using the name "ShowMax" will not have a material adverse effect on the
financial condition of the Company taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
During the fourth quarter of the fiscal year ended March 31, 1996, no
matters were submitted to a vote of the Company's stockholders through the
solicitation of proxies or otherwise.
19.
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under the
symbol "SHOW."
The following table sets forth the high and low sales prices for the
Common Stock for the periods indicated as reported by Nasdaq. The prices do not
include retail mark-ups, mark-downs or fees.
<TABLE>
<CAPTION>
Sales Prices
-------------
High Low
---- ---
Year Ended March 31, 1995
-------------------------
<S> <C> <C>
1st Quarter $ 8 1/4 $ 6 3/8
2nd Quarter 10 6 5/8
3rd Quarter 8 1/2 6
4th Quarter 6 3/4 5 1/4
Year Ended March 31, 1996
-------------------------
1st Quarter $ 6 1/2 $ 5
2nd Quarter 8 1/8 5 1/4
3rd Quarter 7 3/4 5 3/4
4th Quarter 7 1/4 5 3/4
</TABLE>
The Company has never paid dividends on its Common Stock and does not
currently anticipate that it will do so in the foreseeable future. The future
payment of dividends, if any, on the Common Stock, is within the discretion of
the Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition, and other relevant factors. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." The payment of any dividends on the Common Stock also obligates the
Company to pay dividends on the outstanding shares of Series C Preferred Stock.
Each share of Series C Preferred Stock is entitled, on an "as converted" basis,
to 110% of any cash dividends declared on each share of Common Stock, subject to
adjustments for stock splits, combinations or dividends.
As of March 31, 1996, the Company had 134 holders of record of the
Company's Common Stock. However, based solely upon its proxy solicitation
procedures for last year's annual meeting of stockholders, the Company believes
that it has more than 1,000 beneficial owners of its Common Stock.
20.
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Film rentals and royalties............ $ 9,039 $ 5,978(1) $ 2,970(1) $ 4,328(1) $ 4,535(1)
Equipment sales and
related services..................... 8,426 9,459 2,245 6,695 6,999
----------- ---------- ---------- ---------- -----------
Total revenues........................ 17,465 15,437 5,215 11,023 11,534
Cost of Revenues........................ 8,399 8,584(1) 3,967(1) 6,941(1) 6,056(1)
----------- ---------- ---------- ---------- -----------
Gross profit............................ 9,066 6,853 1,248 4,082 5,478
Other costs and expenses:
General and administrative............ 7,576 5,560 5,566 6,286 5,387
Depreciation and amortization......... 971 1,025 2,827 1,369 1,267
Provision for contract modifications.. -- -- 673 -- --
----------- ---------- ---------- ---------- -----------
8,547 6,585 9,066 7,655 6,654
----------- ---------- ---------- ---------- -----------
Operating income (loss)............... 519 268 (7,818) (3,573) (1,176)
Other income (expense):
Equity in operations of owned and
operated theatres................. (217) (502) -- -- --
Other income........................ 358 444 171 164 342
Interest and other expense........... (555) (128) (98) (127) (333)
Provision for income taxes............. (4) (3) -- -- --
----------- ---------- ---------- ---------- -----------
Net income (loss)...................... $ 101 $ 79 $ (7,745) $ (3,536) $ (1,167)
=========== ========== ========== ========== ===========
Net income (loss) per common share..... $ .02 $ .01 $ (1.68) $ (.76) $ (.28)
=========== ========== ========== ========== ===========
Weighted average number of
common shares............................ 6,317,167 5,788,230 4,679,519 4,679,519 4,160,963
=========== ========== ========== ========== ===========
Balance Sheet Data (at end of period):
Cash, cash equivalents and short-term
investments.......................... $ 8,141 $ 6,791 $ 2,371 $ 2,405 $ 2,717
Accounts receivable, net................ 3,241 2,943 2,569 4,202 3,557
Equipment sales inventory............... 1,547 2,142 1,440 1,414 2,118
Other current assets.................... 1,244 980 1,221 1,974 2,547
Film library (net)...................... 3,481 1,394 1,003 1,488 1,915
Property and equipment (net)............ 1,313 1,728 2,140 4,128 4,483
Owned and operated theatres............. 4,045 2,494 1,386 478 --
Patents and other (net)................. 3,745 3,500 2,994 4,211 4,703
----------- ---------- ---------- ---------- -----------
Total assets............................ $ 26,757 $ 21,972 $ 15,124 $ 20,300 $ 22,040
=========== ========== ========== ========== ===========
Current liabilities..................... $ 6,097 $ 4,860 $ 4,632 $ 4,932 $ 2,774
Note payable and other.................. 6,620(3) 3,121(2) 2,998 3,004 3,366
Series B Preferred Stock................ -- -- 1,678 -- --
Stockholders' equity.................... 14,040 13,991 5,816 12,364 15,900
----------- ---------- ---------- ---------- -----------
Total liabilities and stockholders'
equity ............................... $ 26,757 $ 21,972 $ 15,124 $ 20,300 $ 22,040
=========== ========== ========== ========== ===========
</TABLE>
- -----------------------
(1) Restated to conform to 1996 presentation (see Note 1 to Consolidated
Financial Statements).
(2) Paid in full in April 1995.
(3) The Company completed a private placement of convertible notes in
September, 1995.
21.
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company is a leading provider of movie-based motion simulation
theatre attractions to the rapidly expanding out-of-home entertainment market.
The Company is presently in the business of: (i) licensing and distributing the
films in its library and the proprietary technologies necessary to produce and
exhibit Showscan films; (ii) selling and installing attractions and specialty
theatre equipment (including projectors, screens, sound systems, synchronization
and show control and theatre design packages) used to exhibit films in the
Showscan process as well as 15/70 format films; (iii) selling motion bases and
other equipment used in attractions; (iv) producing films using the Showscan
process; and (v) operating attractions in which the Company has an economic
interest (O&O Theatres). The Company is also committed to the continued
recognition of the Showscan (R) brand name worldwide. The Company announced in
Fiscal 1996 the new "ShowMax" product line, a complete 15/70 giant screen
theatre package. The Company anticipates that the ShowMax product line will have
a positive impact on sales in future periods.
The principal sources of the Company's revenues are the licensing of
the Showscan film library and technologies, the sale and installation of
projectors, screens, sound systems and other equipment used to exhibit Showscan
films, and the sale of motion bases and other equipment used in most Showscan
Attractions. The Company currently derives most of its revenues from export
sales. See Note 9 to the Consolidated Financial Statements and "Item 1. Business
- -- Sales and Marketing." The Company does not believe that inflation has had a
material impact on the Company's net revenues or on its results of operations
for the three most recent fiscal years.
Comparison of Year Ended March 31, 1996 and Year Ended March 31, 1995.
Revenues for the fiscal year ended March 31, 1996 (hereafter "Fiscal
1996") increased $2 million or 13% from revenues for the fiscal year ended March
31, 1995 (hereafter "Fiscal 1995").
Film rentals and royalties increased $3.1 million or 51% in Fiscal
1996. The increase was due primarily to the increase in the installed base of
operating Showscan Attractions, renewals on certain licensing contracts (which
affected the timing of revenue recognition) which accounted for $700,000 of the
increase, the renewal of the Imagine Japan agreement which increased film
revenues by approximately $1 million, and approximately $900,000 of revenues
from two specific customer agreements, which revenues constitute all of the
revenues to be received with respect to such agreements. On an annual basis,
recurring film rentals and royalties should increase over time as the number of
operating Showscan Attractions increases.
Revenues from equipment sales and related services decreased $1 million
or 11% in Fiscal 1996. Unit sales actually increased in Fiscal 1996, but
revenues from these sales decreased as a result of the lower than average sales
prices. Fiscal 1996 equipment sales includes $360,000 of revenues recognized as
a result of the expiration under a customer agreement of a required installation
period for two theatre sites. See Notes 6 and 7 to the Consolidated Financial
Statements.
The Company recognizes equipment sales under the
percentage-of-completion method of accounting, generally measured by the
percentage that the labor hours incurred to date bears to the estimated total
labor hours of each contract. This results in a disparity in the comparison of
equipment sales revenues over different time periods, as Showscan records
revenues under this method rather than on the date that the sale agreement is
signed. The actual signing of a Showscan Attraction sale precedes its delivery
and installation by an average of six to seven months. Accordingly, the
recognition of revenue for equipment sales during the current and future periods
is affected by (i) the timing of such sales, (ii) the schedule of the build out
of the Showscan Attractions and (iii) the shipment, delivery and installation of
the equipment and related services.
22.
<PAGE> 23
Cost of revenues was 48% in Fiscal 1996 as compared to 56% in Fiscal
1995. Royalties and film costs as a percentage of film rentals and royalties
dropped to 29% in Fiscal 1996 from 36% in Fiscal 1995 while equipment cost of
sales as a percentage of equipment sales and related services remained constant
at 68% for each of the past two fiscal years. The primary reason for the
increase in film rental gross profit is due to the Company's purchase in Fiscal
1996 of the interests held by certain third-party producers in two films
distributed by the Company, so that the Company now owns 100% of "Cosmic
Pinball" and 57% of "Devil's Mine Ride." These purchases resulted in a reduction
in payments to third-party producers (included in cost of revenues). The
increase in film rental gross profit is also attributed to more Company-owned
films being licensed by the venues in Fiscal 1996 than in the prior years.
Amortization expense of the film library for Fiscal 1996 and Fiscal 1995 was
$481,000 and $502,000 respectively.
General and administrative expenses increased $2 million or 36% in
Fiscal 1996. The increase was primarily the result of the Company's hiring of
additional personnel in Fiscal 1996 to meet the anticipated levels of Showscan
Attractions sales. Company management also made a decision to enhance the
quality of existing product lines and to develop new product lines, both of
which involved the continuing employment and hiring of key personnel in the
Company's engineering and technology departments. The Company believes that
there is a cost savings by performing such projects in-house, rather than
contracting projects out to outside vendors. In addition, the Company increased
its bad debt provision by $440,000 in Fiscal 1996.
Depreciation and amortization remained relatively unchanged during
Fiscal 1996 from Fiscal 1995.
The Company develops, through various financing arrangements, Showscan
Attractions in which the Company has an ownership interest and accounts for its
net ownership position using the equity method of accounting. The Company's loss
of $217,000 on the operations of owned and operated theatres in Fiscal 1996
decreased $285,000 or 57% from the $502,000 loss posted in Fiscal 1995. This
loss is primarily the result of the following factors: (i) expenses incurred in
connection with the acquisition and development of future owned and operated
theatre locations, (ii) operating losses, including initial start-up and
marketing expenses at the Framingham theatres (opened in late May 1995) of which
the Company has a 50% interest and The Edge theatre in San Antonio, Texas
(opened in March 1996), of which the Company has a 25% interest, and (iii) the
combined operating profits of the owned and operated Showscan Attractions at
CityWalk, the Trocadero in London, and Osaka. The results of operations showed
an improvement for the CityWalk and London theatre locations in Fiscal 1996 from
Fiscal 1995. The Company earns film rentals, royalties and management fees (from
some of the owned and operated theatres), which are recorded separately in the
accompanying condensed consolidated statements of operations, thereby inherently
increasing the operating expenses at these specific theatres.
Operating income increased 94% in Fiscal 1996 to an operating profit of
$519,000 from an operating profit of $268,000 in Fiscal 1995. The increase in
operating profit is primarily attributed to the increase in film rentals and
royalties for the Company offset by the increase in general and administrative
expenses. The Company's net income increased 28% to $101,000 or $0.02 per share
in Fiscal 1996 as compared to a $79,000 net profit and $0.01 per share in Fiscal
1995.
Comparison of Year Ended March 31, 1995 and Year Ended March 31, 1994.
Revenues for the fiscal year ended March 31, 1995 ("Fiscal 1995")
increased by $10.2 million or 196% from revenues for the fiscal year ended March
31, 1994 ("Fiscal 1994").
Film rentals and royalties increased by 101% to $6 million in Fiscal
1995. The increase in film rentals and royalties was primarily due to the
increase in the installed base of operating Showscan Attractions and the
modification and extension in Fiscal 1994 of a licensing agreement with a
significant Showscan Attraction customer. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Comparison of Year Ended March 31, 1994 and Year Ended March 31,
1993," below. Revenues
23.
<PAGE> 24
from film rentals and royalties are expected to increase annually in the future
as the installed base of Showscan Attractions increases.
Revenues from equipment sales and related services for Fiscal 1995
increased by 321% to $9.5 million due to the significant increase in the number
of Showscan Attractions opened in Fiscal 1995. Twelve Showscan Attractions
opened in Fiscal 1995 as compared to only two in Fiscal 1994.
Cost of revenues were 56% of revenues in Fiscal 1995 as compared to 76%
in Fiscal 1994. Royalties and film costs as a percentage of film rentals and
royalties decreased to 36% in Fiscal 1995 from 49% in Fiscal 1994. This increase
in gross margin was principally the result of charges made in Fiscal 1994 to
increase inventory reserves, including a one-time charge for costs necessary to
upgrade the Company's inventory of projectors used in its film-based Showscan
Attractions. No similar charges were made in Fiscal 1995. The cost of the
Company's film library is being amortized over estimated future revenues, as
revised quarterly, if applicable. Amortization expense of the film library for
Fiscal 1995 and Fiscal 1994 was $502,000 and $759,000, respectively. The 34%
decrease in amortization was related primarily to the accelerated amortization
in Fiscal 1994 of one of the Company's specialty films.
General and administrative expenses remained relatively unchanged in
absolute terms despite the Company's hiring of additional personnel including a
new Chief Executive Officer and a new Chief Financial Officer. The resulting
increase in personnel costs was primarily offset by (i) the charging of
approximately $446,000 in general and administrative expenses to certain
ventures in which the Company has an ownership interest, and (ii) to a lesser
extent, a decrease in the reserves for accounts receivable. Approximately
$300,000 of accounts receivable that had been previously reserved were collected
in Fiscal 1995.
Depreciation and amortization decreased by $1.8 million, or 64% in
Fiscal 1995. This decrease was related primarily to a $1.5 million write-down in
Fiscal 1994 to certain of the Company's camera and film production equipment
which, pursuant to the Company's revised business strategy, is not expected to
be utilized in future periods. No such write-downs occurred in Fiscal 1995.
The Company develops, through various financial arrangements, Showscan
Attractions in which the Company has an ownership interest and accounts for its
net ownership position under the equity method of accounting. The Company's loss
of $502,000 on investment in owned and operated theatres is the result of the
operating losses during Fiscal 1995 at two Showscan Attractions, plus site
acquisition costs (for future owned and operated theatre locations) incurred
through the Showscan Attractions Venture. The CityWalk attraction located at
Universal CityWalk adjacent to Universal Studios, Universal City, California is
owned by a venture in which the Company has a 50% interest. The loss at that
location was primarily the result of lower than expected attendance caused by
disruptions due to the construction of a substantial addition to Universal
CityWalk in the area adjacent to the theatre and the unseasonably heavy rainfall
in January of 1995 in the Southern California area. The second Showscan
Attraction, which is 50% owned by a wholly-owned subsidiary of the Company,
opened in late September, 1994 at Piccadilly Circus, London, England. The
results of operations from the London theatre were adversely affected by (i)
seasonal factors (attendance typically increases during summer months), (ii)
interruptions during the installation testing period, and (iii) initial start-up
expenses relating primarily to marketing and advertising.
Operating income increased in Fiscal 1995 to an operating profit of
$268,000 from an operating loss of $7,818,000 in Fiscal 1994. This $8.1 million
increase in operating income was the result of the significant increases in
revenue in both film rentals and royalties and equipment sales and related
services and the decreases in depreciation and amortization. The Company's net
income of $79,000, or $.01 per share, in Fiscal 1995 compared favorably to the
Fiscal 1994 net loss of $7,745,000, or $1.68 loss per share.
24.
<PAGE> 25
Comparison of Year Ended March 31, 1994 and Year Ended March 31, 1993.
Revenues for the fiscal year ended March 31, 1994 ("Fiscal 1994")
decreased by 53% from revenues for the fiscal year ended March 31, 1993
("Fiscal 1993"). The decrease in revenues reflected a decrease in both
revenues from equipment sales and related services and revenues from film
rentals and royalties.
Film rentals and royalties decreased in Fiscal 1994 primarily due to
the modification and extension of a licensing agreement with a significant
Showscan Attraction customer. Although the general terms of the modified
agreement were similar to the prior agreement, the Company earned film rentals
and royalties from the customer ratably during the entire calendar year rather
than all at the beginning of each calendar year. Substantially all of the
decrease in revenues from film rentals and royalties in Fiscal 1994 resulted
from the modification of this license agreement.
Revenues from equipment sales and related services for Fiscal 1994
decreased primarily due to the timing of Showscan Attraction sales. Although the
total number of sales of Showscan Attractions did not significantly decrease in
Fiscal 1994 from Fiscal 1993, all but one sale occurred in the last quarter of
Fiscal 1994. Because the Company recognizes equipment sales under the
percentage-of-completion method of accounting, generally measured by the
percentage of labor hours incurred to date to the estimated total labor hours of
each contract, the major portion of the fourth quarter sales were recognized
in periods after Fiscal 1994. The lack of sales in the first three quarters of
Fiscal 1994 is attributable, in significant part, to the announcement of the
potential merger between the Company and one of its competitors, Omni Films
International, Inc. The merger did not occur. The Company believes that this
announcement created customer uncertainty that delayed purchasing decisions by
certain potential customers. The lack of equipment sales also was due to the
recessionary conditions that existed in certain of the markets in which the
Company transacts business, and to increased worldwide competition.
Cost of revenues was 76% in Fiscal 1994 as compared to 63% in Fiscal
1993. Royalties and film costs as a percentage of film rentals increased to 49%
in Fiscal 1994 from 35% in Fiscal 1993. Equipment cost of sales as a percentage
of equipment sales and related services increased to 112% in Fiscal 1994 from
81% in Fiscal 1993. This reduction in gross margins is primarily attributable to
(i) a one-time $525,000 charge for costs necessary to upgrade the Company's
inventory of the projectors used in its film-based Showscan Attractions, and
(ii) to a lesser extent, certain additional inventory reserves.
Depreciation and amortization increased in Fiscal 1994 by $1,458,000.
This increase is related primarily to $1,500,000 of write-downs relating to
certain of the Company's camera and film production equipment that management
does not expect to utilize in future periods pursuant to the Company's revised
business strategy.
General and administrative expenses for Fiscal 1994 decreased by
$720,000, or 11%, due to the reduction in the Company's workforce and the other
cost-cutting measures that were implemented during Fiscal 1994. The decrease in
these expenses was offset by $200,000 of one-time severance charges and other
expenses incurred by the Company in connection with its reorganization.
In Fiscal 1994, the Company recorded a provision of $673,000 for
certain contract modifications. No such provision was made in Fiscal 1993. The
provision is primarily the result of a customer's inability to complete its
contractual commitment to purchase certain Showscan Attractions that had been
previously ordered by the customer.
Due primarily to the reduction in revenues from equipment sales and
related services, the $1,500,000 write-down of certain equipment, the decrease
in revenues from film rentals and royalties, and the provision for contract
modifications, the Company's net loss increased in Fiscal 1994 to $7,745,000, or
$1.68 per share of Common Stock, from a net loss of $3,536,000, or $.76 per
share of Common Stock in Fiscal 1993.
25.
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company's working capital increased to
$8,076,000 from $4,875,000 at March 31, 1995. Cash, cash equivalents and
short-term investments increased to $8,141,000 from $6,791,000 at March 31,
1995. The increase in working capital is primarily due to the completion of a
financing transaction (described below) offset primarily by (i) the Company's
payment in full of a subordinated note payable, (ii) the funding provided by the
Company in connection with the construction of the Showscan Attractions in
Framingham, Osaka and San Antonio, and (iii) the Company's purchase of interests
in two motion simulation films.
Net cash flow provided by operations was $2,990,000 in Fiscal 1996 as a
result of positive changes in several categories. Accounts payable and accrued
expenses and other current liabilities increased by 105%, while accounts
receivable and equipment sales inventory decreased by a combined 15% at March
31, 1996. These changes are primarily attributable to the timing of the
Company's Showscan Attraction sales and the specific contract terms of such
sales (which contract terms generally affect the timing of collections,
shipments to customers and related payment to vendors), and the purchase of
interests in two films.
Net cash used in the Company's investing activities was $8,016,000 in
Fiscal 1996. This was principally the result of $3,086,000 of purchases in
short-term investments, plus $2,568,000 of additions to the Company's film
library, and $2,211,000 of investments in O&O theatres.
Cash flow provided by financing activities was $3,290,000 in Fiscal
1996. During such period, the Company made in April, 1995 a payment in full of
$3,121,000 on a subordinated note payable (see below). On September 1, 1995, the
Company completed a $7,000,000 ($6,381,000 net of expenses) private placement of
convertible notes through a European financial institution. The Company issued
secured convertible notes with a conversion price of $5.75 per share. As of
March 31, 1996, $380,000 had been converted into 66,085 shares of Common Stock.
Subsequently, through June 20, 1996, an additional $480,000 was converted into
83,475 shares of Common Stock. The remaining $6,140,000 of notes are convertible
at the option of the holder into 1,067,826 shares of Common Stock. The notes
have a four year maturity, bear interest at 8 percent per annum with a
semi-annual interest payment schedule commencing March 1, 1996 and are secured
by specific assets of the Company, although the security excludes the Company's
film library and the capital stock of its subsidiaries, which includes its owned
and operated theatres. In addition to the above transactions, on September 30,
1995 the Company converted all of its outstanding Series A Convertible Preferred
Stock into 165,380 shares of Common Stock. Each share of Series A Convertible
Preferred Stock had a liquidation value of $4.00 and was converted into shares
of Common Stock at a conversion rate of 1.1025 shares of Common Stock for each
share of preferred stock.
At March 31, 1995, the Company owed approximately $3,121,000 under a
subordinated note payable to Mr. Douglas Trumbull (the "Trumbull Note"), the
inventor of the Showscan process. The Trumbull Note including interest was due
and paid in full on April 26, 1995.
The above activities had the result of increasing the Company's
stockholders equity from $14 million (as of March 31, 1995) to $14.5 million as
of March 31, 1996 and also resulted in a significant infusion of cash, increased
the film library and the investments in owned and operated theatres.
The Company believes that its working capital will be sufficient to
fund the costs of operations for the next twelve months. The Company's business
strategy includes new film productions, new product development and new product
lines, enhancement of existing product lines and possible site acquisitions for
additional owned and operated theatres. The Company plans to pursue further
financing alternatives by one or more of the following means: the selling of
securities, obtaining a line of credit from a banking institution, and/or
forming strategic alliances or joint ventures. There can be no assurance that
the Company will be able to obtain any of the aforementioned financing
alternatives. If the Company is unable to generate sufficient funds from
operations or is unable to raise additional capital through any of the
aforementioned alternatives, the Company will need to curtail its revised
business strategy, specifically with regards to the timing of new film
productions and the number of new
26.
<PAGE> 27
O&O Theatres. Additionally, the Company has reserved as of June 20, 1996
4,821,834 shares of Common Stock for issuance on the exercise of stock
options, warrants, preferred stock and convertible notes.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Portions of this Report may contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The reader
is cautioned that all forward-looking statements are necessarily speculative and
there are certain risks and uncertainties that could cause actual events or
results to differ materially from those referred to in such forward-looking
statements. The discussion below, together with portions of the discussion
elsewhere in this Report, highlight some of the more important risks identified
by management of the Company but should not be assumed to be the only things
that could affect future performance.
Period to Period Fluctuations
The Company's operating results may fluctuate from period to period for
a number of reasons, including (a) the timing of sales of the Company's motion
simulation attractions, (b) 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, (c) the
size, type and configuration of the attractions sold, (d) 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 (e)
the timing of sales and marketing efforts and related expenditures. Accordingly,
the Company's revenues and earnings in any particular period may not be
indicative of the results for any future period.
The Company's performance depends primarily upon the number of motion
simulation attractions that it can sell and install. This dependence has been
lessening as the percentage of the Company's revenues derived from on-going film
rental has increased though there can be no assurance that this trend will
necessarily continue. The Company's results have followed a seasonal pattern,
with revenues tending to be stronger in the second and fourth fiscal quarters,
reflecting the buying patterns of the Company's customers for new motion
simulation attractions.
Growth Plan
Management of the Company has adopted an aggressive growth plan that
includes substantial investments in its sales and marketing organizations, the
creation of new research and development programs and increased funding of
existing programs, and investments in corporate infrastructure that will be
required to support significant growth. This plan, which was implemented during
the latter half of fiscal 1996 and is planned to continue into fiscal 1997,
carries with it a number of risks, including a higher level of operating
expenses that may not be adequately covered by increased sales and the
complexities associated with managing a larger and faster growing organization.
New Product Development
The Company operates in a technology driven segment of the
entertainment business. As such, the Company must continually improve its
products to increase their entertainment value while also facing pressure to
continually reduce the price of its products to respond to competitive
pressures. Since the Company's main competitors, Iwerks Entertainment, Inc. and
Imax Corporation, have significantly more capital than the Company, the Company
has had to rely more on its suppliers and other third-parties to improve the
Company's existing products and to develop new ones. The Company's future
results will depend in large part on its ability to remain a leader in its
business segment.
International Operations
A significant portion of the Company's revenue is from sales and film
licensing outside the United States. The Company's results could be negatively
affected by such factors as changes in foreign currency exchange rates,
27.
<PAGE> 28
trade protection measures, policies with respect to currency and fiscal
controls, longer accounts receivable collection patterns, changes in regional or
worldwide economic or political conditions, or natural disasters. Though the
Company faces less direct exchange rate risks since nearly all of its contracts
are denominated in United States Dollars, fluctuations in exchange rates can
significantly affect the affordability of the Company's products and services
overseas.
Intellectual Property
The Company has several United States patents on various processes and
elements related to film projection and motion simulation. The most important of
these patents expire in October 2001. Though the Company's patents have never
been challenged and the Company believes that they are valid, third parties
could still challenge the patents and a court could determine that one or more
of them are invalid. Declarations of invalidity, particularly of the Company's
key patents, could adversely affect the marketability of the Company's products
and services. In addition, the Company always faces the risk that new
technologies could be discovered that are superior to the Company's patents.
Competition
The Company faces intense competition in all of its product lines. In
the motion simulation business, the Company's main competitor is Iwerks though
there are an increasing number of smaller competitors. Iwerks has substantially
greater financial resources than the Company and as such may be able to both
price its existing products and services lower than the Company as well as
produce new products. Imax is a growing competitor of the Company in this
segment and has dedicated substantial resources to entering this market.
In the large screen, special format motion picture business, the
Company's main competitor is Imax though Iwerks is also very significant. The
15/70 format appears to be emerging as the most popular large format due
primarily to the large number of films available in that format. Imax is by far
the dominant company in this market. The Company is only a recent entrant into
this market and has not yet made any sales. The Company will have to continue to
invest funds in order to broaden its position in the 15/70 market and thus short
term results could be adversely affected until sales can be made. See also the
discussion in "Item 3 -- Legal Proceedings" regarding litigation initiated with
respect to the Company's entry into this market.
Business Disruption
The Company's corporate headquarters, including its research and
development operations and most of its manufacturing facilities, are located in
Los Angeles, California, a region known for seismic activity. Operating results
could be materially affected by a significant earthquake or other natural
disaster.
Dependence on Major Customers
The Company's motion simulation business has two significant
concentrations. The first concentration involves ongoing film licenses and is
located in Japan where a single customer presently operates or is otherwise
responsible for twelve simulation attractions. The second concentration relates
to the Company's sales backlog where UA and King's Entertainment Co., Ltd.
individually and collectively represent a substantial portion of the outstanding
equipment orders to be delivered in the next few years. Of course, as each of
these customers builds more theatres they will then become a concentration in
the area of ongoing film rental. In the future, the Company plans to increase
the number of customers with which it has multi-system agreements. The Company's
short and long term performance could be adversely impacted if disruptions were
to occur in any of these areas of concentration such as order cancellations,
license terminations or payment problems.
28.
<PAGE> 29
Ability to Produce Additional Films
One of the primary factors considered by potential purchasers of motion
simulation attractions is the quality and extent of the films available to be
shown at the attraction. A large portion of the Company's competitive advantage
resides in its popular and extensive library of ride films. To maintain this
competitive edge, the Company must produce several new films each year. Film
production is expensive and requires the investment of Company funds (to the
extent that investors cannot be located) with no assurance that the films
produced will be popular. Iwerks and Imax have each indicated that they are
devoting substantial portions of their assets to the production of new ride
films. Both the short and long term financial performance of the Company will be
adversely affected if the perceived quality and popularity of the Company's film
library declines either alone or in comparison to the films of the Company's
competitors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are listed under Item 14 in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29.
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company intends to file with the Securities and Exchange Commission
a definitive proxy statement (the "Proxy Statement") pursuant to Regulation 14A
pertaining to the Annual Meeting of Stockholders to be held in August 1996,
which will involve the election of directors, within 120 days of the end of the
fiscal year covered by this Report on Form 10-K. Information regarding directors
and executive officers of the Company will appear under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear under the
caption "Compensation of Directors and Executive Officers" in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management will appear under the caption "Security Ownership of Directors,
Nominees and Principal Security Holders" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will appear under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement and is incorporated herein by reference.
30.
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
a.(1)(2) FINANCIAL STATEMENTS AND SCHEDULES.
See the Index to Consolidated Financial Statements and Financial
Statement Schedule on Page F-1 hereafter, which is incorporated herein by
reference.
a.(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation.(j)
3.2 Certificate of Amendment to Restated Certificate of
Incorporation, dated August 3, 1990.(j)
3.3 Second Certificate of Amendment of Restated Certificate of
Incorporation of Showscan Corporation, dated August 18,
1994.(j)
3.4 Certificate of Designations, Powers and Preferences with
respect to Series A Convertible Preferred Stock of Showscan
Corporation, as filed with the Secretary of State of Delaware
on September 22, 1993.(b)
3.5 Certificate of Designations, Powers and Preferences with
respect to Series B Preferred Stock of Showscan Corporation, as
filed with the Secretary of State of Delaware on September 22,
1993.(b)
3.6 Certificate of Designations with respect to Series C
Convertible Preferred Stock of Showscan Corporation, as filed
with the Secretary of State of Delaware on August 22, 1994.(h)
3.7 Certificate of Designations with respect to Series D
Participating Preferred Stock of Showscan Entertainment Inc.,
as filed with the Secretary of State of Delaware on November 9,
1994.(j)
3.8 Bylaws of the Company, as amended.(j)
4.1 Specimen certificate of the Common Stock, $.001 par value, of
the Company.(a)
4.2 Form of warrants issued to Whale Securities Corp. and its
designees.(c)
4.3 Form of warrant issued to Sutro & Co. Incorporated.(a)
4.4 Stock Purchase Warrant, dated March 9, 1989, issued by the
Company to Columbia Pictures Industries, Inc.(a)
4.5 Specimen certificate of Series A Convertible Preferred Stock,
$.001 par value, of the Company.(g)
4.6 Specimen certificate of Series B Preferred Stock, $.001 par
value, of the Company.(g)
31.
<PAGE> 32
EXHIBIT
NUMBER DESCRIPTION
4.7 Warrant Agreement, dated as of September 27, 1993, among
Showscan Corporation and Charles B. Moss, Jr. and DiBenedetto
Showscan Limited Partnership.(b)
4.8 Form of Warrant Agreement entered into with William D. Eberle.
(g)
4.9 Registration Rights Agreement, dated as of September 27, 1993,
among Showscan Corporation, Charles B. Moss, Jr., Thomas R.
DiBenedetto and DiBenedetto Showscan Limited Partnership.(b)
4.10 Specimen Certificate of Series C Convertible Preferred Stock,
$.001 par value, of the Company.(j)
4.11 Warrant Agreement, dated as of August 19, 1994, by and between
Showscan Corporation and United Artists Theatre Circuit,
Inc.(h)
4.12 Registration Rights Agreement, dated as of August 19, 1994, by
and between Showscan Corporation and United Artists Theatre
Circuit, Inc.(h)
4.13 Rights Agreement, dated as of November 11, 1994, by and between
Showscan Entertainment Inc. and Continental Stock Transfer &
Trust Company.(i)
4.14 Registration Rights Agreement, dated as of September 22, 1994,
by and among Showscan Entertainment Inc., Charles B. Moss, Jr.
and DiBenedetto Showscan Limited Partnership.(j)
4.15 Note Purchase, Paying and Conversion Agency Agreement, dated as
of August 14, 1995, by and between Showscan Entertainment Inc.
and Banca del Gottardo.(k)
4.16 Global Note, dated September 1, 1995, made by Showscan
Entertainment Inc. in favor of Banca del Gottardo.(k)
4.17 Agency Agreement, dated as of August 14, 1995, by and between
Showscan Entertainment Inc. and Banca del Gottardo.(k)
4.18 Pledge/Security Agreement, dated as of September 1, 1995, by
and between Showscan Entertainment Inc. and Banca del
Gottardo.(k)
4.19 Amendment to Pledge/Security Agreement, dated as of September
1, 1995, by and between Showscan Entertainment Inc. and Banca
del Gottardo.(k)
4.20 Warrant Agreement, dated as of September 1, 1995, by and
between Showscan Entertainment Inc. and Jack M. Ferraro.
4.21 Registration Rights Agreement, dated as of September 1, 1995,
by and between Showscan Entertainment Inc. and Jack M. Ferraro.
4.22 Warrant Agreement, dated as of September 1, 1995, by and
between Showscan Entertainment Inc. and Jack Erlanger.
4.23 Registration Rights Agreement, dated as of September 1, 1995,
by and between Showscan Entertainment Inc. and Jack Erlanger.
4.24 Warrant Agreement, dated as of October 3, 1995, by and between
Showscan Entertainment Inc. and Intralink Film Graphic Design.
32.
<PAGE> 33
EXHIBIT
NUMBER DESCRIPTION
9.1 Voting Agreement, dated as of August 19, 1994, by and among
Showscan Corporation, United Artists Theatre Circuit, Inc.,
Charles B. Moss, Jr., and Thomas R. DiBenedetto.(h)
10.1 Lease dated June 15, 1989 between the Company and Landmark
Investments Ltd. ("Lease").(d)
10.2 Amendment No. 1 to Lease, dated February 20, 1991.(a)
10.3 Amendment No. 2 to Lease, dated January 21, 1992.(e)
10.4 Amendment No. 3 to Lease, dated February 18, 1993.(f)
10.5 Amended and Restated Showscan Corporation 1987 Stock Option
Plan.(c)
10.6 Showscan Entertainment Inc. 1992 Stock Option Plan, as
amended.(j)
10.7 Modification, Consent and Assignment Agreement dated April 26,
1985 between the Company, Douglas Trumbull and Brock/Trumbull
Entertainment Corporation.(c)
10.8 Agreement, dated June 27, 1985, between the Company and Future
General Corporation.(c)
10.9 Agreement, dated February 23, 1987, between the Company and
Cinema Products Corporation (the "Camera Agreement").(c)
10.10 Amendment to Camera Agreement, dated July 20, 1988.(a)
10.11 Amendment to Camera Agreement, dated February 1, 1989.(a)
10.12 Showscan 1985 Agreement, dated April 16, 1985, and Agreement,
dated August 31, 1983, between Showscan Investors and
Brock-Trumbull Entertainment Corporation.(c)
10.13 Amendment to Royalty Agreement, dated July 6, 1990, between the
Company and WLS Partners.(a)
10.14 Amendment to payment terms of the Royalty Agreement, dated
November 13, 1990, between the Company and WLS Partners.(a)
10.15 Universal CityWalk Lease, dated November 24, 1992, by and among
the Company and MCA Development Company.(f)
10.16 Purchase Agreement dated as of September 27, 1993, among
Showscan Corporation, Charles B. Moss, Jr., Thomas R.
DiBenedetto and DiBenedetto Showscan Limited Partnership.(b)
10.17 Joint Venture Agreement, dated as of September 27, 1993, among
Showscan Attractions, Inc., Moss Family O&O Corp., and
DiBenedetto O&O Limited Partnership, with respect to the
organization of Showscan Attractions Venture.(b)
10.18 Joint Venture Agreement, dated as of September 27, 1993, among
Showscan CityWalk, Inc., Moss Family LA Corp., and DiBenedetto
CityWalk Limited Partnership, with respect to the organization
of Showscan CityWalk Venture.(b)
33.
<PAGE> 34
EXHIBIT
NUMBER DESCRIPTION
10.19 Proprietary Property Acquisition and Management Agreement,
dated as of September 27, 1993, between Showscan Corporation
and Showscan Attractions Venture.(b)
10.20 Development and Disposition Services Agreement, dated as of
September 27, 1993, among Showscan Attractions Venture,
DiBenedetto Showscan, Inc. and Moss Entertainment Corp.(b)
10.21 Employment Agreement, dated March 3, 1994, between the Company
and William C. Soady.(g)
10.22 Employment Agreement, dated May 3, 1994, between the Company
and Dennis Pope, as amended.(j)
10.23 Purchase Agreement, dated as of August 19, 1994, by and between
Showscan Corporation and United Artists Theatre Circuit,
Inc.(h)
10.24 Joint Venture Agreement, dated as of August 19, 1994, by and
between Showscan Corporation and United Artists Theatre
Circuit, Inc.(h)
10.25 Theater Rights Agreement, dated as of August 19, 1994, among
Showscan Corporation, United Artists Theatre Circuit, Inc. and
Showscan/United Artists Theatres Joint Venture.(h)
10.26 First Amendment to Theater Rights Agreement, dated as of March
30, 1995, by and among Showscan Entertainment Inc., United
Artists Theatre Circuit, Inc. and Showscan/United Artists
Theatres Joint Venture.(j)
10.27 Master Management and Development Agreement, dated as of August
19, 1994, among Showscan Corporation, United Artists Theatre
Circuit, Inc. and Showscan/United Artists Theatres Joint
Venture.(h)
10.28 Amendment No. 1 to the Showscan Attractions Joint Venture
Agreement, dated as of September 22, 1994, by and among
DiBenedetto O&O Limited Partnership, Showscan Attractions,
Inc., and Moss Family O&O Corp.(j)
10.29 Standstill Agreement, dated as of August 22, 1994, by and among
Showscan Corporation, United Artists Theatre Circuit, Inc.,
Charles B. Moss, Jr., Thomas DiBenedetto and DiBenedetto
Showscan Limited Partnership.(h)
10.30 Stock Exchange Agreement, dated as of September 22, 1994, by
and among Showscan Entertainment Inc., Charles B. Moss, Jr.,
Thomas R. DiBenedetto, and DiBenedetto Showscan Limited
Partnership.(j)
10.31 Royalty Agreement, dated as of September 22, 1994, by and among
Showscan Entertainment Inc., Moss Family O&O Corp. and
DiBenedetto O&O Limited Partnership.(j)
10.32 Memorandum of Agreement, dated as of April 24, 1995, by and
between Showscan Framingham, Inc. and General Cinema of
Framingham Inc.(j)
10.33 Operating Agreement, dated as of August 25, 1995, by and
between Showscan Attractions Venture and Maloney Development
Partnership Ltd.*
34.
<PAGE> 35
EXHIBIT
NUMBER DESCRIPTION
10.34 Second Amendment to Theater Rights Agreement, dated as of
December 31, 1995, by and among Showscan Entertainment Inc.,
United Artists Theatre Circuit, Inc. and Showscan/United
Artists Theatres Joint Venture.*
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
-----------------------
* Confidential treatment of this exhibit has been requested
and confidential portions have been omitted and filed
separately with the Securities and Exchange Commission.
(a) Previously filed as an exhibit to the Company's Registration
Statement on Form S-1, Registration No. 33-40531, as
amended, and incorporated herein by reference.
(b) Previously filed as an exhibit to the Schedule 13D filed
with the Securities and Exchange Commission by Charles B.
Moss, Jr., Thomas R. DiBenedetto and DiBenedetto Showscan
Limited Partnership, dated September 27, 1993, and
incorporated herein by reference.
(c) Previously filed as an exhibit to the Company's Registration
Statement on Form S-1, Registration No. 33-13582, as
amended, and incorporated herein by reference.
(d) Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for fiscal year ended March 31, 1990,
and incorporated herein by reference.
(e) Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1992, and incorporated herein by reference.
(f) Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for fiscal year ended March 31, 1993,
and incorporated herein by reference.
(g) Previously filed as an exhibit to the Company's Registration
Statement on Form S-1, Registration No. 33-78236, as
amended, and incorporated herein by reference.
(h) Previously filed as an exhibit to the Company's Current
Report on Form 8-K dated August 19, 1994, as amended by the
Form 8-K/A dated November 7, 1994, and incorporated herein
by reference.
(i) Previously filed as an exhibit to the Company's Current
Report on Form 8-K dated November 11, 1994, and incorporated
herein by reference.
(j) Previously filed as an exhibit to the Company's Annual
Report on Form 10-K, as amended by the Form 10-K/A dated
September 25, 1995, for the fiscal year ended March 31,
1995, and incorporated herein by reference.
(k) Previously filed as an exhibit to the Company's Current
Report on Form 8-K dated September 1, 1995, and incorporated
herein by reference.
35.
<PAGE> 36
B. THE FOLLOWING REPORTS ON FORM 8-K WERE FILED DURING THE FOURTH QUARTER
OF THE FISCAL YEAR ENDED MARCH 31, 1996.
Current Report, dated May 28, 1996, Item 5.
No financial statements were filed with the foregoing
Report.
36.
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
SHOWSCAN ENTERTAINMENT INC.
<TABLE>
<S> <C>
Report of Independent Auditors...................................................................................F-2
Consolidated Balance Sheets at March 31, 1996 and 1995...........................................................F-3
Consolidated Statements of Operations for the years ended March 31, 1996, 1995 and 1994..........................F-5
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996, 1995, and 1994...............F-6
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995 and 1994..........................F-7
Notes to Consolidated Financial Statements.......................................................................F-9
Consolidated Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts....................................................F-27
Supplementary Audited Financial Statements:
Financial Statements for Showscan CityWalk Venture for the years ended December 31, 1995 and 1994......F-28
Financial Statements for Cinemania (U.K.) Limited for the years ended December 31, 1995 and 1994.......F-36
Financial Statements for Showscan/General Cinema Ventures for the period from April 24, 1995
(date of formation) to October 31, 1995...............................................................F-45
</TABLE>
All other schedules have been omitted either as inapplicable or not
required under the instructions contained in Regulation S-X or because the
information is included in the Consolidated Financial Statements or the Notes
thereto listed above.
F-1
<PAGE> 38
Report of Independent Auditors
Board of Directors and Stockholders
Showscan Entertainment Inc.
We have audited the accompanying consolidated balance sheets of Showscan
Entertainment Inc. as of March 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Showscan
Entertainment Inc. at March 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
June 5, 1996
F-2
<PAGE> 39
Showscan Entertainment Inc.
Consolidated Balance Sheets
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
MARCH 31
1996 1995
-------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,055 $ 6,791
Short-term investments (Note 1) 3,086 --
Accounts receivable, net of allowances of $215 (1996)
and $254 (1995) 2,025 2,046
Unbilled receivables on uncompleted equipment
contracts (Note 1) 1,122 870
Due from affiliated entities (Note 7) 1,216 897
Equipment sales inventory 1,547 2,142
Prepaid expenses and other current assets 122 110
-------------------
Total current assets 14,173 12,856
Film library, net (Note 1) 3,481 1,394
Equipment and leasehold improvements, less
depreciation and amortization (Note 2) 1,313 1,728
Owned and operated theatres (Notes 1 and 6) 4,045 2,494
Patents and other intellectual properties, net of
amortization (Note 1) 1,770 2,204
Other assets, including note receivable from
affiliated entity (Note 7) 1,975 1,296
-------------------
Total assets $26,757 $21,972
===================
</TABLE>
See accompanying notes.
F-3
<PAGE> 40
<TABLE>
<CAPTION>
MARCH 31
1996 1995
-----------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 603 $ 322
Customer advances on uncompleted equipment
contracts (Note 1) 2,143 2,929
Accrued expenses and other current liabilities (Note 1) 3,351 1,609
Subordinated note payable (Note 3) -- 3,121
-----------------------
Total current liabilities 6,097 7,981
Convertible notes payable (Note 3) 6,620 --
-----------------------
Total liabilities 12,717 7,981
-----------------------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 5):
Series A Convertible Preferred Stock, $.001 par value; 150,000 shares
authorized, no shares issued and outstanding in
1996 and 150,000 in 1995 (Note 4) -- --
Series C Convertible Preferred Stock, $.001 par value;
100,000 shares authorized; 49,000 shares issued and outstanding
in 1996 and 1995 (Note 4) -- --
Common stock, $.001 par value; 20,000,000 shares
authorized; shares issued and outstanding of
5,480,324 in 1996 and 5,242,859 in 1995 5 5
Additional paid-in capital 42,446 42,498
Accumulated deficit (28,411) (28,512)
-----------------------
Total stockholders' equity 14,040 13,991
-----------------------
Total liabilities and stockholders' equity $ 26,757 $ 21,972
=======================
</TABLE>
See accompanying notes.
F-4
<PAGE> 41
Showscan Entertainment Inc.
Consolidated Statements of Operations
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Revenues (Note 9):
Film rentals and royalties $ 9,039 $ 5,978 $ 2,970
Equipment sales and related services 8,426 9,459 2,245
--------------------------------------
17,465 15,437 5,215
Costs of revenues 8,399 8,584 3,967
--------------------------------------
Gross profit 9,066 6,853 1,248
Other costs and expenses:
General and administrative expenses 7,576 5,560 5,566
Depreciation and amortization 971 1,025 2,827
Provision for contract modifications -- -- 673
--------------------------------------
8,547 6,585 9,066
--------------------------------------
Operating income (loss) 519 268 (7,818)
Other income (expense):
Equity in operations of owned and operated theatres
(Note 6) (217) (502) --
Other income, including interest of $250
(1996), $237 (1995) and $27 (1994) 358 444 171
Other expense, including interest of $410 (1996), $128
(1995) and $98 (1994) (555) (128) (98)
--------------------------------------
(414) (186) 73
--------------------------------------
Income (loss) before taxes 105 82 (7,745)
Provision for income taxes 4 3 --
--------------------------------------
Net income (loss) $ 101 $ 79 $ (7,745)
======================================
Net income (loss) per common share (Note 1) $ 0.02 $ 0.01 $ (1.68)
======================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 42
Showscan Entertainment Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Series A Convertible Series C Convertible
Preferred Stock Preferred Stock Common Stock
----------------------------------------------------------------------------
Number Number of Number
of Shares Amount Shares Amount of Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993 - $ - - $ - 4,679,519 $ 5
Proceeds from issuance of Series A
Convertible Preferred Stock 150,000 - - - - -
Accretion on Series B Preferred Stock - - - - - -
Issuance of warrants to purchase common
stock - - - - - -
Stock issuance costs - - - - - -
Net loss - - - - - -
----------------------------------------------------------------------------
Balance at March 31, 1994 150,000 - - - 4,679,519 5
Proceeds from common stock offering - - - - 560,340 -
Accretion on Series B Preferred Stock - - - - - -
Proceeds from issuance of Series C
Convertible Preferred Stock and
warrants to purchase common stock - - 25,000 - - -
Conversion of Series B Preferred Stock
to Series C Convertible Preferred Stock - - 24,000 - - -
Exercise of stock options - - - - 3,000 -
Stock issuance costs - - - - - -
Net Income - - - - - -
----------------------------------------------------------------------------
Balance at March 31, 1995 150,000 - 49,000 - 5,242,859 5
Conversion of Series A Convertible Preferred
Stock to Common Stock (150,000) - - - 165,380 -
Exercise of stock options 6,000
Conversion of convertible notes payable
to common stock - - - - 66,085 -
Other - - - - - -
Net income - - - - - -
----------------------------------------------------------------------------
Balance at March 31, 1996 - $ - 49,000 $ - 5,480,324 $ 5
============================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
--------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1993 $ 33,205 $ (20,846) $ 12,364
Proceeds from issuance of Series A
Convertible Preferred Stock 600 - 600
Accretion on Series B Preferred Stock (128) - (128)
Issuance of warrants to purchase common
stock 925 - 925
Stock issuance costs (200) - (200)
Net loss - (7,745) (7,745)
--------------------------------------
Balance at March 31, 1994 34,402 (28,591) 5,816
Proceeds from common stock offering 4,342 - 4,342
Accretion on Series B Preferred Stock (122) - (122)
Proceeds from issuance of Series C
Convertible Preferred Stock and
warrants to purchase common stock 2,500 - 2,500
Conversion of Series B Preferred Stock
to Series C Convertible Preferred Stock 1,800 - 1,800
Exercise of stock options 12 - 12
Stock issuance costs (436) - (436)
Net Income - 79 79
--------------------------------------
Balance at March 31, 1995 42,498 (28,512) 13,991
Conversion of Series A Convertible Preferred
Stock to Common Stock - - -
Exercise of stock options 30 30
Conversion of convertible notes payable
to common stock 345 - 345
Other (427) - (427)
Net income - 101 101
--------------------------------------
Balance at March 31, 1996 $ 42,446 $(28,411) $ 14,040
======================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 43
Showscan Entertainment Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 101 $ 79 $ (7,745)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 971 1,025 2,827
Amortization of film library 481 502 759
Amortization of debt issue costs 85 - -
Provision for doubtful accounts receivable 440 (30) 258
Equity in operations of owned and operated theatres 217 502 -
Accrued interest on subordinated note - 123 95
Issuance of common stock and warrants for
services - - 75
Changes in operating assets and liabilities:
Accounts receivable (419) 353 1,575
Due from affiliated entities (454) (1,543) (200)
Equipment sales inventory 595 (702) (26)
Unbilled receivables on uncompleted equipment contracts (252) 248 488
Prepaid expenses and other current assets (12) (7) 265
Accounts payable, accrued expenses and other 2,023 (570) (2,294)
Customer advances on uncompleted equipment contracts (786) 798 1,893
--------------------------------------
Net cash provided by (used in) operating activities 2,990 778 (2,030)
INVESTING ACTIVITIES
Purchases of short-term investments (3,086) - (619)
Redemptions of short-term investments - 1,243 -
Additions to film library (2,568) (891) (274)
Investment in owned and operated theatres (2,211) (1,610) (908)
Purchases of equipment and leasehold improvements and other,
net (151) (275) 378
--------------------------------------
Net cash (used in) provided by investing activities (8,016) (1,533) (1,423)
</TABLE>
F-7
<PAGE> 44
Showscan Entertainment Inc.
Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings, net of debt issue costs $ 6,381 $ - $ -
Repayment of subordinated note payable (3,121) - -
Net proceeds from issuance of common stock - 4,079 -
Net proceeds from issuance of preferred stock and common stock
warrants - 2,327 2,800
Proceeds from exercise of stock options 30 12 -
-----------------------------------
Net cash provided by financing activities 3,290 6,418 2,800
-----------------------------------
Net (decrease) increase in cash and cash equivalents (1,736) 5,663 (653)
Cash and cash equivalents at beginning of year 6,791 1,128 1,781
-----------------------------------
Cash and cash equivalents at end of year $ 5,055 $ 6,791 $ 1,128
===================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 1,818 $ 4 $ 4
===================================
Income taxes paid $ 4 $ 2 $ 2
===================================
</TABLE>
See accompanying notes.
F-8
<PAGE> 45
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OF THE COMPANY
Showscan Entertainment Inc. (the Company) is a leader in the production and
exhibition of exciting movie-based entertainment attractions shown in
large-screen, special-format theatres worldwide. The Company's business is in
the rapidly expanding out-of-home entertainment marketplace. The Company's
simulation motion and specialty theatres are open or under construction in 23
countries around the world, located in theme parks, motion picture mutiplexes,
expos, world's fairs, resorts, shopping centers, casinos, museums and other
tourist destinations. The Company also owns and operates motion simulation
theatres in partnership with leading entertainment companies around the world.
The Company's simulation attractions combine the exhibition of a short action
Showscan film with multi-channel sound systems and synchronized theatre seat
movement to produce an immersive entertainment experience in which the theatre
patron has the perception of actually participating in the on-screen action. The
entertainment creates the experience of "thrill ride" or action entertainment
(such as riding a runaway train or racing through outer space). The Company's
attractions incorporate various proprietary technologies, including the award
winning and patented 70mm filming and projection process known as Showscan(R).
The Company believes that films made and exhibited in the Showscan process
create a visual effect of depth, clarity and realism that is superior to any
other film format. The Showscan process is also used for the exhibition of films
in large screen special format movie theatres. The Company's films have been
exhibited in such specialty theatres at world fairs, tourist destinations, trade
conventions and other locations where the operator desires the impact of the
large-screen, intense image that a Showscan film provides. In January, 1996 the
Company entered into the giant screen theatre business when it announced its new
product line, "ShowMax", which is available in 2-D, 3-D and Dome applications.
The Company is presently in the business of: (i) licensing and distributing the
films in its library and the proprietary technologies necessary to produce and
exhibit the Company's films; (ii) selling and installing attractions and
specialty theatres (including projectors, screens, sound systems,
synchronization and show control, and theatre design packages)
F-9
<PAGE> 46
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS OF THE COMPANY (CONTINUED)
used to exhibit films in the Showscan process as well as 15/70 format films;
(iii) selling motion bases and other equipment used in attractions; (iv)
producing films using the Showscan process; and (v) operating attractions in
which the Company has an economic interest (O&O Theatres). The Company is also
committed to the continued recognition of the Showscan(R) brand name worldwide.
The Company's primary business strategy is to develop high margin recurring
revenues from the licensing and distribution of movie-based software to
third-party owner/operators of its attractions and from ticket sales at, and the
licensing of its movie-based software to, its O&O Theatres. The Company seeks to
increase the demand for its film library by significantly increasing the
installed base of both its motion simulation attractions and specialty theatres.
CONSOLIDATION
The financial statements consolidate the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany amounts and transactions
have been eliminated in consolidation.
The Company accounts for its investment in O&O Theatres (see Note 6) under the
equity method of accounting.
RECLASSIFICATIONS
To conform to the presentation for the year ended March 31, 1996, the
consolidated statements of operations for the years ended March 31, 1995 and
1994 were reclassified, consistent with industry practice, such that certain
costs of film rentals and royalties (payments to co-producers) were recorded as
costs of revenues, rather than being netted against film rentals and royalties.
This reclassification had no effect on gross profit or net income (loss) for any
period. Film rental and royalties, and costs of revenues, increased $1,666,000
and $705,000 for the years ended March 31, 1995 and 1994, respectively, from the
amounts previously reported.
The consolidated financial statements for the years ended March 31, 1995 and
1994 also contain certain other reclassifications to conform to the presentation
for the year ended March 31, 1996.
F-10
<PAGE> 47
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FILM LIBRARY
The Company's film library primarily consists of short "thrill-ride" or action
films that are exhibited in motion simulation attraction theatres worldwide.
Such films are being amortized over their estimated future revenue stream, as
revised quarterly, if applicable. Accumulated amortization of the film library
was $6,505,000 and $6,025,000 at March 31, 1996 and 1995, respectively.
The Company estimates that approximately 60% of unamortized film costs at March
31, 1996 will be amortized over the next four fiscal years.
PATENTS AND OTHER INTELLECTUAL PROPERTIES
Patents (expiring in fiscal year 2002) and other intellectual properties
represent the excess of the total purchase cost over the values assigned to
tangible assets at the date of acquisition of the Showscan process.
Amortization is provided on the basis of the ratio of annual revenues to
projected revenues over the lives of the patents, as revised quarterly, if
applicable, from the Showscan process with minimum annual amortization of
approximately $434,000 (equal to 1/15 of the original balance of $6,504,000).
Accumulated amortization of the patents and other intellectual properties was
$4,734,000 and $4,300,000 at March 31, 1996 and 1995, respectively.
EQUIPMENT SALES ACCOUNTING
Equipment sales inventory, consisting primarily of film exhibition and motion
simulation system equipment packages and related components, is valued at the
lower of average cost or market.
Equipment sales contracts are accounted for using the percentage-of-completion
method of accounting, generally measured by the percentage of labor hours
incurred to date to the estimated total labor hours for each contract. When
revenues and cost estimates for a contract indicate an ultimate loss, that loss
is recognized immediately.
F-11
<PAGE> 48
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. COMPANY BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost.
Depreciation of equipment is computed using the straight-line method over the
estimated useful lives of the respective assets. Amortization of leasehold
improvements is computed using the straight-line method over the lease term.
Depreciation and amortization of equipment and leasehold improvements was
$537,000, $590,000 and $2,217,000 for the years 1996, 1995 and 1994,
respectively. Depreciation for 1994 includes approximately $1,500,000 of
write-downs relating to certain equipment not expected to be utilized by the
Company in future periods pursuant to the Company's revised business strategy.
INCOME TAXES
The Company accounts for taxes using Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
NET INCOME (LOSS) PER COMMON SHARE
Per share information has been determined on the basis of 6,317,167, 5,788,230
and 4,679,519 weighted average shares outstanding for the years ended March 31,
1996, 1995 and 1994, respectively.
The weighted average shares for the years ended March 31, 1996 and 1995 give
effect to the assumed conversion of the Company's Convertible Preferred Stock
(the effect of all other common stock equivalents was anti-dilutive and thus not
reflected in the per share computation). For the year ended March 31, 1994, the
effect of all common stock equivalents is not included in the per share
computation as such items are anti-dilutive.
F-12
<PAGE> 49
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid equity instruments purchased with an
original maturity of three months or less to be cash equivalents.
Short-term investments are stated at amortized cost and consist of amounts
invested in debt securities (U.S. Treasury Bills) which will be held to
maturity. Such securities have maturities ranging from three to nine months from
the time of acquisition. Such investments are carried at unamortized cost, which
approximate their fair value, based on quoted market prices in an active market.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses. The Company generally requires customers to furnish
irrevocable letters of credit to minimize the Company's credit risk.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Included in accrued expenses and other current liabilities are the following:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------
<S> <C> <C>
Accrued royalties $ 988,000 $ 637,000
Purchase of motion simulation films 1,620,000 -
Other items 743,000 972,000
-----------------------------------
$ 3,351,000 $ 1,609,000
===================================
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for compensation cost related to employee stock options in
accordance with the requirements of Accounting Principles Board Opinion 25 (APB)
and intends to continue to do so. APB 25 requires compensation cost for
stock-based compensation plans to be recognized based on the difference, if any,
between the fair market value of the stock on the date of grant and the option
exercise price.
F-13
<PAGE> 50
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at March 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------
<S> <C> <C>
Showscan equipment $ 4,559,000 $ 4,558,000
Leasehold improvements 927,000 926,000
Office furniture and equipment 769,000 671,000
------------------------------------
6,255,000 6,155,000
Less accumulated depreciation and amortization 4,942,000 4,427,000
------------------------------------
$ 1,313,000 $ 1,728,000
====================================
</TABLE>
3. NOTES PAYABLE
On September 1, 1995, the Company completed a private placement of $7,000,000 in
Convertible Notes through a European financial institution, Banca del Gottardo.
The notes mature on September 1, 1999 and bear interest at 8% per annum.
Interest is payable semi-annually commencing March 1, 1996. The notes are
secured by substantially all of the assets of the Company, although the security
excludes the Company's film library and the capital stock of its subsidiaries,
which includes its owned and operated theatres. In connection with the private
placement, $619,000 of debt issue costs were incurred and are being amortized
over the life of the notes. The notes are convertible into common stock at the
option of the holder at a conversion price (subject to certain anti-dilution
adjustments) of $5.75 per share (the closing price on the Nasdaq National Market
on the transaction closing date). Through March 31, 1996, $380,000 of notes were
converted into 66,085 shares of common stock. Subsequent to March 31, 1996, an
additional $480,000 of notes were converted into 83,475 shares of common stock
leaving an outstanding balance of $6,140,000.
F-14
<PAGE> 51
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE (CONTINUED)
The Company believes the carrying amount of the notes approximate their fair
value based on current yields for debt issues of similar quality and terms.
At March 31, 1995, the Company had a subordinated note payable outstanding which
was paid in full in April 1995. The note bore interest at the floating prime
rate of the First National Bank of Chicago; accrued interest was $1,547,000 at
March 31, 1995.
4. PREFERRED STOCK
The Company is authorized to issue preferred stock in one or more series and to
fix the rights, preferences, privileges, qualifications, limitations,
restrictions and the number of shares constituting any such series.
The Company is authorized to issue a total of 10,000,000 shares of preferred
stock of which 49,000 shares are issued as of March 31, 1996. Accordingly,
9,951,000 shares of preferred stock are available for issuance.
SERIES A CONVERTIBLE PREFERRED STOCK (SERIES A)
On September 30, 1995, the Company converted all 150,000 previously outstanding
shares of its Series A into 165,380 shares of common stock. Each share of Series
A had a liquidation value of $4.00 and was convertible at the option of the
holders into shares of common stock at a conversion rate (subject to certain
anti-dilution adjustments) of 1.103 shares of common stock for each share of
Series A. The Series A was not subject to redemption and each share of Series A
was entitled to a dividend equal to 110%, subject to adjustment for
subdivisions, combinations and stock dividends, of any cash dividends declared
on each outstanding share of common stock. The holders of shares of Series A had
voting rights as if such shares had been fully converted into common stock.
SERIES C CONVERTIBLE PREFERRED STOCK (SERIES C)
The Company has 49,000 shares of Series C outstanding. The Series C is
convertible into common stock at $5.04 per share (subject to certain
anti-dilution adjustments), has a liquidation preference of $100 per share, and
provides voting rights as if such shares had been fully converted into common
stock. Each share of Series C entitles the holder to
F-15
<PAGE> 52
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
4. PREFERRED STOCK (CONTINUED)
SERIES C CONVERTIBLE PREFERRED STOCK (SERIES C) (CONTINUED)
receive dividends in an amount equal to 110% of the dividends per share declared
on each share of common stock. The Company may elect to pay dividends on the
Series C either in cash or in additional shares of Series C based on its
liquidation preference of $100 per share.
The Company has the right, but not the obligation, to redeem the outstanding
shares of the Series C at a redemption price equal to the liquidation price
($100 per share) plus any accrued but unpaid dividends, if any.
The Series C is senior to the common stock and other junior stock of the Company
and is on a parity with the Series A; additionally, a majority of the holders of
Series C must consent to (a) the issuance of any securities ranking senior to,
or on parity with, the Series C, and (b) the repurchase or retirement of any
equity securities of the Company other than the Series C and the Series A.
In the event of a "material default" (as defined), the holders of the
outstanding Series C will be entitled to (a) require the Company to repurchase
the outstanding Series C at a price equal to the liquidation price plus any
declared but unpaid dividends plus any accrued interest thereon, (b) require the
Company to pay dividends on the Series C only in cash, and (c) receive interest
on all past due dividends, if any, at the rate of four percentage points above
the then prime rate.
SERIES D PARTICIPATING PREFERRED STOCK (SERIES D)
The issuance of 10,000 shares of Series D was authorized in November 1994 in
connection with the adoption of the Company's stockholder rights plan.
In connection therewith, the Company issued a dividend of one preferred share
purchase right (a Right) for each outstanding share of common stock and for each
share of common stock issuable upon conversion of outstanding Series A or Series
C to the stockholders of record on November 11, 1994. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series D at a purchase price of $40 per one one-thousandth of a share of Series
D, subject to adjustment (the Purchase Price).
F-16
<PAGE> 53
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
4. PREFERRED STOCK (CONTINUED)
SERIES D PARTICIPATING PREFERRED STOCK (SERIES D) (CONTINUED)
The Rights may be exercised (a) 20 days after a person or group of persons has
become the beneficial owner of 20% or more of the common stock then outstanding
(an Acquiring Person), or (b) 20 business days after the date of commencement of
a tender or exchange offer the consummation of which would result in a person or
group of persons becoming an Acquiring Person. The Rights, which do not have any
voting rights, expire on November 11, 2004 and may be redeemed by the Company at
a price of $.01 per Right, subject to adjustment, at any time prior to their
expiration and prior to such time as any person or group of persons becomes an
Acquiring Person.
In the event that a person or group of persons becomes an Acquiring Person, each
Right will entitle its holder to purchase, at the Right's then Purchase Price, a
number of shares of common stock of the Company having a market value of twice
the Purchase Price. If certain mergers or sales of assets by the Company occur,
each Right shall entitle the holder to purchase, at the then Purchase Price, a
number of shares of common stock of the surviving corporation or purchaser
having a market value of twice the Purchase Price.
5. STOCK OPTIONS AND WARRANTS
OPTIONS
The Company currently has two stock option plans in effect, the 1987 Option Plan
and the 1992 Option Plan (collectively, the Plans). The Plans provide for the
issuance of nonqualified and qualified stock options under the Internal Revenue
Code of 1986, as amended. An aggregate of 300,000 shares of common stock were
initially reserved for grant under the 1992 Option Plan to officers, directors
and employees as well as independent contractors and consultants who performed
services for the Company. In 1995, the 1992 Option Plan was amended to permit
the grant of up to 800,000 shares of common stock and such number of shares have
been reserved for grant at March 31, 1996. All remaining shares reserved for
grant under the 1987 Option Plan were cancelled upon adoption of the 1992 Option
Plan. Persons who are not employees of the Company are eligible to receive only
nonqualified stock options. The options may be granted for a term of up to ten
years. If an incentive stock option is granted to an individual owning more than
10% of the total combined voting power of all classes of the Company's stock,
the exercise price of the option may not be less than 110% of the fair market
value of the underlying shares on the date of the grant and the term of the
option may not exceed five years.
F-17
<PAGE> 54
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
OPTIONS (CONTINUED)
The Plans provide that the aggregate fair market value (determined at the time
the option is granted) of the common stock with respect to which incentive stock
options are exercisable for the first time by an optionee during any calendar
year shall not exceed $100,000.
The following table summarizes stock option transactions under the Plans for the
remaining unexercised stock options:
<TABLE>
<CAPTION>
STOCK OPTIONS 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 619,500 333,000 334,500
Granted 32,250 304,750 272,500
Exercised ($5.00 per share in 1996 and
$4.00 per share in 1995) (6,000) (3,000) -
Canceled (40,000) (15,250) (274,000)
Outstanding at end of year 605,750 619,500 333,000
Exercisable at end of year 235,625 156,500 47,900
Available for grant at end of year 231,750 238,000 27,500
Price range at end of year $5.00 - $9.06 $5.00 - $9.06 $4.00 - $7.38
</TABLE>
WARRANTS
During 1991, warrants to purchase an aggregate of 200,000 shares of common stock
were issued by the Company. The warrants are exercisable at a price of $6.50
(50,000 shares) and $9.90 (150,000 shares), subject to certain anti-dilution
adjustments. The warrants expire on July 11, 1996 (150,000 shares) and March 9,
1999 (50,000 shares).
In October 1993, the Company issued a warrant to purchase an aggregate of 50,000
shares of common stock at an exercise price of $4.47 per share to its Chairman
of the Board of Directors. The warrant was issued as compensation for services
the Chairman provided to the Company. At March 31, 1996, the warrant has been
adjusted (due to anti-dilution adjustments) to permit the purchase of up to
55,127 shares of common stock at an exercise price of $4.05 per common share.
The warrant is exercisable at any time on or before October 26, 1998.
F-18
<PAGE> 55
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
WARRANTS (CONTINUED)
In September 1993, the Company issued to certain of its directors (and their
affiliates) warrants which initially allowed the purchase of up to 850,000
shares of common stock at the then exercise price of $4.00 per share. The
warrants have been adjusted (due to anti-dilution adjustments) to permit the
purchase of up to 937,155 shares of common stock at an exercise price of $3.63
per share and are currently exercisable and expire on September 27, 1998.
In August 1994, the Company issued to United Artists Theatre Circuit (UA)
warrants to purchase an aggregate of 552,000 shares of common stock, at exercise
prices ranging from $6.50 to $8.50, subject to certain anti-dilution
adjustments. The warrants become exercisable at dates from August 22, 1995
(300,000) and annually thereafter at 75,000 per year with the remaining 27,000
exercisable on August 22, 1999, and have expiration dates from August 22, 1999
to August 22, 2000.
In September 1995, the Company issued warrants to purchase an aggregate of
150,000 shares of common stock at an exercise price of $5.75 per share, subject
to certain anti-dilution adjustments, to financial advisors who assisted in the
private placement of the Convertible Notes. The warrants become exercisable on
September 1, 1996 and expire on September 1, 2000.
In October 1995, the Company issued warrants to purchase an aggregate of 30,000
shares of common stock at an exercise price of $6.44, subject to certain
anti-dilution adjustments, to an outside marketing, film production and
consulting company. The warrants become exercisable on August 2, 1996 (15,000)
and August 2, 1997 (15,000) and expire on August 1, 1998.
F-19
<PAGE> 56
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
WARRANTS (CONTINUED)
Shares of the Company's common stock reserved for issuance upon exercise of
stock options, warrants, preferred stocks and convertible notes are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
RANGE OF MARCH 31
EXERCISE PRICES 1996 1995
--------------- ------------------------------
<S> <C> <C> <C>
1987 and 1992 Option Plans $5.00 - $9.0625 857,500* 857,500*
Warrants $3.63 - $9.90 1,924,283 1,744,282
Series A - - 165,380
Series C $5.04** 972,222 972,222
Convertible Notes $5.75** 1,151,304 -
------------------------------
4,905,309 3,739,384
==============================
</TABLE>
*At March 31, 1996 and 1995, shares reserved for options which are still
available for grant are 231,750 and 238,000, respectively.
**Subject to certain anti-dilution provisions.
6. OWNED AND OPERATED THEATRES
The Company retains an ownership interest, ranging from 25% to 50%, in selected
Showscan simulation theatre attractions. The Company operates and/or has an
ownership interest in theatre attractions at Universal CityWalk in Universal
City, California (November 1993), at the Trocadero Arcade/Piccadilly Circus in
London, England (September 1994), Framingham, Massachusetts (May 1995), Osaka,
Japan (August 1995), and on the Riverwalk in San Antonio, Texas (March 1996).
Generally, in each of these arrangements, the Company receives reimbursement for
direct expenses (as defined), a percentage of each theatre's cash flow (equal to
its ownership percentage), and receives separately annual film rentals,
royalties, and management fees (if applicable).
F-20
<PAGE> 57
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
6. OWNED AND OPERATED THEATRES (CONTINUED)
Affiliated Ventures
The Company and affiliates of certain of its directors have entered into three
ventures through March 31, 1996 with respect to owned and operated theatres:
a) Universal CityWalk - The Universal CityWalk Venture is a joint venture
which is 50% owned by a wholly-owned subsidiary of the Company, and 50%
owned by affiliates of certain of the directors. The Universal CityWalk
Venture also entered into a ten-year profit sharing lease with the owner
of Universal CityWalk pursuant to which the owner contributed one-half of
the costs incurred for the construction of the theatre. In general, the
Universal CityWalk Venture is obligated to pay a base rent plus 50% of
the cash flow, as defined, from the operations of the theatre.
b) Trocadero Arcade/Piccadilly Circus - the Trocadero Arcade/Piccadilly
Circus theatres are owned by Cinemania (UK) Limited, a British
corporation, which is 50% owned by a wholly-owned subsidiary of the
Company, and 50% owned by affiliates of certain of the directors.
c) Riverwalk/San Antonio - The Riverwalk/San Antonio theatre is owned by a
limited liability company which is 50% owned by an unaffiliated third
party and 50% owned by Showscan Attractions Venture, which is a joint
venture 50% owned by a wholly-owned subsidiary of the Company and 50%
owned by affiliates of certain of the directors.
The Company has through other financing and/or joint venture arrangements
entered into the following additional theatre ventures:
UA Venture
In August 1994, the Company and UA agreed to be partners in a venture called
Showscan/United Artists Theatres Joint Venture (UA Venture).
F-21
<PAGE> 58
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
6. OWNED AND OPERATED THEATRES (CONTINUED)
Pursuant to a Theatre Rights Agreement, as amended (TRA), UA has agreed to offer
to the UA Venture for ownership and operation by the UA Venture, up to 24
theatre sites prior to August 19, 1999 for the installation of motion simulation
attraction threatres in existing or to-be-built UA theatre multiplexes. If the
UA Venture declines to acquire a particular site, then UA must install a motion
simulation attraction theatre at such site. As of March 31, 1996, UA has offered
two sites (the UA Venture declined the two sites) and is now in the process of
preparing offers for six additional sites to the UA Venture. The TRA contains
certain provisions that require UA to make payments to the Company if UA is
unable to meet its obligations under that agreement. The TRA provided that two
motion simulation attraction theatres be installed and in operation in Malaysia
no later than December 31, 1995. UA was unable to meet this commitment (see Note
7).
The TRA has been amended by the Company and UA to eliminate certain installation
requirements in Malaysia and to add those requirements to the overall UA
obligations. In connection with the amendment, UA relinquished its exclusivity
rights to Malaysia and eliminated its rights of first refusal in the Asia
Territory (as defined).
Other O&O Theatres
The Framingham theatre is owned by a partnership which is jointly owned by a
wholly-owned subsidiary of the Company and by a subsidiary of General Cinema
Corporation.
The Osaka theatre is 50% owned by a wholly-owned subsidiary of the Company and
50% by Imagine Japan, Inc. Sega Enterprises, Ltd. operates the Osaka theatre in
exchange for a certain percentage of the gross receipts.
During 1996 and 1995, the Company sold equipment to several of these ventures
and eliminated the gross profit on such sales to the extent of its ownership
percentage ($382,000 in 1996 and $194,000 in 1995). The amount of profit
eliminated is being recognized into income over the depreciation period of the
related equipment.
F-22
<PAGE> 59
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
7. RECEIVABLES FROM AFFILIATED ENTITIES
At March 31, 1996 and 1995, the Company is due $981,000 and $846,000,
respectively, from CineMania (UK) Limited under the terms of a promissory note
dated May 1, 1994. Such amounts are included in other assets in the accompanying
consolidated balance sheets. The note provides for (a) interest on the unpaid
principal balance to be charged at 3% over LIBOR and (b) principal and interest
to be repaid in ten semi-annual payments commencing in November 1995, to the
extent that CineMania (UK) Limited has cumulative net profits available to make
such payments. If no payments are made due to the lack of available profits,
interest will continue to accrue until at such time as cumulative profits exist
whereby payments will be made. No payments were made through March 31, 1996,
although $196,200 was paid subsequently in May 1996.
At March 31, 1996, the Company is due $660,000 from UA in connection with the
TRA as discussed in Note 6. The payment terms provide for (a) interest on the
unpaid principal balance to be charged at 7.5% and (b) principal and interest to
be paid in full on or before December 31, 1996 (Maturity Date); provided,
however, that if the UA Venture has not accepted one of the theatre sites it has
been offered by UA prior to the Maturity Date, the Maturity Date will be
extended 30 days after the date that the UA Venture does accept, but in no event
shall the Maturity Date be extended later than August 19, 1999. The UA Venture
presently intends to accept an offered theatre site by December 31, 1996.
During 1996 and 1995, the Company charged approximately $897,000 and $789,000,
respectively, to the owned and operated theatre ventures. Such amounts have
either been recognized as film rentals and royalties ($565,000 in 1996 and
$314,000 in 1995), or offset against general and administrative expenses
($332,000 in 1996 and $475,000 in 1995) in the accompanying consolidated
statements of operations. Such amounts represent film rentals and royalties,
management and administrative services provided by the Company to the theatre
ventures. The ventures owed the Company approximately $318,000 and $465,000 at
March 31, 1996 and 1995, respectively, (included in due from affiliated
entities) for such changes and for costs paid on behalf of the ventures.
F-23
<PAGE> 60
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
At March 31, 1996, the Company has net operating loss carryforwards for federal
and state income tax purposes of approximately $27,138,000 and $7,340,000,
respectively. The federal net operating loss carryforwards expire through the
year ending 2011. The state net operating loss carryforwards expire through the
year ending 2001. These net operating loss carryforwards can be used to offset
future taxable income, if any.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts utilized for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of March 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------------
<S> <C> <C>
Deferred tax liabilities:
Unbilled receivables on uncompleted equipment
contracts $ 1,770 $ 1,806
Other 15 -
--------------------------------
Total deferred tax liabilities 1,785 1,806
Deferred tax assets:
Customer advances on uncompleted equipment contracts 1,505 1,630
Excess of book over tax depreciation 395 552
Patent amortization 339 374
Other 315 368
Net operating loss carryforward 10,181 9,722
--------------------------------
Total deferred tax assets 12,735 12,646
Valuation allowance for deferred tax asset (10,950) (10,840)
--------------------------------
Total deferred taxes $ - $ -
================================
</TABLE>
F-24
<PAGE> 61
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
9. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Export revenues by geographic area for each of the three years ended March 31
consisted of:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C>
Africa $ 281,000 $ 851,000 $ 85,000
Australasia 2,574,000 1,031,000 115,000
Europe 1,992,000 3,531,000 1,490,000
Far East 5,628,000 4,982,000 2,161,000
Other 173,000 225,000 206,000
--------------------------------------------------------
Total export revenues $ 10,648,000 $ 10,620,000 $ 4,057,000
========================================================
</TABLE>
In 1996, 1995 and 1994, the Company earned revenues from a significant customer
of approximately $3,407,000, $3,080,000 and $913,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various operating leases for its corporate
office, storage premises and equipment. Future net minimum rental payments under
these leases at March 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 $ 430,000
1998 405,000
1999 396,000
2000 391,000
2001 391,000
Thereafter 881,000
-------------------
$ 2,894,000
===================
</TABLE>
The corporate office lease provides for rent adjustments based on increases in
the Consumer Price Index. The Company has provided a letter of credit to its
landlord in the amount of $280,000 which permits the landlord to draw against
the letter of credit upon default by the Company (as defined) under the terms of
the lease. The letter of credit is secured by a cash deposit in the amount of
$280,000; such amount is included in other assets in the accompanying
consolidated balance sheet.
F-25
<PAGE> 62
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rental expense charged to operations for the years ended March 31, 1996,
1995 and 1994 was $389,000, $456,000 and $425,000, respectively.
Under the terms of a film production agreement, the Company has guaranteed, for
four years beginning in 1996, a minimum amount per year of proceeds to the
outside investors in the film project. If revenues, as defined, from the
exhibition of the film is less than the required minimum amount, the Company
will contribute the difference to the outside investors. Based upon management's
estimate of future revenues to be derived from the film, the Company does not
expect to pay any amounts under this guarantee.
The Company is obligated under various royalty agreements to pay royalties
(ranging from 1% to 3%) to various parties, generally based on the gross
receipts (as defined) from either the exploitation of the Showscan process (in
excess of certain amounts), the exploitation of Showscan motion pictures, or
other receipts.
F-26
<PAGE> 63
SHOWSCAN ENTERTAINMENT INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Other
Beginning Charged to Accounts - Deductions - Balance at End
DESCRIPTION of Year Costs and Expenses Described Describe of Year
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended 1996:
Allowance for doubtful accounts $254,000 $440,000 $ - $479,000 (a) $215,000
======== ======== ========= ============ ========
Product warrant liability $187,000 $ 77,000 $ - $ 82,000 (b) $182,000
======== ======== ========= ============ ========
Year ended 1995:
Allowance for doubtful accounts $283,000 $(30,000) $ - $ (1,000) $254,000
======== ======== ========= ==========-- ========
Product warrant liability $213,000 $124,000 $ - $ 150,000(b) $187,000
======== ======== ========= =========--- ========
Year ended 1994:
Allowance for doubtful accounts $323,000 $258,000 $ - $ 298,000(a) $283,000
======== ======== ========== =========--- ========
Product warrant liability $252,000 $130,000 $ - $ 169,000(b) $213,000
======== ======== ========== =========--- ========
</TABLE>
(a) Represents write-off of uncollectible accounts receivable.
(b) Represents actual warranty expenditures.
F-27
<PAGE> 64
Financial Statements
Showscan CityWalk Venture
Years ended December 31, 1995 and 1994
with Report of Independent Auditors
F-28
<PAGE> 65
Report of Independent Auditors
The Partners
Showscan CityWalk Venture
We have audited the accompanying balance sheets of Showscan CityWalk Venture as
of December 31, 1995 and 1994, and the related statements of operations,
partners' capital, and cash flows for the years then ended. These financial
statements are the responsibility of the Venture's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Showscan CityWalk Venture at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Los Angeles, California
June 5, 1996
F-29
<PAGE> 66
Showscan CityWalk Venture
Balance Sheets
<TABLE>
<CAPTION>
December 31
1995 1994
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 74,163 $ 77,356
Due from Showscan CityWalk, Inc. (Note 3) 20,000 20,000
Due from Showscan Entertainment Inc. (Note 3) 26,424 -
Prepaid expenses and other assets 7,993 60,640
------------------------------
Total current assets 128,580 157,996
Property and equipment:
Leasehold improvements 557,431 544,262
Operating equipment 868,682 818,682
------------------------------
1,426,113 1,362,944
Less accumulated depreciation and amortization (312,360 (161,346)
------------------------------
1,113,753 1,201,598
Other assets 16,211 16,144
------------------------------
Total assets $ 1,258,544 $ 1,375,738
==============================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 74,708 $ 132,326
Due to Showscan Entertainment Inc. (Note 3) 21,248 19,025
------------------------------
Total current liabilities 95,956 151,351
Commitments and contingencies (Note 2)
Partners' capital (Note 4) 1,162,588 1,224,387
------------------------------
$ 1,258,544 $ 1,375,738
==============================
</TABLE>
See accompanying notes.
F-30
<PAGE> 67
Showscan CityWalk Venture
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1995 1994
-----------------------------------
<S> <C> <C>
Revenues $ 1,000,198 $ 1,206,961
Cost of revenues, primarily film rental, royalty and
management fees (Note 3) 293,708 250,383
-----------------------------------
Gross profit 706,490 956,578
Other costs and expenses:
Rent 197,923 180,000
Payroll and related items 180,402 191,151
Marketing and advertising 27,235 294,065
Other general and administrative 238,139 263,496
Depreciation and amortization 151,014 148,939
-----------------------------------
794,713 1,077,651
-----------------------------------
Net loss $ (88,223) $ (121,073)
===================================
</TABLE>
See accompanying notes.
F-31
<PAGE> 68
Showscan CityWalk Venture
Statements of Partners' Capital
<TABLE>
<CAPTION>
<S> <C>
Partners' capital at December 31, 1993 $ 1,325,460
Capital contributions 20,000
Net loss (121,073)
---------------
Partners' capital at December 31, 1994 1,224,387
Capital contributions 26,424
Net loss (88,223)
---------------
Partners' capital at December 31, 1995 $ 1,162,588
===============
</TABLE>
See accompanying notes.
F-32
<PAGE> 69
Showscan CityWalk Venture
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1995 1994
-----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (88,223) $ (121,073)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 151,014 148,939
Changes in operating assets and liabilities:
Due from Showscan Entertainment Inc. (26,424) -
Due from Showscan CityWalk, Inc. - (20,000)
Prepaid expenses and other assets 52,580 12,387
Accounts payable and accrued expenses (57,618) 95,287
Due to Showscan Entertainment Inc. 2,223 (171,368)
-----------------------------------
Net cash provided by (used in) operating activities 33,552 (55,828)
INVESTING ACTIVITIES
Purchases of property and equipment (63,169) (2,664)
-----------------------------------
Net cash used in investing activities (63,169) (2,664)
FINANCING ACTIVITIES
Capital contributions by partners 26,424 20,000
-----------------------------------
Net cash provided by financing activities 26,424 20,000
-----------------------------------
Decrease in cash (3,193) (38,492)
Cash at beginning of year 77,356 115,848
-----------------------------------
Cash at end of year $ 74,163 $ 77,356
===================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 1,790 $ 6,849
Income taxes $ - $ -
</TABLE>
See accompanying notes.
F-33
<PAGE> 70
Showscan CityWalk Venture
Notes to Financial Statements
December 31, 1995 and 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Showscan CityWalk Venture (the Venture) is a venture engaged in the business of
operating a Showscan motion simulation attraction theatre. The theatre opened in
late November 1993 at Universal CityWalk adjacent to Universal Studios,
Universal City, California. The Venture is 50% owned by Showscan CityWalk, Inc.,
a wholly-owned subsidiary of Showscan Entertainment Inc. (Showscan). Moss Family
LA Corp. and DiBenedetto CityWalk Limited Partnership (collectively the
Investors) each own 25% of the Venture. The principals of the Investors are
greater than 10% stockholders and members of the Board of Directors of Showscan.
Cumulative net income or loss of the Venture is allocated to the partners in
accordance with their respective ownership percentage interests.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost.
Depreciation on operating equipment is recorded on a straight-line basis over
the estimated useful lives of the assets. Leasehold improvements are amortized
on a straight-line basis over their estimated useful lives or the term of the
leases, whichever is shorter.
INCOME TAXES
No provision has been made for income taxes in the accompanying financial
statements; such taxes, if any, are the responsibility of the individual
partners.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-34
<PAGE> 71
Showscan CityWalk Venture
Notes to Financial Statements (continued)
2. COMMITMENTS AND CONTINGENCIES
In connection with the establishment of the Universal CityWalk theatre, the
Venture entered into a ten-year profit sharing lease pursuant to which MCA
Development Company, a division of MCA, Inc., contributed one-half of the costs
incurred for the construction of the theatre. The lease expires in November
2002, subject to options to extend it for three five-year periods. The Venture
is obligated to pay base rent equal to $180,000 (subject to annual Consumer
Price Index increases) per year plus 50% of the cash flow, as defined
(Percentage Rent), from the operations of the theatre. Percentage rent paid was
$13,358 in 1995 and none in 1994.
Future minimum payments, by year and in the aggregate, under the lease at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 $ 185,274
1997 185,274
1998 185,274
1999 185,274
2000 185,274
Thereafter 555,822
----------
Total minimum lease payments $1,482,192
==========
</TABLE>
3. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1995 and 1994, cost of revenues shown in the
accompanying statements of operations include $184,500 and $180,250,
respectively, of amounts paid or owed to Showscan for film rental, royalty and
management fees. At December 31, 1995 and 1994, the Venture owed Showscan
$21,248 and $19,025, respectively, related to such fees.
Amounts due from Showscan CityWalk, Inc. ($20,000 in 1995 and 1994) and Showscan
($26,424 in 1995) relate to capital contributions due the Venture. Such
contributions were made subsequent to December 31, 1995.
F-35
<PAGE> 72
CINEMANIA (UK) LIMITED
Audited Financial Statements
Year ended 31 December 1995
F-36
<PAGE> 73
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
CINEMANIA (UK) LIMITED
We have audited the accompanying balance sheets of Cinemania (UK) Limited as of
December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cinemania (UK) Limited at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Ernst & Young
London
England
June 11, 1996
F-37
<PAGE> 74
CINEMANIA (UK) LIMITED
- --------------------------------------------------------------------------------
BALANCE SHEET
<TABLE>
<CAPTION>
December 31 December 31
Notes 1995 1994
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 821,401 $ 479,019
Prepaid expenses and other current assets 187,315 138,311
----------- -----------
Total current assets 1,008,716 617,330
Property and equipment, net 2 2,925,474 3,160,422
----------- -----------
Total assets $ 3,934,190 $ 3,777,752
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 58,431 $ 179,750
Accrued expenses and other current liabilities 202,048 268,051
Amounts payable to related party 5 22,483 -
Current maturities of notes payable to
stockholders 3 633,695 127,969
----------- -----------
Total current liabilities 916,657 575,770
Notes payable to stockholders 3 1,478,619 1,819,616
----------- -----------
Total liabilities 2,395,276 2,395,386
----------- -----------
Stockholders' equity:
Common stock , (pound)1 ($1.48) par value;
1,000 shares authorised; 100 shares
issued and outstanding 148 148
Additional paid-in capital 1,891,000 1,891,000
Accumulated deficit (423,040) (590,103)
Currency translation adjustments 70,806 81,321
----------- -----------
Total stockholders' equity 1,538,914 1,382,366
----------- -----------
Total liabilities and stockholders' equity $ 3,934,190 $ 3,777,752
=========== ===========
</TABLE>
See accompanying notes
F-38
<PAGE> 75
CINEMANIA (UK) LIMITED
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended
December 31 December 31
Note 1995 1994
<S> <C> <C>
Revenues $ 2,140,118 $ 507,242
Cost of revenues, primarily film rental,
royalty and management fees 5 415,035 157,544
------------ ----------
Gross profit 1,725,083 349,698
Costs and expenses:
Rent 344,551 78,348
Payroll and related items 402,359 63,652
Marketing and advertising 87,188 54,044
Pre-opening - 397,151
Other general and administrative 310,338 205,801
Depreciation 265,959 69,528
------------ ----------
1,410,395 868,524
------------ ----------
Operating profit (loss) 314,688 (518,826)
Other income(expense):
Interest income 24,193 3,199
Interest expense (171,818) (74,476)
------------ ----------
(147,625) (71,277)
------------ ----------
Net profit (loss) $ 167,063 $ (590,103)
============ ==========
Net profit (loss) per common share $ 1,671 $ (5,901)
============ ==========
</TABLE>
See accompanying notes
F-39
<PAGE> 76
CINEMANIA (UK) LIMITED
- --------------------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Additional Currency
Number of paid in Accumulated translation
shares Amount capital deficit adjustments Total
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $
Balance at December 31, 1993 - - - - - -
Proceeds from issuance of
common stock 100 148 - - - 148
Capital contributions - - 1,891,000 - - 1,891,000
Net loss - - - (590,103) - (590,103)
Foreign exchange gain on
translation - - - - 81,321 81,321
------ ----- ---------- --------- ------- ----------
Balance at December 31, 1994 100 148 1,891,000 (590,103) 81,321 1,382,366
Net profit - - - 167,063 - 167,063
Foreign exchange loss
on translation - - - - (10,515) (10,515)
------ ----- ---------- --------- ------- ----------
Balance at December 31, 1995 100 $ 148 $1,891,000 $(423,040) $70,806 $1,538,914
====== ===== ========== ========= ======= ==========
</TABLE>
See accompanying notes
F-40
<PAGE> 77
CINEMANIA (UK) LIMITED
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Year ended
December 31 December 31
1995 1994
OPERATING ACTIVITIES
<S> <C> <C>
Net profit (loss) $ 167,063 $ (590,103)
Adjustments to reconcile net profit (loss) to net cash
provided by (used in) operating activities:
Depreciation 265,959 69,528
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (50,056) (138,311)
Accounts payable (121,319) 179,750
Accrued expenses and other liabilities (62,596) 202,116
Amounts payable to related party 22,483 -
Interest payable to stockholders 82,597 47,435
---------- -------------
Net cash provided by (used in) operating activities 304,131 (229,585)
INVESTING ACTIVITY
Purchases of property and equipment (55,051) (3,211,450)
---------- -------------
Net cash used in investing activity (55,051) (3,211,450)
FINANCING ACTIVITIES
Proceeds from issuance of common stock - 148
Capital contributions - 1,891,000
Borrowings from stockholders 96,946 1,947,585
---------- -------------
Net cash provided by financing activities 96,946 3,838,733
Effect of exchange rate changes on cash (3,644) 81,321
---------- -------------
Net increase in cash 342,382 479,019
Cash at beginning of year 479,019 -
---------- -------------
Cash at end of year $ 821,401 $ 479,019
========== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 730 $ 254
Taxes paid $ - $ -
</TABLE>
See accompanying notes
F-41
<PAGE> 78
CINEMANIA (UK) LIMITED
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Cinemania (UK) Limited (the Company), owns a Showscan motion simulation twin
theatre attraction based at Piccadilly Circus, London, England. The Company
was incorporated in December 1993. The Showscan attraction opened on
September 26 1994.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of equipment is
computed using the straight line method over the estimated useful lives of
the assets. Leasehold property is depreciated on a straight line basis over
the term of the lease.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company are measured
using local currency as the functional currency. Assets and liabilities of
the Company are translated into US dollars at the exchange rate in effect at
the year end (1995 -$1.5526:(pound)1, 1994-$1.5645:(pound)1). Income
statement accounts are translated at the average rate of exchange prevailing
during the year. Translation adjustments arising from differences in
exchange rates from period to period are included in stockholders' equity.
INCOME TAXES
The company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
Under SFAS No. 109, the liability method is used. Under this method,
deferred tax assets and liabilities are measured using the enacted tax rates
and laws for the year in which the taxes are expected to be paid.
NET PROFIT (LOSS) PER COMMON SHARE
The net profit (loss) per common share has been determined on the basis of
the 100 weighted average shares outstanding for the years ended December 31,
1995 and 1994.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Leasehold property $ 40,056 $ 40,363
Operating equipment 3,205,971 3,180,926
Office furniture and fixtures 14,934 8,661
------------ -----------
3,260,961 3,229,950
Less accumulated depreciation 335,487 69,528
------------ -----------
$ 2,925,474 $ 3,160,422
============ ===========
</TABLE>
F-42
<PAGE> 79
CINEMANIA (UK) LIMITED
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
3. NOTES PAYABLE TO STOCKHOLDERS
The loans, which are due to mature on May 1, 2000, are repayable in 10
semi-annual instalments commencing November 1, 1995, only to the extent that
the company has cumulative net profits available to make such payments. If
no payments are made due to lack of profits available, interest will accrue
until such time as cumulative profits exist whereby payments will be made.
Interest is payable at LIBOR plus 3% (8.875% at December 31, 1995).
The aggregate maturities of long-term debt (including interest of $238,940
at December 31, 1995) are as follows:
<TABLE>
<CAPTION>
1995
<S> <C>
1996 $ 633,695
1997 422,463
1998 422,463
1999 422,463
2000 211,230
----------
$2,112,314
==========
</TABLE>
Included within the $633,695 debt due to mature in 1996 is $211,232 which
was due to be paid on November 1,1995. However, due to the lack of available
profits, no payment was made.
The 1994 notes payable to stockholders figures have been restated as a
result of the reclassification of an interest amount of $66,789 from current
liabilities to long term liabilities.
4. LEASES
The Company leases its theatre location under an operating lease, having a
non-cancellable term expiring in 2008, with a renewal option for 10 years.
Future minimum payments under leases with terms of one year or more are
approximately as follows:
<TABLE>
<CAPTION>
Operating
leases
<C> <C>
1996 $ 210,000
1997 240,000
1998 247,500
1999 247,500
2000 247,500
2001 and thereafter 1,980,000
--------------
Total minimum lease payments $ 3,172,500
==============
</TABLE>
F-43
<PAGE> 80
CINEMANIA (UK) LIMITED
- -------------------------------------------------------------------------------
NOTES TO FINACIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS
Showscan Entertainment Inc. (Showscan) holds a 50% equity interest in the
Company. Cost of revenues shown in the accompanying statement of operations
includes $228,400 ($151,100 - 1994) of amounts paid to and $22,483 ($nil -
1994) of amounts owed to Showscan for film rental, royalty and management
fees.
Entities controlled by Mr. Charles Moss and Mr. Thomas Di Benedetto each
hold a 25% equity interest in the Company. Mr. Moss and Mr. Di Benedetto
each have a greater than 10% stockholding in Showscan.
F-44
<PAGE> 81
AUDITED FINANCIAL STATEMENTS
SHOWSCAN/GENERAL CINEMA
VENTURES
Period from April 24, 1995 (date of
formation) to October 31, 1995
F-45
<PAGE> 82
Report of Independent Auditors
The Partners
Showscan/General Cinema Ventures
We have audited the accompanying balance sheet of Showscan/General Cinema
Ventures (the Venture) as of October 31, 1995, and the related statements of
operations, partners' capital, and cash flows for the period from April 24, 1995
(date of formation) to October 31, 1995. These financial statements are the
responsibility of the Venture's management. Our responsibility is to express an
opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Showscan/General Cinema
Ventures at October 31, 1995, and the results of its operations and its cash
flows for the period from April 24, 1995 (date of formation) to October 31, 1995
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
May 17, 1996
F-46
<PAGE> 83
Showscan/General Cinema Ventures
Balance Sheet
October 31, 1995
<TABLE>
ASSETS
Current assets:
<S> <C>
Due from related party (Note 2) $ 34,858
Current portion of foregone rent (Note 2) 110,086
----------
Total current assets 144,944
Property and equipment:
Leasehold improvements 1,011,864
Operating equipment 1,723,422
----------
2,735,286
Less accumulated depreciation and amortization (189,378)
----------
2,545,908
Foregone rent, less current portion, net of accumulated
amortization of $42,726 (Note 2) 511,188
----------
Total assets $3,202,040
==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 49,640
Partners' capital 3,152,400
----------
Total liabilities and partners' capital $3,202,040
==========
</TABLE>
See accompanying notes.
F-47
<PAGE> 84
Showscan/General Cinema Ventures
Statement of Operations
Period from April 24, 1995 (date of formation) to October 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Revenues $ 159,651
Cost of revenues, primarily film rental and management
fees to related parties (Note 2) 86,664
---------
Gross profit 72,987
Other costs and expenses:
Rent 71,500
Payroll and related items 30,892
Marketing and advertising 18,865
Other general and administrative 38,012
Depreciation and amortization 189,378
---------
348,647
---------
(275,660)
Interest income 28,774
---------
Net loss $(246,886)
==========
</TABLE>
See accompanying notes.
F-48
<PAGE> 85
Showscan/General Cinema Ventures
Statement of Partners' Capital
<TABLE>
<CAPTION>
<S> <C>
Beginning partners' capital contributions
effective April 24, 1995 $3,399,286
Net loss (246,886)
-----------
Partners' capital at October 31, 1995 $3,152,400
===========
</TABLE>
See accompanying notes.
F-49
<PAGE> 86
Showscan/General Cinema Ventures
Statement of Cash Flows
Period from April 24, 1995 (date of formation) to October 31, 1995
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
Net loss $ (246,886)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 189,378
Foregone rent, net 42,726
Changes in operating assets and liabilities:
Due from related party (34,858)
Accounts payable and accrued expenses 49,640
-------------
Net cash used in operating activities 0
FINANCING ACTIVITIES
Capital contributions 97,643
Capital distributions (97,643)
-------------
Net cash used in financing activities 0
-------------
Net increase in cash and cash equivalents 0
Cash at beginning of year 0
-------------
Cash at end of year $ 0
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest $ -
Income taxes $ -
NONCASH ACTIVITY
Noncash capital contributions:
Equipment $ 1,723,422
Leasehold improvements $ 1,011,864
Foregone rent $ 664,000
</TABLE>
See accompanying notes.
F-50
<PAGE> 87
Showscan/General Cinema Ventures
Notes to Financial Statements
October 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Showscan/General Cinema Ventures (the Venture) is a partnership engaged in the
business of operating twin Showscan motion simulation attraction theaters. The
theaters opened in late May 1995 at the Framingham General Cinema 14-screen
multiplex in Framingham, Massachusetts. The Venture is 50% owned by Showscan
Framingham, Inc. (Showscan), a wholly-owned subsidiary of Showscan Entertainment
Inc. and 50% owned by General Cinema of Framingham Inc. (General Cinema), a
wholly-owned subsidiary of General Cinema Corp. of Massachusetts.
Net income or loss of the Venture is allocated to the partners, 50% to Showscan
and 50% to General Cinema. Showscan and General Cinema hold equal voting
interests in the Venture regardless of capital accounts. The term of the Venture
is to continue until the earlier of five years measured from the date of opening
the theater, with an option to extend for additional five-year periods, or
December 31, 2025. Either party may terminate the agreement any time after the
first two years if certain prerequisites, as defined in the Venture Agreement,
are met.
The partners of the Venture have agreed to make additional capital contributions
to the Venture as needed to fund its operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Venture recognizes revenue from ticket sales at the time the tickets are
purchased.
PROPERTY AND EQUIPMENT
Property and equipment have been contributed to the Venture as part of the
initial capital contributions of the partners and are carried at values
representing cost, as specified in the Venture Agreement. Other assets purchased
specifically for the Venture are carried at the cost to the contributor.
F-51
<PAGE> 88
Showscan/General Cinema Ventures
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation on operating equipment is recorded on a straight-line basis over
the estimated useful lives of the assets of five or ten years. Leasehold
improvements are amortized on a straight-line basis over their estimated useful
lives or the five-year term of the leases, whichever is shorter.
INCOME TAXES
No provision has been made for income taxes in the accompanying financial
statements; such taxes, if any, are the responsibility of the individual
partners.
2. RELATED-PARTY TRANSACTIONS
Cost of revenues shown in the accompanying statement of operations includes
$43,332 of amounts paid to Showscan Entertainment Inc. for film rental and
$43,332 of amounts paid to General Cinema for management fees.
In accordance with the Venture Agreement, General Cinema was credited with a
capital contribution to the Venture in the amount of $664,000, representing the
present value of five years of rent which would be payable by the Venture to
General Cinema but for which payment was waived. Such amount has been classified
as an asset on the Venture's balance sheet as foregone rent. The initial
undiscounted value of the foregone rent was $881,250. The discounting effect of
the rent resulted in the Venture recognizing interest income of approximately
$29,000 for the period ended October 31, 1995. Rent expense is being recognized
on a straight-line basis over the 60-month lease period concluding May of 1999.
Related rent expense for the year amounted to $71,500.
General Cinema also made in-kind capital contributions in the form of leasehold
improvements and equipment which are being carried at cost of approximately $1.1
million as specified in the Venture Agreement.
F-52
<PAGE> 89
Showscan/General Cinema Ventures
Notes to Financial Statements (continued)
2. RELATED-PARTY TRANSACTIONS (CONTINUED)
As part of its initial capital contribution, Showscan made a noncash
contribution of certain operating equipment valued at $1,602,000. As specified
in the Venture Agreement, such value represents 90% of the price Showscan
generally charges unaffiliated parties for the purchase of such equipment.
In addition, Showscan made a cash capital contribution of approximately $98,000,
which was then paid out as a distribution to General Cinema in order to equalize
the capital accounts as called for in the Venture Agreement.
F-53
<PAGE> 90
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 28, 1996
SHOWSCAN ENTERTAINMENT INC.
By /s/ WILLIAM C. SOADY
-------------------------------------
William C. Soady
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1933,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM D. EBERLE Chairman of the Board June 28, 1996
- ----------------------------------
William D. Eberle
/s/ WILLIAM C. SOADY Director; President; Chief Executive June 28, 1996
- ---------------------------------- Officer (Principal Executive Officer)
William C. Soady
/s/ CHARLES B. MOSS, JR. Director June 28, 1996
- ----------------------------------
Charles B. Moss, Jr.
/s/ THOMAS R. DIBENEDETTO Director June 28, 1996
- ----------------------------------
Thomas R. DiBenedetto
/s/ KURT C. HALL Director June 28, 1996
- ----------------------------------
Kurt C. Hall
/s/ DENNIS POPE Executive Vice President and June 28, 1996
- ---------------------------------- Chief Financial Officer (Principal
Dennis Pope Financial Officer)
/s/ GREGORY W. BETZ Vice President and Director of Finance June 28, 1996
- ---------------------------------- (Principal Accounting Officer)
Gregory W. Betz
</TABLE>
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ----------- --------
<S> <C> <C>
4.20 Warrant Agreement, dated as of September 1, 1995, by and
between Showscan Entertainment Inc. and Jack M. Ferraro.
4.21 Registration Rights Agreement, dated as of September 1,
1995, by and between Showscan Entertainment Inc. and Jack M.
Ferraro.
4.22 Warrant Agreement, dated as of September 1, 1995, by and
between Showscan Entertainment Inc. and Jack Erlanger.
4.23 Registration Rights Agreement, dated as of September 1,
1995, by and between Showscan Entertainment Inc. and Jack
Erlanger.
4.24 Warrant Agreement, dated as of October 3, 1995, by and
between Showscan Entertainment Inc. and Intralink Film
Graphic Design.
10.33 Operating Agreement, dated as of August 25, 1995, by and
between Showscan Attractions Venture and Maloney Development
Partnership Ltd.*
10.34 Second Amendment to Theater Rights Agreement, dated as of
December 31, 1995, by and among Showscan Entertainment Inc.,
United Artists Theatre Circuit, Inc. and Showscan/United
Artists Theatres Joint Venture.*
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
</TABLE>
_______
* Confidential treatment of this exhibit has been requested and confidential
portions have been omitted and filed separately with the Securities and
Exchange Commission.
<PAGE> 1
EXHIBIT 4.20
WARRANT AGREEMENT
BETWEEN
SHOWSCAN ENTERTAINMENT INC.
and
JACK M. FERRARO
______________________________
Dated as of September 1, 1995
______________________________
<PAGE> 2
WARRANT AGREEMENT
This Warrant Agreement, dated as of September 1, 1995 (this
"Agreement"), is by and between Showscan Entertainment Inc., a Delaware
corporation (the "Company"), and Jack M. Ferraro, an individual ("Holder").
WHEREAS, the Company proposes to issue to Holder, or his
designee, common stock purchase warrants, as hereinafter described (the
"Warrants"), to purchase up to an aggregate of 100,000 shares of Common Stock,
$.001 per share par value (the "Common Stock"), of the Company (the Common
Stock issuable on exercise of the Warrants being referred to herein as the
"Warrant Shares"), pursuant to a consulting letter agreement dated as of August
1, 1995.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Warrant Certificates. The certificates evidencing
the Warrants (the "Warrant Certificates") to be delivered pursuant to this
Agreement shall be in registered form only and shall be substantially in the
form set forth in Exhibit A attached hereto.
SECTION 2. Execution of Warrant Certificates. Warrant
Certificates shall be signed on behalf of the Company by its Chairman of the
Board or its President or a Vice President and by its Secretary or an Assistant
Secretary under its corporate seal.
SECTION 3. Registration. The Company shall number and
register the Warrant Certificates in a register as they are issued. The
Company may deem and treat the registered holder(s) of the Warrant Certificates
as the absolute owner(s) thereof (notwithstanding any notation of ownership or
other writing thereon made by anyone), for all purposes, and shall not be
affected by any notice to the contrary.
SECTION 4. Registration of Transfers and Exchanges; Right of
Refusal.
(a) Registration of Transfers and Exchange. The Company
shall from time to time register the transfer of any outstanding Warrant
Certificates in a Warrant register to be maintained by the Company upon
surrender thereof accompanied by a written instrument or instruments of
transfer in form satisfactory to the Company, duly executed by the registered
holder or holders thereof or by the duly appointed legal representative thereof
or by a duly authorized attorney. Upon any such registration of transfer, a
new Warrant Certificate shall be issued to the transferee(s) and the
surrendered Warrant Certificate shall be canceled and disposed of by the
Company. The Warrants shall in no event be transferred in an amount which
represents the right to purchase fewer than the lesser of (i) 5,000 shares of
Common Stock or (ii) the full number of shares of Common Stock for which the
Warrants held by the proposed transferor are then exercisable.
1
<PAGE> 3
The Warrant holders agree that prior to any proposed transfer
of Warrants or of the Warrant Shares, if such transfer is not made pursuant to
an effective Registration Statement under the Securities Act of 1933, as
amended (the "Act"), or an opinion of counsel, reasonably satisfactory in form
and substance to the Company, that the Warrants or Warrant Shares may be sold
publicly without registration under the Act, the Warrant holder will, if
requested by the Company, deliver to the Company:
(1) an investment covenant reasonably satisfactory to the
Company signed by the proposed transferee;
(2) an agreement by such transferee to the impression of
the restrictive investment legend set forth below on the Warrant or
the Warrant Shares;
(3) an agreement by such transferee that the Company may
place a notation in the stock books of the Company or a "stop transfer
order" with any transfer agent or registrar with respect to the
Warrant Shares; and
(4) an agreement by such transferee to be bound by the
provisions of this Section 4 relating to the transfer of such Warrant
or Warrant Shares.
The Warrant holders agree that each certificate representing
Warrant Shares will bear the following legend:
"The securities evidenced or constituted hereby have been
acquired for the purpose of investment only and have not been
registered under the Securities Act of 1933, as amended. Such
securities may not be sold, transferred, pledged or
hypothecated unless the registration provisions of said Act
have been complied with or unless the Company has received an
opinion of counsel reasonably satisfactory to the Company that
such registration is not required."
Warrant Certificates may be exchanged at the option of the
holder(s) thereof, when surrendered to the Company at its office for another
Warrant Certificate or other Warrant Certificates of like tenor and
representing in the aggregate a like number of Warrants. Warrant Certificates
surrendered for exchange shall be canceled and disposed of by the Company.
(b) Company's Right of First Refusal. Prior to any
proposed transfer of Warrants or of Warrant Shares in a negotiated private
sale, Holder will give notice (the "Sale Notice") of such proposed transfer to
the Company. The Sale Notice will disclose in reasonable detail the identity
of the prospective transferee(s), the number of Warrants or Warrant Shares to
be transferred and the terms and conditions of the proposed transfer. The
Company may elect to purchase all (but not less than all) the securities to be
transferred upon
2
<PAGE> 4
the same terms and conditions as those set forth in the Sale Notice by
delivering a written notice of such election to Holder within 10 days after the
Sale Notice has been given to the Company. Such notice shall contain the time
and place for the closing of the transaction, which time shall be within 20
days after the Sale Notice has been given to the Company. If the Company does
not elect to purchase all of the securities specified in the Sale Notice,
Holder may transfer the securities specified in the Sale Notice, subject to
Section 4(a) hereof, at a price and on terms no more favorable to the
transferee(s) thereof than specified in the Sale Notice during the 60-day
period immediately following the date 10 days after the Sale Notice has been
given to the Company. Any Warrants or Warrant Shares not transferred within
such 60- day period will be subject to the provisions of this Section 4(b) upon
subsequent transfer.
SECTION 5. Warrants; Exercise of Warrants. Subject to the
terms of this Agreement, each Warrant holder shall have the right, which may be
exercised commencing at the opening of business on September 1, 1996 and until
5:00 p.m., Los Angeles time on September 1, 2000, to receive from the Company
the number of fully paid and nonassessable Warrant Shares which the holder may
at the time be entitled to receive on exercise of such Warrants and payment of
the Exercise Price then in effect for such Warrant Shares. Each Warrant not
exercised prior to 5:00 p.m., Los Angeles time, on September 1, 2000 shall
become void and all rights thereunder and all rights in respect thereof under
this agreement shall cease as of such time. No adjustments as to dividends
will be made upon exercise of the Warrants.
A Warrant may be exercised upon surrender to the Company at
its office designated for such purpose (the address of which is set forth in
Section 13 hereof) of the certificate or certificates evidencing the Warrants
to be exercised with the form of election to purchase on the reverse thereof
duly filled in and signed, and upon payment to the Company of the exercise
price (the "Exercise Price") which is set forth in the form of Warrant
Certificate attached hereto as Exhibit A as adjusted as herein provided, for
the number of Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price shall be made (i) in cash
or by certified or official bank check payable to the order of the Company, or
(ii) through the surrender of debt or preferred equity securities of the
Company having a principal amount or liquidation preference, as the case may
be, equal to the aggregate Exercise Price to be paid (the Company will pay the
accrued interest or dividends on such surrendered debt or preferred equity
securities in cash at the time of surrender notwithstanding the stated terms
thereof).
Subject to the provisions of Section 6 hereof, upon such
surrender of Warrants and payment of the Exercise Price the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the written
order of the holder and in such name or names as the Warrant holder may
designate, a certificate or certificates for the number of full Warrant Shares
issuable upon the exercise of such Warrants together with cash as provided in
Section 11; provided, however, that if any consolidation, merger or lease or
sale of assets is proposed to be effected by the Company as described in
subsection (c) of Section 10 hereof, or a tender
3
<PAGE> 5
offer or an exchange offer for shares of Common Stock of the Company shall be
made, upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Company shall, as soon as possible, but in any event not later
than two business days thereafter, issue and cause to be delivered the full
number of Warrant Shares issuable upon the exercise of such Warrants in the
manner described in this sentence together with cash as provided in Section 11.
Such certificate or certificates shall be deemed to have been issued and any
individual, partnership, corporation, association, joint stock company, trust,
joint venture, unincorporated organization or governmental entity or any
subdivision thereof (each a "Person") so designated to be named therein shall
be deemed to have become a holder of record of such Warrant Shares as of the
date of the surrender of such Warrants and payment of the Exercise Price.
The Warrants shall be exercisable, at the election of the
holders thereof, either in full or from time to time in part and, in the event
that a certificate evidencing Warrants is exercised in respect of fewer than
all of the Warrant Shares issuable on such exercise at any time prior to the
date of expiration of the Warrants, a new certificate evidencing the remaining
Warrant or Warrants will be issued and delivered pursuant to the provisions of
this Section and of Section 2 hereof. Warrants shall be exercisable for
Warrant Shares only in an amount which is at least equal to the lesser of (i)
5,000 Warrant Shares or (ii) the full number of Warrant Shares for which the
Warrants held by the Warrant holder are then exercisable.
All Warrant Certificates surrendered upon exercise of Warrants
shall be canceled and disposed of by the Company. The Company shall keep
copies of this Agreement and any notices given or received hereunder available
for inspection by the holders during normal business hours at its office. The
Company covenants that all Warrant Shares which may be issued upon exercise of
Warrants will, upon issue, be fully paid, nonassessable, free of preemptive
rights and free from all taxes, liens, charges and security interests with
respect to the issue thereof.
SECTION 6. Payment of Taxes. The Company will pay all
documentary stamp taxes attributable to the initial issuance of Warrant Shares
upon the exercise of Warrants; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any
transfer involved in the issue of any Warrant Certificates or any certificates
for Warrant Shares in a name other than that of the registered holder of a
Warrant Certificate surrendered upon the exercise of a Warrant or to a Person
outside of the United States, and the Company shall not be required to issue or
deliver such Warrant Certificates unless or until the Person or Persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
SECTION 7. Mutilated or Missing Warrant Certificates. In
case any of the Warrant Certificates shall be mutilated, lost, stolen or
destroyed, the Company shall issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant
4
<PAGE> 6
Certificate of like tenor and representing an equivalent number of Warrants,
but only upon receipt of evidence reasonably satisfactory to the Company of
such loss, theft or destruction of such Warrant Certificate and an indemnity,
if requested, also reasonably satisfactory to it. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
SECTION 8. Reservation of Warrant Shares. The Company will
at all times reserve and keep available, free from preemptive rights, out of
the aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
SECTION 9. Obtaining Stock Exchange Listings. The Company
will use its best efforts to obtain approval for the listing, upon official
notice of issuance, of the Warrant Shares on the principal securities exchanges
and markets within the United States of America, if any, on which other shares
of Common Stock are then listed.
SECTION 10. Adjustments of Exercise Price and Number of
Warrant Shares. The Exercise Price shall be subject to adjustment from time to
time as hereinafter provided. Upon each adjustment of the Exercise Price
pursuant to subsection (a), (b), (d) or (e) of this Section 10, the Warrant
holder shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of shares of Common Stock obtained
by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of shares of Common Stock issuable upon exercise of
such Warrant immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
(a) Adjustment for Certain Special Dividends. In
case the Company shall declare a dividend upon the Common Stock payable
otherwise than out of earnings or earned surplus, determined in accordance with
generally accepted accounting principles, and otherwise than in Common Stock or
securities convertible into Common Stock, the Exercise Price in effect
immediately prior to the declaration of such dividend shall be reduced by an
amount equal, in the case of a dividend in cash, to the amount per share of the
Common Stock so declared as payable otherwise than out of earnings or earned
surplus or, in the case of any other dividend, to the fair value per share of
the Common Stock or the property so declared as payable otherwise than out of
earnings or earned surplus, as determined, reasonably and in good faith, by the
board of directors of the Company. For the purposes of the foregoing a
dividend other than in cash shall be considered payable out of earnings or
earned surplus (other than revaluation or paid-in surplus) only to the extent
that such earnings or earned surplus are charged an amount equal to the fair
value of such dividend as determined, in good faith and in the exercise of
reasonable business judgment, by the board of directors of the Company. Such
5
<PAGE> 7
reductions shall take effect as of the record date for such dividend or, if a
record is not taken, on the date as of which the holders of Common Stock of
record entitled to such dividend are determined.
(b) Subdivision or Combination of Stock. In case
the Company shall at any time subdivide the outstanding shares of Common Stock
into a greater number of shares, whether through a stock split, stock dividend
or otherwise, the number of shares of Common Stock for which the Warrants are
exercisable shall be proportionately increased and the Exercise Price in effect
immediately prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the number of shares of Common Stock for which
the Warrants are exercisable shall be proportionately reduced and the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased.
(c) Adjustments for Consolidation, Merger, Sale
of Assets, Reorganization, Etc. In case the Company (i) consolidates with or
merges into any other Person and is not the continuing or surviving corporation
of such consolidation or merger, or (ii) permits any other Person to
consolidate with or merge into the Company and the Company is the continuing or
surviving corporation but in connection with such consolidation or merger, the
Common Stock is changed into or exchanged for stock or other securities of any
other corporation or cash or any other assets, or (iii) transfers all or
substantially all of its properties and assets to any other Person, or (iv)
effects a capital reorganization or reclassification of the capital stock of
the Company in such a way that holders of Common Stock shall be entitled to
receive stock, securities, cash or assets with respect to or in exchange for
Common Stock (each of the foregoing events in clauses (i) through (iv) being a
"Fundamental Change"), then in each such case proper provision shall be made so
that, upon the basis and upon the terms and in the manner provided in this
subsection (c), the Warrant holders, upon the exercise of the Warrants at any
time after the consummation of such Fundamental Change, shall be entitled to
receive (at the aggregate Exercise Price in effect for all shares of Common
Stock issuable upon such exercise immediately prior to such consummation as
adjusted to the time of such transaction), in lieu of shares of Common Stock
issuable upon such exercise prior to such consummation, the stock and other
securities, cash and assets to which such Warrant holders would have been
entitled upon such consummation if such Warrant holders had exercised such
Warrants immediately prior thereto (subject to adjustments subsequent to such
corporate action as nearly equivalent as possible to the adjustments provided
for in this Section 10). In the case of any Fundamental Change the Company
shall require the successor or acquiring corporation to assume the obligation
to perform each and every covenant and condition of this Agreement to be
performed and observed by the Company and all liabilities and obligations of
the Company hereunder.
(d) Rights, Options, Etc. In case the Company
shall issue rights, options, warrants or convertible securities to all or
substantially all holders of its Common Stock, without any charge to such
holders, entitling them to subscribe for or purchase
6
<PAGE> 8
Common Stock at a price per share which is lower at the record date mentioned
below than 95% of the then-Current Market Price (as defined below), the
Exercise Price in effect immediately prior to such issuance shall be adjusted
by multiplying such Exercise Price by a fraction, of which the numerator shall
be the number of shares of Common Stock outstanding immediately prior to the
issuance of such rights, options, warrants or convertible securities plus the
number of shares which the aggregate offering price (i.e., the consideration
required to be paid, if any, in connection with the exercise of any such
rights) of the total number of shares offered would purchase at such Current
Market Price and of which the denominator shall be the number of shares of
Common stock outstanding immediately prior to the issuance of such rights,
options, warrants or convertible securities plus the number of additional
shares of Common Stock offered for subscription or purchase. Such adjustment
shall be made whenever such rights, options, warrants or convertible securities
are issued, and shall become effective immediately and retroactively to the
record date for the determination of stockholders entitled to receive such
rights, options, warrants or convertible securities. To the extent any of such
rights, options, warrants or convertible securities shall lapse, without the
exercise thereof, then the Exercise Price shall thereupon be readjusted as
though such rights, options, warrants or convertible securities were never
issued.
(e) Adjustment of Price upon Issuance of Common
Stock. If and whenever after the date hereof the Company shall issue or sell
any shares of Common Stock for a consideration per share less than 95% of the
Current Market Price at the time of such issue or sale, then, forthwith upon
such issue or sale, the Exercise Price shall be reduced to the price
(calculated to the nearest cent) determined by multiplying the Exercise Price
in effect immediately prior to such time of such issue or sale by a fraction,
the numerator of which shall be the sum of (A) the number of shares of Common
Stock outstanding immediately prior to such issue or sale multiplied by the
Current Market Price immediately prior to such issue or sale plus (B) the
consideration received by the Company upon such issue or sale, and the
denominator of which shall be the product of (C) the total number of shares of
Common Stock outstanding immediately after such issue or sale, multiplied by
(D) the Current Market Price immediately prior to such issue or sale.
No adjustment of the Exercise Price, however, shall be made in
an amount less than $.01 per share, but any such lesser adjustment shall be
carried forward and shall be made at the time of, and together with, the next
subsequent adjustment which together with any adjustments so carried forward
shall amount to $.01 per share or more.
For purposes of this subsection (e) of this section, the
following clauses shall also be applicable:
(i) Issuance of Rights or Options. If at any
time after the Effective Date the Company grants (whether directly or
by assumption in a merger or otherwise) any rights (other than the
Warrants) to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock or other securities convertible
into or
7
<PAGE> 9
exchangeable for Common Stock (such convertible or exchangeable
securities being called "Convertible Securities") whether or not such
rights or options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such
rights or options or upon conversion or exchange of such Convertible
Securities (determined as provided below) is less than 95% of the
Current Market Price determined as of the date of granting such rights
or options, as the case may be, then the total maximum number of
shares of Common Stock issuable upon the exercise of such rights or
options or upon conversion or exchange of the total maximum amount of
such Convertible Securities issuable upon the exercise of such rights
or options shall (as of the date of granting of such rights or
options) be deemed to be outstanding and to have been issued for such
price per share. Except as provided in clause (iii) of this
subsection, no further adjustments of the Exercise Price shall be made
upon the actual issue of such Common Stock or of such Convertible
Securities upon exercise of such rights or options or upon the actual
issue of such Common Stock upon conversion or exchange of such
Convertible Securities. For the purposes of this clause (i), the
price per share for which Common Stock is issuable upon the exercise
of any such rights or options or upon conversion or exchange of any
such Convertible Securities shall be determined by dividing (A) the
total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the
minimum aggregate amount of additional consideration payable to the
Company upon the exercise of all such rights or options, plus, in the
case of such rights or options which relate to Convertible Securities,
or in the case of Convertible Securities, the minimum aggregate amount
of additional consideration, if any, payable upon the issue or sale of
such Convertible Securities and upon their conversion or exchange by
(B) the total number of shares of Common Stock issuable upon the
exercise of such rights or options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such
rights or options.
(ii) Issuance of Convertible Securities. If the
Company after the Effective Date issues (whether directly or by
assumption in a merger or otherwise) or sells any Convertible
Securities (other than pursuant to right or options for which an
adjustment to the Exercise Price has been made pursuant to Section
10(e)(i)), whether or not the rights to exchange or convert under such
securities are immediately exercisable, and the price per share for
which Common Stock is issuable upon conversion or exchange of such
Convertible Securities (determined as provided below) is less than 95%
of the Current Market Price determined as of the date of such issue or
sale of such Convertible Securities, as the case may be, then the
total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall (as of
the date of the issue or sale of such Convertible Securities) be
deemed to be outstanding and to have been issued for such price per
share, provided that (A) except as provided in clause (iii) of this
subsection no further adjustments of the Exercise Price shall be made
upon the actual issue of such Common
8
<PAGE> 10
Stock upon conversion or exchange of such Convertible Securities, and
(B) if any such issue or sale of Convertible Securities occurs for
which adjustments of the Exercise Price have been or are to be made
pursuant to other provisions of this subsection (e), no further
adjustment of the Exercise Price shall be made by reason of such issue
or sale. For the purpose of this clause (ii), the price per share for
which Common Stock is issuable upon conversion or exchange of
Convertible Securities shall be determined by dividing (1) the total
amount received or receivable by the Company as consideration for the
issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (2) the total
number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities.
(iii) Change in Option Price or Conversion Rate.
If the purchase price provided for in any rights or options referred
to in clause (i) above, or the additional consideration, if any,
payable upon the conversion or exchange of Convertible Securities
referred to in clause (i) or (ii) above, or the rate at which any
Convertible Securities referred to in clause (i) or (ii) above are
convertible into or exchangeable for Common Stock, changes (other than
under or by reason of provisions designed to protect against
dilution), then the Exercise Price in effect at the time of such event
shall forthwith be readjusted to the Exercise Price which would have
been in effect at such time had such rights, options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at
the time initially granted, issued or sold, and on the expiration of
any such option or right or the termination of any such right to
convert or exchange such Convertible Securities, the Exercise Price
then in effect hereunder shall forthwith be increased to the Exercise
Price which would have been in effect at the time of such expiration
or termination had such right, option or Convertible Security, to the
extent outstanding immediately prior to such expiration or
termination, never been issued, and the Common Stock issuable
thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such right or option referred to in
clause (i) above or the rate at which any Convertible Securities
referred to in clause (i) or (ii) above are convertible into or
exchangeable for Common Stock shall decrease at any time under or by
reason of provisions with respect thereto designed to protect against
dilution, then in case of the delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of
any such Convertible Security, the Exercise Price then in effect
hereunder shall forthwith be adjusted to such amount as would have
obtained had such right, option or Convertible Security never been
issued as to such Common Stock and had adjustments been made upon the
issuance of the shares of Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Exercise Price then in
effect hereunder is thereby decreased.
(iv) Consideration for Stock. If any shares of
Common Stock or Convertible Securities or any rights or options to
purchase any such Common Stock or
9
<PAGE> 11
Convertible Securities are issued or sold for cash, the consideration
received therefor shall be deemed to be the amount received by the
Company therefor, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Company
in connection with such issuance or sale. If any shares of Common
Stock or Convertible Securities or any rights or options to purchase
any such Common Stock or Convertible Securities are issued or sold for
a consideration other than cash, the amount of the consideration other
than cash received by the Company shall be deemed to be the fair
market value of such consideration as determined, in good faith and in
the exercise of reasonable business judgement, by the board of
directors of the Company, without deduction of any expenses incurred
or any underwriting commissions or concessions paid or allowed by the
Company in connection with such issuance or sale. If any shares of
Common Stock or Convertible Securities or any rights or options to
purchase such shares of Common Stock or Convertible Securities are
issued in connection with any merger or consolidation in which the
Company is the surviving corporation (other than any consolidation or
merger in which the previously outstanding shares of Common Stock of
the Company shall be changed into or exchanged for the stock or other
securities of another corporation), the amount of consideration for
such shares or rights or options shall be deemed to be the fair market
value as determined, in good faith and in the exercise of reasonable
business judgment, by the board of directors of the Company of such
portion of the assets and business of the non-surviving corporation as
the board of directors determines, in good faith and in the exercise
of reasonable business judgment, to be attributable to such shares of
Common Stock, Convertible Securities, rights or options, as the case
may be.
(v) Determination of Current Market Price under
Certain Circumstances. Anything herein to the contrary
notwithstanding, in determining for any purpose hereunder whether in
consideration received by the Company is less than the Current Market
Price, the Current Market Price shall be determined as of the date the
Company and the other party to the transaction agree in writing on the
consideration to be received by the Company for the Common Stock or
Convertible Securities rather than on the date of payment of such
consideration.
(vi) Certain Issues Excepted. Anything herein to
the contrary notwithstanding, the Company shall not be required to
make any adjustment pursuant to this Section 10(e), either (A) if an
adjustment was made pursuant to the provisions of Sections 10(a), (b),
(c) or (d) upon such issuance, or (B) with respect to (1) the exercise
of one or more of the Warrants or any other options, warrants or
convertible securities (including without limitation the Series C
Convertible Preferred Stock, the Series A Convertible Preferred Stock
and the 8% Convertible Notes due September 1, 1999) which have been
issued and are outstanding as of the Effective Date, or (2) the
issuance to Holder of any Common Stock, or securities exchangeable or
exercisable for or convertible into Common Stock (or the exercise or
conversion thereof), for
10
<PAGE> 12
consideration below the Current Market Price, or (3) the declaration
or payment of dividends on the Series C Preferred Stock in the form of
shares of Series C Preferred Stock, or (4) the issuance of Common
Stock, or the issuance or exercise of options, rights or warrants
therefor, in connection with employee benefit plans, employment or
consultant agreements or similar transactions, and pursuant to
contracts entered into by the Company prior to the Effective Date.
(f) Other Equitable Adjustments. If any event occurs as
to which the other provisions of this Section 10 are not strictly applicable
(or if strictly applicable would not fairly protect the rights of the Warrant
holders in accordance with the basic intent and principles of such provisions)
but, in the reasonable opinion of the Company's board of directors, an
adjustment should be made to fairly protect the rights of the Warrant holders
in accordance with the basic intent and principles of such provisions, then the
Company shall appoint a firm of independent certified public accountants (which
may be the regular auditors of the Company) of recognized national standing,
which shall give its opinion upon the adjustment, if any, to be made to protect
the Warrant holders against dilution on a basis consistent with the basic
intent and principles established in the other provisions of this Section 10.
Upon receipt of such opinion, the Company shall forthwith make the adjustments,
if any, described therein.
(g) Notice of Adjustment. Upon any adjustment of the
Exercise Price, then and in each such case the Company shall promptly deliver a
notice to the Warrant holders, which notice shall state the Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of each Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(h) Other Notices. In case at any time:
(i) the Company shall declare any cash dividend
on its Common Stock;
(ii) the Company shall pay any dividend payable in
stock upon its Common Stock or make any distribution (other than
regular cash dividends) to the holders of its Common Stock;
(iii) the Company shall offer for subscription pro
rata to the holders of its Common Stock any additional shares of stock
of any class or other rights;
(iv) the Company shall authorize the distribution
to all holders of its Common Stock of evidences of its indebtedness or
assets (other than cash dividends or cash distributions payable out of
earnings or earned surplus or dividends payable in Common Stock);
11
<PAGE> 13
(v) there shall be any capital reorganization, or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with another corporation (other than a
subsidiary of the Company in which the Company is the surviving or
continuing corporation and no change occurs in the Company's Common
Stock), or sale of all or substantially all of its assets to, another
Person;
(vi) there shall be a voluntary or involuntary
dissolution, liquidation, bankruptcy, assignment for the benefit of
creditors, or winding up of the Company; or
(vii) the Company proposes to take any other action
or an event occurs which would require an adjustment of the Exercise
Price pursuant to this Section 10;
then, in any one or more of said cases, the Company shall give written notice,
addressed to the Warrant holders at their addresses as shown on the books of
the Company, of (1) the date on which the books of the Company shall close or a
record shall be taken for such dividend, distribution or subscription rights,
or (2) the date (or, if not then known, a reasonable approximation thereof by
the Company) on which such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit
of creditors, winding up or other action, as the case may be, shall take place.
Such notice shall also specify (or, if not then known, reasonably approximate)
the date as of which the holders of Common Stock of record shall participate in
such dividend, distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger sale, dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors, winding up,
or other action, as the case may be. Such written notice shall be given at
least ten days prior to the action in question and not less than ten days prior
to the record date or the date on which the Company's transfer books are closed
in respect thereto. Notwithstanding any other provision of this Section 10(h),
the Company shall not be required to give any notice to Warrant holders
pursuant to this Section 10(h) if the giving of such notice would violate
applicable federal or state securities laws or the Company's obligations
thereunder.
(i) Adjustments below Par Value. Before taking any
action which would cause an adjustment pursuant to this Section 10 to reduce
the Exercise Price below the then par value (if any) of the Warrant Shares, the
Company will take any corporate action which may, in the opinion of its counsel
(which may be counsel employed by the Company), be necessary in order that the
Company may validly and legally issue fully paid and nonassessable Warrant
Shares at the Exercise Price as so adjusted.
SECTION 11. Fractional Interests. The Company shall not be
required to issue fractional Warrant Shares on the exercise of Warrants. If
more than one Warrant shall be presented for exercise in full at the same time
by the same holder, the number of full Warrant Shares which shall be issuable
upon the exercise thereof shall be computed on the basis of the aggregate
number of Warrant Shares purchasable on exercise of the Warrants so
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<PAGE> 14
presented. If any fraction of a Warrant Share would, except for the provisions
of this Section 11, be issuable on the exercise of any Warrants (or specified
portion thereof), the Company shall pay an amount in cash equal to the fair
market value of such fractional share.
SECTION 12. No Stockholder Rights. Nothing contained in this
Agreement or in any of the Warrant Certificates shall be construed as
conferring upon the holders thereof the right to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or
the election of Directors of the Company or any other matter, or any rights
whatsoever as stockholders of the Company.
SECTION 13. Notices to Company and Warrant Holder. All
notices, demands or other communications to any party under this Agreement
shall be in writing Including facsimile transmission); shall be sent only by
facsimile, by first class United States mail, by nationally recognized courier
service, or by personal delivery; and shall be given, if to the Company to:
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Attention: W. Tucker Lemon, Vice President,
General Counsel and Secretary
Fax: (310) 280-0476
and with a copy to:
Latham & Watkins
633 W. 5th Street, Suite 4000
Los Angeles, California 90071
Attention: John R. Light, Esq.
Fax: (213) 891-8763
if to Holder, to:
Mr. Jack M. Ferraro
430 River Road
Scarborough, New York
The Company or the Holder by notice to the other pursuant to
this Section 13 may designate additional or different addresses for subsequent
notices or communications.
SECTION 14. Supplements and Amendments. The Company may from
time to time supplement or amend this Agreement without the approval of any
holders of Warrant Certificates in order to cure any ambiguity or to correct or
supplement any provision contained
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<PAGE> 15
herein which may be defective or inconsistent with any other provision herein,
or to make any other provisions in regard to matters or questions arising
hereunder which the Company may deem necessary or desirable and which shall not
in any way adversely affect the interests of the holders of Warrant
Certificates.
SECTION 15. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company shall bind and inure to the
benefit of its respective successors and assigns hereunder.
SECTION 16. Termination. This Agreement shall terminate at
5:00 p.m., Los Angeles time on September 1, 2000. Notwithstanding the
foregoing, this Agreement will terminate on any earlier date if all Warrants
have been exercised.
SECTION 17. Governing Law. This Agreement and each Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the internal laws of said State.
SECTION 19. Benefits of This Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the Company and
the registered holders of the Warrant Certificates any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for
the sole and exclusive benefit of the Company and the registered holders of the
Warrant Certificates.
SECTION 20. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
[Signature Page Follows]
14
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
SHOWSCAN ENTERTAINMENT INC.
By /s/ DENNIS POPE
-----------------------------------
Title: Executive Vice President
[Seal]
Attest: /s/ W. TUCKER LEMON
------------------------
Title:
By /s/ JACK M. FERRARO
----------------------------------
Jack M. Ferraro
15
<PAGE> 17
EXHIBIT A
[Form of Warrant Certificate]
[Face]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. SAID SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT.
EXERCISABLE ON OR AFTER SEPTEMBER 1, 1996 AND
ON OR BEFORE ON OR BEFORE SEPTEMBER 1, 2000
100,000 Warrants
Warrant Certificate
SHOWSCAN ENTERTAINMENT INC.
This Warrant Certificate certifies that Jack M. Ferraro, or
registered assigns, is the registered holder of Warrants expiring September 1,
2000 (the "Warrants") to purchase Common Stock, par value $.001 per share (the
"Common Stock"), of Showscan Entertainment Inc., a Delaware corporation (the
"Company"). Each Warrant entitles the holder upon exercise to receive from the
Company on or before 5:00 p.m. Los Angeles Time on September 1, 2000, one fully
paid and nonassessable share of Common Stock (a "Warrant Share") at the initial
exercise price (the "Exercise Price") of $5.75 payable in lawful money of the
United States of America upon surrender of this Warrant Certificate and payment
of the Exercise Price at the office of the Company designated for such purpose,
but only subject to the conditions set forth herein and in the Warrant
Agreement referred to on the reverse hereof.
No Warrant may be exercised after 5:00 p.m., Los Angeles Time
on September 1, 2000 and to the extent not exercised by such time such Warrants
shall become void.
Reference is hereby made to the further provisions of this
Warrant Certificate set forth on the reverse hereof and such further provisions
shall for all purposes have the same effect as though fully set forth at this
place.
A-1
<PAGE> 18
This Warrant Certificate shall not be valid unless
countersigned by the Company, as such term is used in the Warrant Agreement.
IN WITNESS WHEREOF, Showscan Entertainment Inc. has caused
this Warrant Certificate to be signed by its President and by its Secretary and
has caused its corporate seal to be affixed hereunto or imprinted hereon.
Dated: September 1, 1995
SHOWSCAN ENTERTAINMENT INC.
By _____________________________
President
By _____________________________
Secretary
A-2
<PAGE> 19
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants expiring September 1, 2000 entitling the
holder on exercise to receive shares of Common Stock, par value $.001 per
share, of the Company (the "Common Stock"), and are issued or to be issued
pursuant to a Warrant Agreement dated as of September 1, 1995 (the "Warrant
Agreement"), duly executed and delivered by the Company, which Warrant
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants. A copy of the Warrant Agreement
may be obtained by the holder hereof upon written request to the Company.
Warrants may be exercised at any time on or after September 1,
1996 and on or before September 1, 2000. The holder of Warrants evidenced by
this Warrant Certificate may exercise them by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with payment of the Exercise Price in cash at
the office of the Company designated for such purpose. In the event that upon
any exercise of Warrants evidenced hereby the number of Warrants exercised
shall be less than the total number of Warrants evidenced hereby, there shall
be issued to the holder hereof or his assignee a new Warrant Certificate
evidencing the number of Warrants not exercised. No adjustment shall be made
for any dividends on any Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price set forth on the face hereof may, subject to
certain conditions, be adjusted. If the Exercise Price is adjusted, the
Warrant Agreement provides that the number of shares of Common Stock issuable
upon the exercise of each Warrant shall be adjusted. No fractions of a share
of Common Stock will be issued upon the exercise of any Warrant, but the
Company will pay the cash value thereof determined as provided in the Warrant
Agreement.
The holders of the Warrants are entitled to certain
registration rights with respect to the Common Stock purchasable upon exercise
thereof. Said registration rights are set forth in full in a Registration
Rights Agreement dated as of September 1, 1995, between the Company and Jack M.
Ferraro. A copy of the Registration Rights Agreement may be obtained by the
holder hereof upon written request to the Company.
A-3
<PAGE> 20
Warrant Certificates, when surrendered at the office of the
Company by the registered holder thereof in person or by legal representative
or attorney duly authorized in writing, may be exchanged, in the manner and
subject to the limitations provided in the Warrant Agreement, but without
payment of any service charge, for another Warrant Certificate or Warrant
Certificates of like tenor evidencing in the aggregate a like number of
Warrants.
Upon due presentation for registration of transfer of this
Warrant Certificate at the office of the Company a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided in the Warrant
Agreement, without charge except for any tax or other governmental charge
imposed in connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
A-4
<PAGE> 21
[Form of Election to Purchase]
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to receive __________ shares of
Common Stock and herewith tenders payment for such shares to the order of
Showscan Entertainment Inc. in the amount of $______ in accordance with the
terms hereof. The undersigned requests that a certificate for such shares be
registered in the name of ________________, whose address is
_______________________________ and that such shares be delivered to
________________ whose address is ___________ ______________________. If said
number of shares is less than all of the shares of Common Stock purchasable
hereunder, the undersigned requests that a new Warrant Certificate representing
the remaining balance of such shares be registered in the name of
______________, whose address is _________________________, and that such
Warrant Certificate be delivered to _________________, whose address is
__________________.
Signature:
Date:
Signature:
A-5
<PAGE> 1
EXHIBIT 4.21
SHOWSCAN ENTERTAINMENT INC.
____________________
REGISTRATION RIGHTS AGREEMENT
Dated as of September 1, 1995
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of September 1, 1995, between Showscan Entertainment Inc.,
a Delaware corporation (the "Company"), and Jack M. Ferraro, an individual
("Investor"), and is made pursuant to that certain Warrant Agreement dated the
same date as this Agreement between the Company and the Investor (the "Warrant
Agreement").
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following capitalized terms
shall have the following meanings:
Board: The Board of Directors of the Company.
Claim: Any loss, claim, damages, liability or
expense (including the reasonable costs of investigation and legal
fees and expenses).
Common Stock: The common stock, par value $.001 per
share, of the Company.
Demand Registration: A registration pursuant to
Section 2 hereof.
Exchange Act: The Securities Exchange Act of 1934,
as from time to time amended.
Holder: The beneficial owner of a security. For all
purposes of this Agreement, the Company shall be entitled to treat the
record owner of a security as the beneficial owner of such security
unless the Company has been given written notice of the existence and
identity of a different beneficial owner.
Indemnified Holder: Any Holder of Registrable
Securities, any officer, director, employee or agent of any such
Holder and any Person who controls any such Holder within the meaning
of either Section 15 of the Securities Act or Section 20 of the
Exchange Act.
Misstatement: An untrue statement of a material fact
or an omission to state a material fact required to be stated in a
Registration Statement or Prospectus or necessary to make the
statements in a Registration Statement, Prospectus or preliminary
prospectus not misleading.
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<PAGE> 3
Person: A natural person, partnership,
corporation, business trust, association, joint venture or other entity
or a government or agency or political subdivision thereof.
Piggyback Registration: A registration pursuant to
Section 3 hereof.
Prospectus: The prospectus included in any
Registration Statement, as supplemented by any and all prospectus
supplements and as amended by any and all post-effective amendments
and including all material incorporated by reference in such
prospectus.
Registration: A Demand Registration or a Piggyback
Registration.
Registration Expenses: The out-of-pocket expenses of
a Registration, including:
(1) all registration and filing fees (including
fees with respect to filings required to be made with the
National Association of Securities Dealers);
(2) fees and expenses of compliance with
securities or blue sky laws (including fees and disbursements
of counsel for the underwriters or selling holders in
connection with blue sky qualifications of the Registrable
Securities and determinations of their eligibility for
investment under the laws of such jurisdictions as the
managing underwriters or holders of a majority of the
Registrable Securities being sold may designate);
(3) printing, messenger, telephone and delivery
expenses;
(4) fees and disbursements of counsel for the
Company and counsel for the underwriters;
(5) fees and disbursements of all independent
certified public accountants of the Company incurred in
connection with such Registration (including the expenses of
any special audit and "cold comfort" letters incident to such
registration); and
(6) fees and disbursements of underwriters
(excluding discounts, commissions or fees of underwriters,
selling brokers, dealer managers or similar securities
industry professionals relating to the distribution of the
Registrable Securities); and
(7) fees and expenses of any other Persons
retained by the Company.
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<PAGE> 4
Registrable Securities: The Warrant Shares; provided,
however, as to any particular Registrable Securities, such securities
will cease to be Registrable Securities when they have (x) been
registered under the Securities Act and disposed of in accordance with
the registration statement covering them, (y) become eligible for sale
pursuant to Rule 144 or Rule 144A (or any similar provision then in
force) under the Securities Act, or (z) in the opinion of counsel to
the Company they may be freely transferred (without volume or other
limitations) without registration or qualification under the Securities
Act or any similar state securities laws. Whenever any particular
securities cease to be Registrable Securities, the holder of such
securities will be entitled to receive from the Company, without
expense, new securities of like tenor not bearing a Securities Act
legend of the character set forth in Section 4 of the Warrant
Agreement.
Registration Statement: Any registration statement
which covers Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus included in such registration
statement, amendments (including post-effective amendments) and
supplements to such registration statement, and all exhibits to and
all material incorporated by reference in such registration statement.
Securities Act: The Securities Act of 1933, as from
time to time amended.
SEC: The Securities and Exchange Commission.
underwritten registration or underwritten offering:
A registration in which securities of the Company are sold to an
underwriter for distribution to the public.
Warrants: The warrants, each to purchase one share
of Common Stock, issued and sold pursuant to the Warrant Agreement.
Warrant Shares: (a) the shares of Common Stock
issued or issuable upon conversion of the Warrants, and (b) any
securities issued or issuable with respect to such Common Stock by way
of a stock dividend or stock split or in connection with a combination
of shares, recapitalization, merger, consolidation or reorganization.
2. Demand Registration
(a) Timing of Demand Registration
The Holders of all of the shares of Registrable Securities
then outstanding may request that the Company file a registration statement
under the Securities Act covering the shares of Registrable Securities that are
the subject of such request at any time after the thirty (30) month anniversary
of the date of this Agreement.
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<PAGE> 5
If the Company is requested to effect a Demand Registration
and the Company furnishes to the Holders of Registrable Securities requesting
such registration a copy of a resolution of the Board certified by the
Secretary of the Company stating that in the good faith judgment of the Board
(i) it would be seriously detrimental to the Company and its stockholders for
such registration statement to be filed on or before the date such filing would
otherwise be required hereunder, then the Company shall have the right to defer
such filing for a period of not more than 120 days after receipt of the request
for such registration from the Holder or Holders of Registrable Securities
requesting such registration; provided that during such time the Company may
not file a registration statement for securities to be issued and sold for its
own account or that of anyone other than the Holder or Holders of Registrable
Securities requesting such registration, or (ii) upon advice of its counsel, it
has determined that such filing or registration would result in the integration
of the sale of the Registrable Securities with a prior sale of securities by
the Company in a private or limited offering such that registration of the
securities sold in the prior offering would be required by applicable federal
securities laws, then the Company shall have the right to defer such filing for
a period of not more than 180 days after receipt of the request for such
registration. The Company shall have no obligation to effect any Demand
Registration which would necessitate an audit of the Company's financial
statements for any period as to which the Company would not otherwise have been
required to conduct such an audit under the Securities Exchange Act of 1934,
or earlier than any date by which the Company otherwise would have been
required to have filed such audited financial statements under the Securities
Exchange Act of 1934.
(b) Number of Demand Registrations
The Company shall be obligated to prepare, file and cause to
become effective pursuant to this Section 2 no more than one (1) Registration
Statement. The Holders of Registrable Securities shall lose their right to a
Demand Registration if any or all of them shall at any time participate in a
Piggyback Registration.
(c) Required Thresholds
The Company shall not be obligated to prepare, file and cause
to become effective pursuant to this Section 2 a Registration Statement unless
all of the Registrable Securities are requested to be included in the
Registration Statement.
(d) Underwriter's Cutback
If the public offering of Registrable Securities is to be
underwritten and, in the good faith judgment of the managing underwriter, the
inclusion of all the Registrable Securities requested to be registered
hereunder would interfere with the successful marketing of a smaller number of
such shares of Registrable Securities, the number of shares of Registrable
Securities to be included shall be reduced to such smaller number with the
participation in such offering to be pro rata among the Holders of Registrable
Securities
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<PAGE> 6
requesting such registration, based upon the number of shares of Registrable
Securities owned by such Holders.
Any shares that are thereby excluded from the offering shall
be withheld from the market by the Holders thereof in accordance with Section 4
hereof.
The Company and other Holders of securities of the Company may
include such securities in any Demand Registration if, but only if, the
managing underwriter concludes that such inclusion will not interfere with the
successful marketing of all of the Registrable Securities.
(e) Managing Underwriter
The managing underwriter or underwriters of any underwritten
public offering covered by a Demand Registration shall be selected by the
holders of all of the shares of Registrable Securities that initiate such
registration, subject to the approval of the Board, which shall not be
unreasonably withheld.
3. Piggyback Registrations
(a) Participation
Each time the Company decides to file a registration statement
under the Securities Act covering the offer and sale by it or any of its
security holders of any of its securities for money, other than (i) on Forms
S-4, S-8, S-20 or any successor or similar forms, or (ii) by a registration
which is incident to any offering of the Company's securities pursuant to a
merger, combination of interest, recapitalization, consolidation or other
reorganization, or in connection with any employee benefit plan, the Company
shall give written notice thereof to all Holders of Registrable Securities.
Upon the written request of Investor or any subsequent Holder of Registrable
Securities made within 20 days after receipt of any such notice (which request
will specify the Registrable Securities intended to be disposed of), the
Company will, subject to the terms of this Agreement and subject to the full
cooperation by Investor or any Holder of Registrable Securities in connection
with any such registration, use its best efforts to effect the registration
under the Securities Act of all Registrable Securities which the Company has
been so requested to register (which in no event shall be less than 50,000
shares in the aggregate and 10,000 shares per selling Holder of Registrable
Securities (such number to adjust equitably in the future to account for any
stock split, stock combination or similar event)). If the registration
statement is to cover an underwritten offering, such Registrable Securities
shall be included in the underwriting on the same terms and conditions
(including, without limitation, underwriting discounts, commissions and fees)
as the securities otherwise being sold through the underwriters. Investor's
and any subsequent Holders' rights under this Section 2 shall expire on the
seventh anniversary of the date of this Agreement.
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<PAGE> 7
(b) Underwriter's Cutback
If in the good faith judgment of the managing underwriter of
such offering the inclusion of all of the shares of Registrable Securities and
any other Common Stock requested to be registered would interfere with the
successful marketing of a smaller number of such shares, then the number of
shares of Registrable Securities and other Common Stock to be included in the
offering (except for shares to be issued by the Company in an offering
initiated by the Company) shall be reduced to such smaller number, provided
that such reduction is pro rata with reductions that shall be imposed on any
other shares of Common Stock requested to be included.
(c) Company Control
The Company may decline to file a Registration Statement after
giving notice to any Holder pursuant to Section 2(a) above, or withdraw a
Registration Statement after filing and after such notice, but prior to the
effectiveness thereof, provided that the Company shall promptly notify each
Holder in writing of any such action and provided further that the Company
shall bear all reasonable expenses incurred by such Holder or otherwise in
connection with such withdrawn Registration Statement.
4. Hold-Back Agreements
Upon the written request of the managing underwriter of any
underwritten offering of the Company's securities, or if reasonably requested
by the Company in the case of a registered offering which in not underwritten,
a Holder of Registrable Securities shall not sell, make any short sale of,
loan, grant any option for the purchase of, or otherwise dispose of any
Registrable Securities (other than those included in such registration) without
the prior written consent of such managing underwriter or the Company, as the
case may be, for a period (not to exceed 30 days before the effective date and
90 days thereafter) that such managing underwriter or the Company, as the case
may be, requires; provided that each of the officers and directors of the
Company who are stockholders of the Company shall be subject to similar
agreements (other than with respect to options granted to officers and
directors of the Company under benefit plans approved by the stockholders of
the Company) covering at least the same period.
5. Registration Procedures
If and whenever the Company is required to register
Registrable Securities in a Registration, the Company will use its reasonable
best efforts to effect such registration to permit the sale of such Registrable
Securities in accordance with the intended plan of distribution thereof, and
pursuant thereto the Company will as expeditiously as possible:
(a) prepare and file with the SEC as soon as practicable a
Registration Statement with respect to such Registrable Securities and use its
best efforts to cause such Registration
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<PAGE> 8
Statement to become effective and remain effective until the Registrable
Securities covered by such Registration Statement have been sold; provided that
the Company shall not be required to maintain the effectiveness of any
Registration Statement not covering an underwritten public offering for more
than 90 days after such registration statement becomes effective;
(b) prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement, and such supplements
to the Prospectus, as may be required by the rules, regulations or instructions
applicable to the registration form used by the Company or by the Securities
Act or rules and regulations thereunder to keep the Registration Statement
effective until all Registrable Securities covered by such Registration
Statement are sold in accordance with the intended plan of distribution set
forth in such Registration Statement or supplement to the Prospectus or for
such shorter period of time during which such Registration Statement must be
kept effective by the terms of this Agreement;
(c) promptly notify the selling Holders of Registrable Securities
and the managing underwriter, if any, and (if requested by any such Person)
confirm such advice in writing,
(1) when the Prospectus or any supplement or
post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same
has become effective,
(2) of any request by the SEC for amendments or
supplements to the Registration Statement or the Prospectus or for
additional information,
(3) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose,
(4) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Registrable
Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, and
(5) of the existence of any fact which results in the
Registration Statement, the Prospectus or any document incorporated
therein by reference containing a Misstatement (and every selling
Holder of Registrable Securities agrees to promptly advise the Company
at any time that it learns of the existence of such a fact);
(d) use its reasonable best efforts to obtain the withdrawal of
any order suspending the effectiveness of the Registration Statement at the
earliest possible time;
(e) furnish to each selling Holder of Registrable Securities and
the managing underwriter, without charge, at least one conformed copy of the
Registration Statement and any post-effective amendments thereto, including
financial statements and schedules, all
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<PAGE> 9
documents incorporated therein by reference and all exhibits (including those
incorporated by reference);
(f) deliver to each selling Holder of Registrable Securities and
the underwriters, if any, without charge, as many copies of each Prospectus
(and each preliminary prospectus) as such Persons may reasonably request (the
Company hereby consenting to the use of each such Prospectus (or preliminary
prospectus) by each selling Holder of Registrable Securities and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by such Prospectus (or preliminary prospectus);
(g) Use its best efforts to register or qualify the Registrable
Securities for offer and sale under the securities or blue sky laws of such
jurisdictions as such selling Holders or underwriters may reasonably request in
writing; provided that the Company shall not be required to qualify generally
to do business in any jurisdiction where it is not then so qualified or to take
any action which would subject it to general service of process in any such
jurisdiction where it is not then so subject;
(h) use its reasonable best efforts to cause the Registrable
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof or the underwriters, if any, to
consummate the disposition of such Registrable Securities;
(i) if the Registration Statement or the Prospectus contains a
Misstatement, prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities, the Prospectus will
not contain a Misstatement;
(j) cause all Registrable Securities covered by the Registration
Statement to be listed in the Nasdaq National Market, if requested by the
Holders of a majority of such Registrable Securities or the managing
underwriter, if any;
With respect to any registration statement contemplated by
Section 3, each selling Holder of Registrable Securities shall provide such
information with respect to it, and its intended method of distribution for
inclusion in any such registration statement, as the Company shall reasonably
request from time to time in writing.
6. Registration Expenses
The Registration Expenses of all Registrations shall be borne
by the Company.
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<PAGE> 10
7. Indemnification
(a) Indemnification by Company
The Company agrees to indemnify and hold harmless each
Indemnified Holder from and against all Claims arising out of or based upon any
Misstatement or alleged Misstatement, except insofar as such Misstatement or
alleged Misstatement was based upon information furnished to the Company by
such Indemnified Holder or the underwriter expressly for use in the document
containing such Misstatement or alleged Misstatement.
The foregoing notwithstanding, the Company shall not be liable
to the extent that any such Claim arises out of or is based upon a Misstatement
or alleged Misstatement made in any preliminary prospectus if (i) such
Indemnified Holder failed to send or deliver a copy of the Prospectus with or
prior to the delivery of written confirmation of the sale of Registrable
Securities giving rise to such Claim and (ii) the Prospectus would have
corrected such untrue statement or omission.
In addition, the Company shall not be liable to the extent
that any such Claim arises out of or is based upon a Misstatement or alleged
Misstatement in a Prospectus, (x) if such Misstatement or alleged Misstatement
is corrected in an amendment or supplement to such Prospectus and (y) having
previously been furnished by or on behalf of the Company with copies of the
Prospectus as so amended or supplemented, such Indemnified Holder thereafter
fails to deliver such Prospectus as so amended or supplemented prior to or
concurrently with the sale to the person who purchased a Registrable Security
from such Indemnified Holder and who is asserting such Claim.
The Company shall also indemnify underwriters, selling
brokers, dealer managers and similar securities industry professionals
participating in a distribution covered by a Registration Statement, their
officers and directors and each Person who controls such Persons (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
to the same extent as provided above with respect to the indemnification of the
Indemnified Holders of Registrable Securities.
(b) Indemnification Procedures
If any action or proceeding (including any governmental
investigation or inquiry) shall be brought or asserted against an Indemnified
Holder in respect of which indemnity may be sought from the Company, such
Indemnified Holder shall promptly notify the Company in writing, and the
Company shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such Indemnified Holder and the payment of all
expenses.
Such Indemnified Holder shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such separate
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<PAGE> 11
counsel shall be the expense of such Indemnified Holder unless (i) the Company
has agreed to pay such fees and expenses or (ii) the Company shall have failed
to assume the defense of such action or proceeding or has failed to employ
counsel reasonably satisfactory to such Indemnified Holder in any such action
or proceeding.
If such Indemnified Holder notifies the Company in writing
that it elects to employ separate counsel at the expense of the Company as
permitted by the provisions of the preceding paragraph, the Company shall not
have the right to assume the defense of such action or proceeding on behalf of
such Indemnified Holder. The foregoing notwithstanding, the Company shall not
be liable for the reasonable fees and expenses of more than one separate firm
of attorneys at any time for such Indemnified Holder and any other Indemnified
Holders (which firm shall be designated in writing by such Indemnified Holders)
in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances.
The Company shall not be liable for any settlement of any such
action or proceeding effected without its written consent, but if settled with
its written consent, or if there be a final judgment for the plaintiff in any
such action or proceeding, the Company agrees to indemnify and hold harmless
such Indemnified Holders from and against any loss or liability by reason of
such settlement or judgment.
(c) Indemnification by Holder of Registrable Securities.
Each Holder of Registrable Securities agrees to indemnify and
hold harmless the Company, its directors and officers and each Person, if any,
who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to such Holder, but only with respect to
information relating to such Holder furnished in writing by such Holder
expressly for use in any Registration Statement, Prospectus or preliminary
prospectus.
In case any action or proceeding shall be brought against the
Company or its directors or officers or any such controlling person, in respect
of which indemnity may be sought against a Holder of Registrable Securities,
such Holder shall have the rights and duties given the Company and the Company
or its directors or officers or such controlling person shall have the rights
and duties given to each Holder by Sections 6(a) and 6(b) above.
The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as provided
above with respect to information so furnished in writing by such Persons
specifically for inclusion in any Prospectus or Registration Statement.
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<PAGE> 12
(d) Contribution
If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under Section 7(a) or Section 7(c) above
(other than by reason of exceptions provided in those Sections) in respect of
any Claims referred to in such Sections, then each applicable indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such Claims in
such proportion as is appropriate to reflect the relative fault of the Company
on the one hand and of the Indemnified Holder on the other in connection with
the statements or omissions which resulted in such Claims as well as any other
relevant equitable considerations. The amount paid or payable by a party as a
result of the Claims referred to above shall be deemed to include, subject to
the limitations set forth in Section 7(b), any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim.
The relative fault of the Company on the one hand and of the
Indemnified Holder on the other shall be determined by reference to, among
other things, whether the Misstatement or alleged Misstatement relates to
information supplied by the Company or by the Indemnified Holder and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such Misstatement or alleged Misstatement.
The Company and each Holder of Registrable Securities agree
that it would not be just and equitable if contribution pursuant to this
Section 7(d) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to above.
No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
8. Requirements for Participation in Underwritten Offerings
No Person may participate in any underwritten offering
pursuant to a Registration hereunder unless such Person (a) agrees to sell such
Person's securities on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
cooperates fully in connection with the offering, including without limitation
the completion and execution of all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents required under the
terms of such underwriting arrangements.
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<PAGE> 13
9. Suspension of Sales
Upon receipt of written notice from the Company that a
Registration Statement or Prospectus contains a Misstatement, each Holder of
Registrable Securities shall forthwith discontinue disposition of Registrable
Securities until such Holder has received copies of the supplemented or amended
Prospectus required by Section 5(i) hereof, or until such Holder is advised in
writing by the Company that the use of the Prospectus may be resumed, and, if
so directed by the Company, such Holder shall deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the 90-day period referred to in Section 5(a) hereof
shall be extended by the number of days during the period from and including
the date of the giving of such notice to and including the date when each
seller of Registrable Securities covered by such Registration Statement either
has received the copies of the supplemented or amended prospectus contemplated
by Section 5(i) hereof or has been advised in writing by the Company that the
use of the Prospectus may be resumed.
10. Miscellaneous
(a) Remedies.
Each Holder of Registrable Securities, in addition to being
entitled to exercise all rights provided herein, in the Warrant Agreement and
granted by law, including recovery of damages, shall be entitled to specific
performance of its rights under this Agreement.
(b) Amendments and Waivers
The provisions of this Agreement, including the provisions of
this sentence, may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given unless the
Company has obtained the written consent of the Holders of at least a majority
of the outstanding shares of Registerable Securities. The foregoing
notwithstanding, a waiver or consent to departure from the provisions hereof
that relates exclusively to the rights of Holders of shares of Registerable
Securities whose shares are being sold pursuant to a Registration Statement and
that does not directly or indirectly affect the rights of other Holders of
shares of Registerable Securities may be given by the Holders of a majority of
the shares of Registerable Securities being sold pursuant to such Registration
Statement.
(c) Notices
All notices, demands or other communications to any party
under this Agreement shall be in writing Including facsimile transmission);
shall be sent only by facsimile, by first class United States mail, by
nationally recognized courier service, or by personal delivery; and shall be
given, if to the Company to:
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<PAGE> 14
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Attention: W. Tucker Lemon, Vice President,
General Counsel and Secretary
Fax: (310) 280-0476
and with a copy to:
Latham & Watkins
633 W. 5th Street, Suite 4000
Los Angeles, California 90071
Attention: John R. Light, Esq.
Fax: (213) 891-8763
if to Investor, to:
Mr. Jack M. Ferraro
430 River Road
Scarborough, New York
The Company or the Investor by notice to the other pursuant to
this Section 9(c) may designate additional or different addresses for
subsequent notices or communications.
(d) Successors and Assigns
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties.
The foregoing notwithstanding, the registration rights granted
the Holders of Registerable Securities under this Agreement may not be
transferred without the prior written consent of the Company.
(e) Counterparts
This Agreement may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
(f) Table of Contents and Headings
The table of contents and headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
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<PAGE> 15
(h) Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
(i) Severability
In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
(j) Forms
All references in this Agreement to particular forms of
registration statements are intended to include all successor forms which are
intended to replace, or to apply to similar transactions as, the forms herein
referenced.
(k) Entire Agreement.
This Agreement and the Warrant Agreement are intended by the
parties as the final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein or therein with respect to the registration rights
granted by the Company with respect to the securities sold pursuant to the
Warrant Agreement. This Agreement and the Warrant Agreement supersede all
prior agreements and understandings between the parties with respect to such
subject matter.
[signature pages follow]
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<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
SHOWSCAN ENTERTAINMENT INC.
By: /s/ DENNIS POPE
----------------------------------------
Title: Executive Vice President
-------------------------------------
INVESTOR
/s/ JACK M. FERRARO
----------------------------------
Jack M. Ferraro
15
<PAGE> 1
EXHIBIT 4.22
WARRANT AGREEMENT
BETWEEN
SHOWSCAN ENTERTAINMENT INC.
and
JACK ERLANGER
______________________________
Dated as of September 1, 1995
<PAGE> 2
WARRANT AGREEMENT
This Warrant Agreement, dated as of September 1, 1995 (this
"Agreement"), is by and between Showscan Entertainment Inc., a Delaware
corporation (the "Company"), and Jack Erlanger, an individual ("Holder").
WHEREAS, the Company proposes to issue to Holder, or his
designee, common stock purchase warrants, as hereinafter described (the
"Warrants"), to purchase up to an aggregate of 50,000 shares of Common Stock,
$.001 per share par value (the "Common Stock"), of the Company (the Common
Stock issuable on exercise of the Warrants being referred to herein as the
"Warrant Shares"), pursuant to a consulting letter agreement dated as of August
1, 1995.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Warrant Certificates. The certificates evidencing
the Warrants (the "Warrant Certificates") to be delivered pursuant to this
Agreement shall be in registered form only and shall be substantially in the
form set forth in Exhibit A attached hereto.
SECTION 2. Execution of Warrant Certificates. Warrant
Certificates shall be signed on behalf of the Company by its Chairman of the
Board or its President or a Vice President and by its Secretary or an Assistant
Secretary under its corporate seal.
SECTION 3. Registration. The Company shall number and
register the Warrant Certificates in a register as they are issued. The
Company may deem and treat the registered holder(s) of the Warrant Certificates
as the absolute owner(s) thereof (notwithstanding any notation of ownership or
other writing thereon made by anyone), for all purposes, and shall not be
affected by any notice to the contrary.
SECTION 4. Registration of Transfers and Exchanges; Right of
Refusal.
(a) Registration of Transfers and Exchange. The Company
shall from time to time register the transfer of any outstanding Warrant
Certificates in a Warrant register to be maintained by the Company upon
surrender thereof accompanied by a written instrument or instruments of
transfer in form satisfactory to the Company, duly executed by the registered
holder or holders thereof or by the duly appointed legal representative thereof
or by a duly authorized attorney. Upon any such registration of transfer, a
new Warrant Certificate shall be issued to the transferee(s) and the
surrendered Warrant Certificate shall be canceled and disposed of by the
Company. The Warrants shall in no event be transferred in an amount which
represents the right to purchase fewer than the lesser of (i) 5,000 shares of
Common Stock or (ii) the full number of shares of Common Stock for which the
Warrants held by the proposed transferor are then exercisable.
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<PAGE> 3
The Warrant holders agree that prior to any proposed transfer
of Warrants or of the Warrant Shares, if such transfer is not made pursuant to
an effective Registration Statement under the Securities Act of 1933, as
amended (the "Act"), or an opinion of counsel, reasonably satisfactory in form
and substance to the Company, that the Warrants or Warrant Shares may be sold
publicly without registration under the Act, the Warrant holder will, if
requested by the Company, deliver to the Company:
(1) an investment covenant reasonably satisfactory to the
Company signed by the proposed transferee;
(2) an agreement by such transferee to the impression of
the restrictive investment legend set forth below on the Warrant or
the Warrant Shares;
(3) an agreement by such transferee that the Company may
place a notation in the stock books of the Company or a "stop transfer
order" with any transfer agent or registrar with respect to the
Warrant Shares; and
(4) an agreement by such transferee to be bound by the
provisions of this Section 4 relating to the transfer of such Warrant
or Warrant Shares.
The Warrant holders agree that each certificate representing
Warrant Shares will bear the following legend:
"The securities evidenced or constituted hereby have been
acquired for the purpose of investment only and have not been
registered under the Securities Act of 1933, as amended. Such
securities may not be sold, transferred, pledged or
hypothecated unless the registration provisions of said Act
have been complied with or unless the Company has received an
opinion of counsel reasonably satisfactory to the Company that
such registration is not required."
Warrant Certificates may be exchanged at the option of the
holder(s) thereof, when surrendered to the Company at its office for another
Warrant Certificate or other Warrant Certificates of like tenor and
representing in the aggregate a like number of Warrants. Warrant Certificates
surrendered for exchange shall be canceled and disposed of by the Company.
(b) Company's Right of First Refusal. Prior to any
proposed transfer of Warrants or of Warrant Shares in a negotiated private
sale, Holder will give notice (the "Sale Notice") of such proposed transfer to
the Company. The Sale Notice will disclose in reasonable detail the identity
of the prospective transferee(s), the number of Warrants or Warrant Shares to
be transferred and the terms and conditions of the proposed transfer. The
Company may elect to purchase all (but not less than all) the securities to be
transferred upon
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<PAGE> 4
the same terms and conditions as those set forth in the Sale Notice by
delivering a written notice of such election to Holder within 10 days after the
Sale Notice has been given to the Company. Such notice shall contain the time
and place for the closing of the transaction, which time shall be within 20
days after the Sale Notice has been given to the Company. If the Company does
not elect to purchase all of the securities specified in the Sale Notice,
Holder may transfer the securities specified in the Sale Notice, subject to
Section 4(a) hereof, at a price and on terms no more favorable to the
transferee(s) thereof than specified in the Sale Notice during the 60-day
period immediately following the date 10 days after the Sale Notice has been
given to the Company. Any Warrants or Warrant Shares not transferred within
such 60- day period will be subject to the provisions of this Section 4(b) upon
subsequent transfer.
SECTION 5. Warrants; Exercise of Warrants. Subject to the
terms of this Agreement, each Warrant holder shall have the right, which may be
exercised commencing at the opening of business on September 1, 1996 and until
5:00 p.m., Los Angeles time on September 1, 2000, to receive from the Company
the number of fully paid and nonassessable Warrant Shares which the holder may
at the time be entitled to receive on exercise of such Warrants and payment of
the Exercise Price then in effect for such Warrant Shares. Each Warrant not
exercised prior to 5:00 p.m., Los Angeles time, on September 1, 2000 shall
become void and all rights thereunder and all rights in respect thereof under
this agreement shall cease as of such time. No adjustments as to dividends
will be made upon exercise of the Warrants.
A Warrant may be exercised upon surrender to the Company at
its office designated for such purpose (the address of which is set forth in
Section 13 hereof) of the certificate or certificates evidencing the Warrants
to be exercised with the form of election to purchase on the reverse thereof
duly filled in and signed, and upon payment to the Company of the exercise
price (the "Exercise Price") which is set forth in the form of Warrant
Certificate attached hereto as Exhibit A as adjusted as herein provided, for
the number of Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price shall be made (i) in cash
or by certified or official bank check payable to the order of the Company, or
(ii) through the surrender of debt or preferred equity securities of the
Company having a principal amount or liquidation preference, as the case may
be, equal to the aggregate Exercise Price to be paid (the Company will pay the
accrued interest or dividends on such surrendered debt or preferred equity
securities in cash at the time of surrender notwithstanding the stated terms
thereof).
Subject to the provisions of Section 6 hereof, upon such
surrender of Warrants and payment of the Exercise Price the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the written
order of the holder and in such name or names as the Warrant holder may
designate, a certificate or certificates for the number of full Warrant Shares
issuable upon the exercise of such Warrants together with cash as provided in
Section 11; provided, however, that if any consolidation, merger or lease or
sale of assets is proposed to be effected by the Company as described in
subsection (c) of Section 10 hereof, or a tender
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<PAGE> 5
offer or an exchange offer for shares of Common Stock of the Company shall be
made, upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Company shall, as soon as possible, but in any event not later
than two business days thereafter, issue and cause to be delivered the full
number of Warrant Shares issuable upon the exercise of such Warrants in the
manner described in this sentence together with cash as provided in Section 11.
Such certificate or certificates shall be deemed to have been issued and any
individual, partnership, corporation, association, joint stock company, trust,
joint venture, unincorporated organization or governmental entity or any
subdivision thereof (each a "Person") so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of such Warrants and payment of the Exercise Price.
The Warrants shall be exercisable, at the election of the
holders thereof, either in full or from time to time in part and, in the event
that a certificate evidencing Warrants is exercised in respect of fewer than
all of the Warrant Shares issuable on such exercise at any time prior to the
date of expiration of the Warrants, a new certificate evidencing the remaining
Warrant or Warrants will be issued and delivered pursuant to the provisions of
this Section and of Section 2 hereof. Warrants shall be exercisable for
Warrant Shares only in an amount which is at least equal to the lesser of (i)
5,000 Warrant Shares or (ii) the full number of Warrant Shares for which the
Warrants held by the Warrant holder are then exercisable.
All Warrant Certificates surrendered upon exercise of Warrants
shall be canceled and disposed of by the Company. The Company shall keep
copies of this Agreement and any notices given or received hereunder available
for inspection by the holders during normal business hours at its office. The
Company covenants that all Warrant Shares which may be issued upon exercise of
Warrants will, upon issue, be fully paid, nonassessable, free of preemptive
rights and free from all taxes, liens, charges and security interests with
respect to the issue thereof.
SECTION 6. Payment of Taxes. The Company will pay all
documentary stamp taxes attributable to the initial issuance of Warrant Shares
upon the exercise of Warrants; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any
transfer involved in the issue of any Warrant Certificates or any certificates
for Warrant Shares in a name other than that of the registered holder of a
Warrant Certificate surrendered upon the exercise of a Warrant or to a Person
outside of the United States, and the Company shall not be required to issue or
deliver such Warrant Certificates unless or until the Person or Persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
SECTION 7. Mutilated or Missing Warrant Certificates. In
case any of the Warrant Certificates shall be mutilated, lost, stolen or
destroyed, the Company shall issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant
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<PAGE> 6
Certificate of like tenor and representing an equivalent number of Warrants,
but only upon receipt of evidence reasonably satisfactory to the Company of
such loss, theft or destruction of such Warrant Certificate and an indemnity,
if requested, also reasonably satisfactory to it. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
SECTION 8. Reservation of Warrant Shares. The Company will
at all times reserve and keep available, free from preemptive rights, out of
the aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
SECTION 9. Obtaining Stock Exchange Listings. The Company
will use its best efforts to obtain approval for the listing, upon official
notice of issuance, of the Warrant Shares on the principal securities exchanges
and markets within the United States of America, if any, on which other shares
of Common Stock are then listed.
SECTION 10. Adjustments of Exercise Price and Number of
Warrant Shares. The Exercise Price shall be subject to adjustment from time to
time as hereinafter provided. Upon each adjustment of the Exercise Price
pursuant to subsection (a), (b), (d) or (e) of this Section 10, the Warrant
holder shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of shares of Common Stock obtained
by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of shares of Common Stock issuable upon exercise of
such Warrant immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
(a) Adjustment for Certain Special Dividends. In
case the Company shall declare a dividend upon the Common Stock payable
otherwise than out of earnings or earned surplus, determined in accordance with
generally accepted accounting principles, and otherwise than in Common Stock or
securities convertible into Common Stock, the Exercise Price in effect
immediately prior to the declaration of such dividend shall be reduced by an
amount equal, in the case of a dividend in cash, to the amount per share of the
Common Stock so declared as payable otherwise than out of earnings or earned
surplus or, in the case of any other dividend, to the fair value per share of
the Common Stock or the property so declared as payable otherwise than out of
earnings or earned surplus, as determined, reasonably and in good faith, by the
board of directors of the Company. For the purposes of the foregoing a
dividend other than in cash shall be considered payable out of earnings or
earned surplus (other than revaluation or paid-in surplus) only to the extent
that such earnings or earned surplus are charged an amount equal to the fair
value of such dividend as determined, in good faith and in the exercise of
reasonable business judgment, by the board of directors of the Company. Such
reductions shall take effect as of the record date for such dividend or, if a
record is not taken,
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<PAGE> 7
on the date as of which the holders of Common Stock of record entitled to such
dividend are determined.
(b) Subdivision or Combination of Stock. In case
the Company shall at any time subdivide the outstanding shares of Common Stock
into a greater number of shares, whether through a stock split, stock dividend
or otherwise, the number of shares of Common Stock for which the Warrants are
exercisable shall be proportionately increased and the Exercise Price in effect
immediately prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the number of shares of Common Stock for which
the Warrants are exercisable shall be proportionately reduced and the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased.
(c) Adjustments for Consolidation, Merger, Sale
of Assets, Reorganization, Etc. In case the Company (i) consolidates with or
merges into any other Person and is not the continuing or surviving corporation
of such consolidation or merger, or (ii) permits any other Person to
consolidate with or merge into the Company and the Company is the continuing or
surviving corporation but in connection with such consolidation or merger, the
Common Stock is changed into or exchanged for stock or other securities of any
other corporation or cash or any other assets, or (iii) transfers all or
substantially all of its properties and assets to any other Person, or (iv)
effects a capital reorganization or reclassification of the capital stock of
the Company in such a way that holders of Common Stock shall be entitled to
receive stock, securities, cash or assets with respect to or in exchange for
Common Stock (each of the foregoing events in clauses (i) through (iv) being a
"Fundamental Change"), then in each such case proper provision shall be made so
that, upon the basis and upon the terms and in the manner provided in this
subsection (c), the Warrant holders, upon the exercise of the Warrants at any
time after the consummation of such Fundamental Change, shall be entitled to
receive (at the aggregate Exercise Price in effect for all shares of Common
Stock issuable upon such exercise immediately prior to such consummation as
adjusted to the time of such transaction), in lieu of shares of Common Stock
issuable upon such exercise prior to such consummation, the stock and other
securities, cash and assets to which such Warrant holders would have been
entitled upon such consummation if such Warrant holders had exercised such
Warrants immediately prior thereto (subject to adjustments subsequent to such
corporate action as nearly equivalent as possible to the adjustments provided
for in this Section 10). In the case of any Fundamental Change the Company
shall require the successor or acquiring corporation to assume the obligation
to perform each and every covenant and condition of this Agreement to be
performed and observed by the Company and all liabilities and obligations of
the Company hereunder.
(d) Rights, Options, Etc. In case the Company
shall issue rights, options, warrants or convertible securities to all or
substantially all holders of its Common Stock, without any charge to such
holders, entitling them to subscribe for or purchase Common Stock at a price
per share which is lower at the record date mentioned below than
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<PAGE> 8
95% of the then-Current Market Price (as defined below), the Exercise Price in
effect immediately prior to such issuance shall be adjusted by multiplying such
Exercise Price by a fraction, of which the numerator shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
rights, options, warrants or convertible securities plus the number of shares
which the aggregate offering price (i.e., the consideration required to be
paid, if any, in connection with the exercise of any such rights) of the total
number of shares offered would purchase at such Current Market Price and of
which the denominator shall be the number of shares of Common stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities plus the number of additional shares of Common Stock
offered for subscription or purchase. Such adjustment shall be made whenever
such rights, options, warrants or convertible securities are issued, and shall
become effective immediately and retroactively to the record date for the
determination of stockholders entitled to receive such rights, options,
warrants or convertible securities. To the extent any of such rights, options,
warrants or convertible securities shall lapse, without the exercise thereof,
then the Exercise Price shall thereupon be readjusted as though such rights,
options, warrants or convertible securities were never issued.
(e) Adjustment of Price upon Issuance of Common
Stock. If and whenever after the date hereof the Company shall issue or sell
any shares of Common Stock for a consideration per share less than 95% of the
Current Market Price at the time of such issue or sale, then, forthwith upon
such issue or sale, the Exercise Price shall be reduced to the price
(calculated to the nearest cent) determined by multiplying the Exercise Price
in effect immediately prior to such time of such issue or sale by a fraction,
the numerator of which shall be the sum of (A) the number of shares of Common
Stock outstanding immediately prior to such issue or sale multiplied by the
Current Market Price immediately prior to such issue or sale plus (B) the
consideration received by the Company upon such issue or sale, and the
denominator of which shall be the product of (C) the total number of shares of
Common Stock outstanding immediately after such issue or sale, multiplied by
(D) the Current Market Price immediately prior to such issue or sale.
No adjustment of the Exercise Price, however, shall be made in
an amount less than $.01 per share, but any such lesser adjustment shall be
carried forward and shall be made at the time of, and together with, the next
subsequent adjustment which together with any adjustments so carried forward
shall amount to $.01 per share or more.
For purposes of this subsection (e) of this section, the
following clauses shall also be applicable:
(i) Issuance of Rights or Options. If at any
time after the Effective Date the Company grants (whether directly or
by assumption in a merger or otherwise) any rights (other than the
Warrants) to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock or other securities convertible
into or exchangeable for Common Stock (such convertible or
exchangeable securities being
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<PAGE> 9
called "Convertible Securities") whether or not such rights or options
or the right to convert or exchange any such Convertible Securities
are immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such rights or options or upon
conversion or exchange of such Convertible Securities (determined as
provided below) is less than 95% of the Current Market Price
determined as of the date of granting such rights or options, as the
case may be, then the total maximum number of shares of Common Stock
issuable upon the exercise of such rights or options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such rights or options shall
(as of the date of granting of such rights or options) be deemed to be
outstanding and to have been issued for such price per share. Except
as provided in clause (iii) of this subsection, no further adjustments
of the Exercise Price shall be made upon the actual issue of such
Common Stock or of such Convertible Securities upon exercise of such
rights or options or upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities. For the
purposes of this clause (i), the price per share for which Common
Stock is issuable upon the exercise of any such rights or options or
upon conversion or exchange of any such Convertible Securities shall
be determined by dividing (A) the total amount, if any, received or
receivable by the Company as consideration for the granting of such
rights or options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of all such
rights or options, plus, in the case of such rights or options which
relate to Convertible Securities, or in the case of Convertible
Securities, the minimum aggregate amount of additional consideration,
if any, payable upon the issue or sale of such Convertible Securities
and upon their conversion or exchange by (B) the total number of
shares of Common Stock issuable upon the exercise of such rights or
options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or options.
(ii) Issuance of Convertible Securities. If the
Company after the Effective Date issues (whether directly or by
assumption in a merger or otherwise) or sells any Convertible
Securities (other than pursuant to right or options for which an
adjustment to the Exercise Price has been made pursuant to Section
10(e)(i)), whether or not the rights to exchange or convert under such
securities are immediately exercisable, and the price per share for
which Common Stock is issuable upon conversion or exchange of such
Convertible Securities (determined as provided below) is less than 95%
of the Current Market Price determined as of the date of such issue or
sale of such Convertible Securities, as the case may be, then the
total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall (as of
the date of the issue or sale of such Convertible Securities) be
deemed to be outstanding and to have been issued for such price per
share, provided that (A) except as provided in clause (iii) of this
subsection no further adjustments of the Exercise Price shall be made
upon the actual issue of such Common Stock upon conversion or exchange
of such Convertible Securities, and (B) if any such
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<PAGE> 10
issue or sale of Convertible Securities occurs for which adjustments
of the Exercise Price have been or are to be made pursuant to other
provisions of this subsection (e), no further adjustment of the
Exercise Price shall be made by reason of such issue or sale. For the
purpose of this clause (ii), the price per share for which Common
Stock is issuable upon conversion or exchange of Convertible
Securities shall be determined by dividing (1) the total amount
received or receivable by the Company as consideration for the issue
or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Company
upon the conversion or exchange thereof, by (2) the total number of
shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities.
(iii) Change in Option Price or Conversion Rate.
If the purchase price provided for in any rights or options referred
to in clause (i) above, or the additional consideration, if any,
payable upon the conversion or exchange of Convertible Securities
referred to in clause (i) or (ii) above, or the rate at which any
Convertible Securities referred to in clause (i) or (ii) above are
convertible into or exchangeable for Common Stock, changes (other than
under or by reason of provisions designed to protect against
dilution), then the Exercise Price in effect at the time of such event
shall forthwith be readjusted to the Exercise Price which would have
been in effect at such time had such rights, options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at
the time initially granted, issued or sold, and on the expiration of
any such option or right or the termination of any such right to
convert or exchange such Convertible Securities, the Exercise Price
then in effect hereunder shall forthwith be increased to the Exercise
Price which would have been in effect at the time of such expiration
or termination had such right, option or Convertible Security, to the
extent outstanding immediately prior to such expiration or
termination, never been issued, and the Common Stock issuable
thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such right or option referred to in
clause (i) above or the rate at which any Convertible Securities
referred to in clause (i) or (ii) above are convertible into or
exchangeable for Common Stock shall decrease at any time under or by
reason of provisions with respect thereto designed to protect against
dilution, then in case of the delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of
any such Convertible Security, the Exercise Price then in effect
hereunder shall forthwith be adjusted to such amount as would have
obtained had such right, option or Convertible Security never been
issued as to such Common Stock and had adjustments been made upon the
issuance of the shares of Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Exercise Price then in
effect hereunder is thereby decreased.
(iv) Consideration for Stock. If any shares of
Common Stock or Convertible Securities or any rights or options to
purchase any such Common Stock or Convertible Securities are issued or
sold for cash, the consideration received therefor
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<PAGE> 11
shall be deemed to be the amount received by the Company therefor,
without deduction of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Company in
connection with such issuance or sale. If any shares of Common Stock
or Convertible Securities or any rights or options to purchase any
such Common Stock or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other
than cash received by the Company shall be deemed to be the fair
market value of such consideration as determined, in good faith and in
the exercise of reasonable business judgement, by the board of
directors of the Company, without deduction of any expenses incurred
or any underwriting commissions or concessions paid or allowed by the
Company in connection with such issuance or sale. If any shares of
Common Stock or Convertible Securities or any rights or options to
purchase such shares of Common Stock or Convertible Securities are
issued in connection with any merger or consolidation in which the
Company is the surviving corporation (other than any consolidation or
merger in which the previously outstanding shares of Common Stock of
the Company shall be changed into or exchanged for the stock or other
securities of another corporation), the amount of consideration for
such shares or rights or options shall be deemed to be the fair market
value as determined, in good faith and in the exercise of reasonable
business judgment, by the board of directors of the Company of such
portion of the assets and business of the non-surviving corporation as
the board of directors determines, in good faith and in the exercise
of reasonable business judgment, to be attributable to such shares of
Common Stock, Convertible Securities, rights or options, as the case
may be.
(v) Determination of Current Market Price under
Certain Circumstances. Anything herein to the contrary
notwithstanding, in determining for any purpose hereunder whether in
consideration received by the Company is less than the Current Market
Price, the Current Market Price shall be determined as of the date the
Company and the other party to the transaction agree in writing on the
consideration to be received by the Company for the Common Stock or
Convertible Securities rather than on the date of payment of such
consideration.
(vi) Certain Issues Excepted. Anything herein to
the contrary notwithstanding, the Company shall not be required to
make any adjustment pursuant to this Section 10(e), either (A) if an
adjustment was made pursuant to the provisions of Sections 10(a), (b),
(c) or (d) upon such issuance, or (B) with respect to (1) the exercise
of one or more of the Warrants or any other options, warrants or
convertible securities (including without limitation the Series C
Convertible Preferred Stock, the Series A Convertible Preferred Stock
and the 8% Convertible Notes due September 1, 1999) which have been
issued and are outstanding as of the Effective Date, or (2) the
issuance to Holder of any Common Stock, or securities exchangeable or
exercisable for or convertible into Common Stock (or the exercise or
conversion thereof), for consideration below the Current Market Price,
or (3) the declaration or payment of
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<PAGE> 12
dividends on the Series C Preferred Stock in the form of shares of
Series C Preferred Stock, or (4) the issuance of Common Stock, or the
issuance or exercise of options, rights or warrants therefor, in
connection with employee benefit plans, employment or consultant
agreements or similar transactions, and pursuant to contracts entered
into by the Company prior to the Effective Date.
(f) Other Equitable Adjustments. If any event occurs as
to which the other provisions of this Section 10 are not strictly applicable
(or if strictly applicable would not fairly protect the rights of the Warrant
holders in accordance with the basic intent and principles of such provisions)
but, in the reasonable opinion of the Company's board of directors, an
adjustment should be made to fairly protect the rights of the Warrant holders
in accordance with the basic intent and principles of such provisions, then the
Company shall appoint a firm of independent certified public accountants (which
may be the regular auditors of the Company) of recognized national standing,
which shall give its opinion upon the adjustment, if any, to be made to protect
the Warrant holders against dilution on a basis consistent with the basic
intent and principles established in the other provisions of this Section 10.
Upon receipt of such opinion, the Company shall forthwith make the adjustments,
if any, described therein.
(g) Notice of Adjustment. Upon any adjustment of the
Exercise Price, then and in each such case the Company shall promptly deliver a
notice to the Warrant holders, which notice shall state the Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of each Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(h) Other Notices. In case at any time:
(i) the Company shall declare any cash dividend
on its Common Stock;
(ii) the Company shall pay any dividend payable in
stock upon its Common Stock or make any distribution (other than
regular cash dividends) to the holders of its Common Stock;
(iii) the Company shall offer for subscription pro
rata to the holders of its Common Stock any additional shares of stock
of any class or other rights;
(iv) the Company shall authorize the distribution
to all holders of its Common Stock of evidences of its indebtedness or
assets (other than cash dividends or cash distributions payable out of
earnings or earned surplus or dividends payable in Common Stock);
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(v) there shall be any capital reorganization, or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with another corporation (other than a
subsidiary of the Company in which the Company is the surviving or
continuing corporation and no change occurs in the Company's Common
Stock), or sale of all or substantially all of its assets to, another
Person;
(vi) there shall be a voluntary or involuntary
dissolution, liquidation, bankruptcy, assignment for the benefit of
creditors, or winding up of the Company; or
(vii) the Company proposes to take any other action
or an event occurs which would require an adjustment of the Exercise
Price pursuant to this Section 10;
then, in any one or more of said cases, the Company shall give written notice,
addressed to the Warrant holders at their addresses as shown on the books of
the Company, of (1) the date on which the books of the Company shall close or a
record shall be taken for such dividend, distribution or subscription rights,
or (2) the date (or, if not then known, a reasonable approximation thereof by
the Company) on which such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit
of creditors, winding up or other action, as the case may be, shall take place.
Such notice shall also specify (or, if not then known, reasonably approximate)
the date as of which the holders of Common Stock of record shall participate in
such dividend, distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger sale, dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors, winding up,
or other action, as the case may be. Such written notice shall be given at
least ten days prior to the action in question and not less than ten days prior
to the record date or the date on which the Company's transfer books are closed
in respect thereto. Notwithstanding any other provision of this Section 10(h),
the Company shall not be required to give any notice to Warrant holders
pursuant to this Section 10(h) if the giving of such notice would violate
applicable federal or state securities laws or the Company's obligations
thereunder.
(i) Adjustments below Par Value. Before taking any
action which would cause an adjustment pursuant to this Section 10 to reduce
the Exercise Price below the then par value (if any) of the Warrant Shares, the
Company will take any corporate action which may, in the opinion of its counsel
(which may be counsel employed by the Company), be necessary in order that the
Company may validly and legally issue fully paid and nonassessable Warrant
Shares at the Exercise Price as so adjusted.
SECTION 11. Fractional Interests. The Company shall not be
required to issue fractional Warrant Shares on the exercise of Warrants. If
more than one Warrant shall be presented for exercise in full at the same time
by the same holder, the number of full Warrant Shares which shall be issuable
upon the exercise thereof shall be computed on the basis of the aggregate
number of Warrant Shares purchasable on exercise of the Warrants so
12
<PAGE> 14
presented. If any fraction of a Warrant Share would, except for the provisions
of this Section 11, be issuable on the exercise of any Warrants (or specified
portion thereof), the Company shall pay an amount in cash equal to the fair
market value of such fractional share.
SECTION 12. No Stockholder Rights. Nothing contained in this
Agreement or in any of the Warrant Certificates shall be construed as
conferring upon the holders thereof the right to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or
the election of Directors of the Company or any other matter, or any rights
whatsoever as stockholders of the Company.
SECTION 13. Notices to Company and Warrant Holder. All
notices, demands or other communications to any party under this Agreement
shall be in writing Including facsimile transmission); shall be sent only by
facsimile, by first class United States mail, by nationally recognized courier
service, or by personal delivery; and shall be given, if to the Company to:
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Attention: W. Tucker Lemon, Vice President,
General Counsel and Secretary
Fax: (310) 280-0476
and with a copy to:
Latham & Watkins
633 W. 5th Street, Suite 4000
Los Angeles, California 90071
Attention: John R. Light, Esq.
Fax: (213) 891-8763
if to Holder, to:
Mr. Jack Erlanger
2 East 88th Street
New York, New York 10128
The Company or the Holder by notice to the other pursuant to
this Section 13 may designate additional or different addresses for subsequent
notices or communications.
SECTION 14. Supplements and Amendments. The Company may from
time to time supplement or amend this Agreement without the approval of any
holders of Warrant Certificates in order to cure any ambiguity or to correct or
supplement any provision contained
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<PAGE> 15
herein which may be defective or inconsistent with any other provision herein,
or to make any other provisions in regard to matters or questions arising
hereunder which the Company may deem necessary or desirable and which shall not
in any way adversely affect the interests of the holders of Warrant
Certificates.
SECTION 15. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company shall bind and inure to the
benefit of its respective successors and assigns hereunder.
SECTION 16. Termination. This Agreement shall terminate at
5:00 p.m., Los Angeles time on September 1, 2000. Notwithstanding the
foregoing, this Agreement will terminate on any earlier date if all Warrants
have been exercised.
SECTION 17. Governing Law. This Agreement and each Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the internal laws of said State.
SECTION 19. Benefits of This Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the Company and
the registered holders of the Warrant Certificates any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for
the sole and exclusive benefit of the Company and the registered holders of the
Warrant Certificates.
SECTION 20. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
[Signature Page Follows]
14
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
SHOWSCAN ENTERTAINMENT INC.
By /s/ Dennis Pope
------------------------------
Title: Executive Vice President
[Seal]
Attest: /s/ W. Tucker Lemon
-----------------------------------------
Title: Vice President and General Counsel
By /s/ Jack Erlanger
--------------------------
Jack Erlanger
15
<PAGE> 17
EXHIBIT A
[Form of Warrant Certificate]
[Face]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. SAID SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT.
EXERCISABLE ON OR AFTER SEPTEMBER 1, 1996 AND
ON OR BEFORE SEPTEMBER 1, 2000
50,000 Warrants
Warrant Certificate
SHOWSCAN ENTERTAINMENT INC.
This Warrant Certificate certifies that Jack Erlanger, or
registered assigns, is the registered holder of Warrants expiring September 1,
2000 (the "Warrants") to purchase Common Stock, par value $.001 per share (the
"Common Stock"), of Showscan Entertainment Inc., a Delaware corporation (the
"Company"). Each Warrant entitles the holder upon exercise to receive from the
Company on or before 5:00 p.m. Los Angeles Time on September 1, 2000, one fully
paid and nonassessable share of Common Stock (a "Warrant Share") at the initial
exercise price (the "Exercise Price") of $5.75 payable in lawful money of the
United States of America upon surrender of this Warrant Certificate and payment
of the Exercise Price at the office of the Company designated for such purpose,
but only subject to the conditions set forth herein and in the Warrant
Agreement referred to on the reverse hereof.
No Warrant may be exercised after 5:00 p.m., Los Angeles Time
on September 1, 2000 and to the extent not exercised by such time such Warrants
shall become void.
Reference is hereby made to the further provisions of this
Warrant Certificate set forth on the reverse hereof and such further provisions
shall for all purposes have the same effect as though fully set forth at this
place.
A-1
<PAGE> 18
This Warrant Certificate shall not be valid unless
countersigned by the Company, as such term is used in the Warrant
Agreement.
IN WITNESS WHEREOF, Showscan Entertainment Inc. has caused
this Warrant Certificate to be signed by its President and by its Secretary and
has caused its corporate seal to be affixed hereunto or imprinted hereon.
Dated: September 1, 1995
SHOWSCAN ENTERTAINMENT INC.
By _____________________________
President
By _____________________________
Secretary
A-2
<PAGE> 19
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants expiring September 1, 2000 entitling the
holder on exercise to receive shares of Common Stock, par value $.001 per
share, of the Company (the "Common Stock"), and are issued or to be issued
pursuant to a Warrant Agreement dated as of September 1, 1995 (the "Warrant
Agreement"), duly executed and delivered by the Company, which Warrant
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants. A copy of the Warrant Agreement
may be obtained by the holder hereof upon written request to the Company.
Warrants may be exercised at any time on or after September 1,
1996 and on or before September 1, 2000. The holder of Warrants evidenced by
this Warrant Certificate may exercise them by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with payment of the Exercise Price in cash at
the office of the Company designated for such purpose. In the event that upon
any exercise of Warrants evidenced hereby the number of Warrants exercised
shall be less than the total number of Warrants evidenced hereby, there shall
be issued to the holder hereof or his assignee a new Warrant Certificate
evidencing the number of Warrants not exercised. No adjustment shall be made
for any dividends on any Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price set forth on the face hereof may, subject to
certain conditions, be adjusted. If the Exercise Price is adjusted, the
Warrant Agreement provides that the number of shares of Common Stock issuable
upon the exercise of each Warrant shall be adjusted. No fractions of a share
of Common Stock will be issued upon the exercise of any Warrant, but the
Company will pay the cash value thereof determined as provided in the Warrant
Agreement.
The holders of the Warrants are entitled to certain
registration rights with respect to the Common Stock purchasable upon exercise
thereof. Said registration rights are set forth in full in a Registration
Rights Agreement dated as of September 1, 1995, between the Company and Jack
Erlanger. A copy of the Registration Rights Agreement may be obtained by the
holder hereof upon written request to the Company.
A-3
<PAGE> 20
Warrant Certificates, when surrendered at the office of the
Company by the registered holder thereof in person or by legal representative
or attorney duly authorized in writing, may be exchanged, in the manner and
subject to the limitations provided in the Warrant Agreement, but without
payment of any service charge, for another Warrant Certificate or Warrant
Certificates of like tenor evidencing in the aggregate a like number of
Warrants.
Upon due presentation for registration of transfer of this
Warrant Certificate at the office of the Company a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided in the Warrant
Agreement, without charge except for any tax or other governmental charge
imposed in connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
A-4
<PAGE> 21
[Form of Election to Purchase]
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to receive __________ shares of
Common Stock and herewith tenders payment for such shares to the order of
Showscan Entertainment Inc. in the amount of $______ in accordance with the
terms hereof. The undersigned requests that a certificate for such shares be
registered in the name of ________________, whose address is
_______________________________ and that such shares be delivered to
________________ whose address is ___________ ______________________. If said
number of shares is less than all of the shares of Common Stock purchasable
hereunder, the undersigned requests that a new Warrant Certificate representing
the remaining balance of such shares be registered in the name of
______________, whose address is _________________________, and that such
Warrant Certificate be delivered to _________________, whose address is
__________________.
Signature:
Date:
Signature:
A-5
<PAGE> 1
EXHIBIT 4.23
SHOWSCAN ENTERTAINMENT INC.
____________________
REGISTRATION RIGHTS AGREEMENT
Dated as of September 1, 1995
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of September 1, 1995, between Showscan Entertainment Inc.,
a Delaware corporation (the "Company"), and Jack Erlanger, an individual
("Investor"), and is made pursuant to that certain Warrant Agreement dated the
same date as this Agreement between the Company and the Investor (the "Warrant
Agreement").
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following capitalized terms
shall have the following meanings:
Board: The Board of Directors of the Company.
Claim: Any loss, claim, damages, liability or
expense (including the reasonable costs of investigation and legal
fees and expenses).
Common Stock: The common stock, par value $.001 per
share, of the Company.
Exchange Act: The Securities Exchange Act of 1934,
as from time to time amended.
Holder: The beneficial owner of a security. For all
purposes of this Agreement, the Company shall be entitled to treat the
record owner of a security as the beneficial owner of such security
unless the Company has been given written notice of the existence and
identity of a different beneficial owner.
Indemnified Holder: Any Holder of Registrable
Securities, any officer, director, employee or agent of any such
Holder and any Person who controls any such Holder within the meaning
of either Section 15 of the Securities Act or Section 20 of the
Exchange Act.
Misstatement: An untrue statement of a material fact
or an omission to state a material fact required to be stated in a
Registration Statement or Prospectus or necessary to make the
statements in a Registration Statement, Prospectus or preliminary
prospectus not misleading.
Person: A natural person, partnership, corporation,
business trust, association, joint venture or other entity or a
government or agency or political subdivision thereof.
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<PAGE> 3
Piggyback Registration: A registration pursuant to
Section 2 hereof.
Prospectus: The prospectus included in any
Registration Statement, as supplemented by any and all
prospectus supplements and as amended by any and all
post-effective amendments and including all material
incorporated by reference in such prospectus.
Registration Expenses: The out-of-pocket expenses of
a Registration, including:
(1) all registration and filing fees (including
fees with respect to filings required to be made with the
National Association of Securities Dealers);
(2) fees and expenses of compliance with
securities or blue sky laws (including fees and disbursements
of counsel for the underwriters or selling holders in
connection with blue sky qualifications of the Registrable
Securities and determinations of their eligibility for
investment under the laws of such jurisdictions as the
managing underwriters or holders of a majority of the
Registrable Securities being sold may designate);
(3) printing, messenger, telephone and delivery
expenses;
(4) fees and disbursements of counsel for the
Company and counsel for the underwriters;
(5) fees and disbursements of all independent
certified public accountants of the Company incurred in
connection with such Registration (including the expenses of
any special audit and "cold comfort" letters incident to such
registration); and
(6) fees and disbursements of underwriters
(excluding discounts, commissions or fees of underwriters,
selling brokers, dealer managers or similar securities
industry professionals relating to the distribution of the
Registrable Securities); and
(7) fees and expenses of any other Persons
retained by the Company.
Registrable Securities: The Warrant Shares;
provided, however, as to any particular Registrable Securities, such
securities will cease to be Registrable Securities when they have (x)
been registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (y) become eligible for
sale pursuant to Rule 144 or Rule 144A (or any similar provision then
in force) under the Securities Act, or (z) in the opinion of counsel
to the Company they may be freely transferred (without volume or other
limitations) without registration or qualification
2
<PAGE> 4
under the Securities Act or any similar state securities laws.
Whenever any particular securities cease to be Registrable Securities,
the holder of such securities will be entitled to receive from the
Company, without expense, new securities of like tenor not bearing a
Securities Act legend of the character set forth in Section 4 of the
Warrant Agreement.
Registration Statement: Any registration statement
which covers Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus included in such registration
statement, amendments (including post-effective amendments) and
supplements to such registration statement, and all exhibits to and
all material incorporated by reference in such registration statement.
Securities Act: The Securities Act of 1933, as from
time to time amended.
SEC: The Securities and Exchange Commission.
underwritten registration or underwritten offering:
A registration in which securities of the Company are sold to an
underwriter for distribution to the public.
Warrants: The warrants, each to purchase one share
of Common Stock, issued and sold pursuant to the Warrant Agreement.
Warrant Shares: (a) the shares of Common Stock
issued or issuable upon conversion of the Warrants, and (b) any
securities issued or issuable with respect to such Common Stock by way
of a stock dividend or stock split or in connection with a combination
of shares, recapitalization, merger, consolidation or reorganization.
2. Piggyback Registrations
(a) Participation
Each time the Company decides to file a registration statement
under the Securities Act covering the offer and sale by it or any of its
security holders of any of its securities for money, other than (i) on Forms
S-4, S-8, S-20 or any successor or similar forms, or (ii) by a registration
which is incident to any offering of the Company's securities pursuant to a
merger, combination of interest, recapitalization, consolidation or other
reorganization, or in connection with any employee benefit plan, the Company
shall give written notice thereof to all Holders of Registrable Securities.
Upon the written request of Investor or any subsequent Holder of Registrable
Securities made within 20 days after receipt of any such notice (which request
will specify the Registrable Securities intended to be disposed of), the
Company will, subject to the terms of this Agreement and subject to the full
cooperation by Investor or any Holder of Registrable Securities in connection
with any such
3
<PAGE> 5
registration, use its best efforts to effect the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register (which in no event shall be less than 50,000 shares in
the aggregate and 10,000 shares per selling Holder of Registrable Securities
(such number to adjust equitably in the future to account for any stock split,
stock combination or similar event)). If the registration statement is to
cover an underwritten offering, such Registrable Securities shall be included
in the underwriting on the same terms and conditions (including, without
limitation, underwriting discounts, commissions and fees) as the securities
otherwise being sold through the underwriters. Investor's and any subsequent
Holders' rights under this Section 2 shall expire on the seventh anniversary of
the date of this Agreement.
(b) Underwriter's Cutback
If in the good faith judgment of the managing underwriter of
such offering the inclusion of all of the shares of Registrable Securities and
any other Common Stock requested to be registered would interfere with the
successful marketing of a smaller number of such shares, then the number of
shares of Registrable Securities and other Common Stock to be included in the
offering (except for shares to be issued by the Company in an offering
initiated by the Company) shall be reduced to such smaller number, provided
that such reduction is pro rata with reductions that shall be imposed on any
other shares of Common Stock requested to be included.
(c) Company Control
The Company may decline to file a Registration Statement after
giving notice to any Holder pursuant to Section 2(a) above, or withdraw a
Registration Statement after filing and after such notice, but prior to the
effectiveness thereof, provided that the Company shall promptly notify each
Holder in writing of any such action and provided further that the Company
shall bear all reasonable expenses incurred by such Holder or otherwise in
connection with such withdrawn Registration Statement.
3. Hold-Back Agreements
Upon the written request of the managing underwriter of any
underwritten offering of the Company's securities, or if reasonably requested
by the Company in the case of a registered offering which in not underwritten,
a Holder of Registrable Securities shall not sell, make any short sale of,
loan, grant any option for the purchase of, or otherwise dispose of any
Registrable Securities (other than those included in such registration) without
the prior written consent of such managing underwriter or the Company, as the
case may be, for a period (not to exceed 30 days before the effective date and
90 days thereafter) that such managing underwriter or the Company, as the case
may be, requires; provided that each of the officers and directors of the
Company who are stockholders of the Company shall be subject to similar
agreements (other than with respect to options granted to officers and
directors of the
4
<PAGE> 6
Company under benefit plans approved by the stockholders of the Company)
covering at least the same period.
4. Registration Procedures
If and whenever the Company is required to register
Registrable Securities in a Piggyback Registration, the Company will use its
reasonable best efforts to effect such registration to permit the sale of such
Registrable Securities in accordance with the intended plan of distribution
thereof, and pursuant thereto the Company will as expeditiously as possible:
(a) prepare and file with the SEC as soon as practicable a
Registration Statement with respect to such Registrable Securities and use its
best efforts to cause such Registration Statement to become effective and
remain effective until the Registrable Securities covered by such Registration
Statement have been sold; provided that the Company shall not be required to
maintain the effectiveness of any Registration Statement not covering an
underwritten public offering for more than 90 days after such registration
statement becomes effective;
(b) prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement, and such supplements
to the Prospectus, as may be required by the rules, regulations or instructions
applicable to the registration form used by the Company or by the Securities
Act or rules and regulations thereunder to keep the Registration Statement
effective until all Registrable Securities covered by such Registration
Statement are sold in accordance with the intended plan of distribution set
forth in such Registration Statement or supplement to the Prospectus or for
such shorter period of time during which such Registration Statement must be
kept effective by the terms of this Agreement;
(c) promptly notify the selling Holders of Registrable Securities
and the managing underwriter, if any, and (if requested by any such Person)
confirm such advice in writing,
(1) when the Prospectus or any supplement or
post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same
has become effective,
(2) of any request by the SEC for amendments or
supplements to the Registration Statement or the Prospectus or for
additional information,
(3) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose,
5
<PAGE> 7
(4) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Registrable
Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, and
(5) of the existence of any fact which results in the
Registration Statement, the Prospectus or any document incorporated
therein by reference containing a Misstatement (and every selling
Holder of Registrable Securities agrees to promptly advise the Company
at any time that it learns of the existence of such a fact);
(d) use its reasonable best efforts to obtain the withdrawal of
any order suspending the effectiveness of the Registration Statement at the
earliest possible time;
(e) furnish to each selling Holder of Registrable Securities and
the managing underwriter, without charge, at least one conformed copy of the
Registration Statement and any post-effective amendments thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(f) deliver to each selling Holder of Registrable Securities and
the underwriters, if any, without charge, as many copies of each Prospectus
(and each preliminary prospectus) as such Persons may reasonably request (the
Company hereby consenting to the use of each such Prospectus (or preliminary
prospectus) by each selling Holder of Registrable Securities and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by such Prospectus (or preliminary prospectus);
(g) use its best efforts to register or qualify the Registrable
Securities for offer and sale under the securities or blue sky laws of such
jurisdictions as such selling Holders or underwriters may reasonably request in
writing; provided that the Company shall not be required to qualify generally
to do business in any jurisdiction where it is not then so qualified or to take
any action which would subject it to general service of process in any such
jurisdiction where it is not then so subject;
(h) use its reasonable best efforts to cause the Registrable
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof or the underwriters, if any, to
consummate the disposition of such Registrable Securities;
(i) if the Registration Statement or the Prospectus contains a
Misstatement, prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities, the Prospectus will
not contain a Misstatement;
6
<PAGE> 8
(j) cause all Registrable Securities covered by the
Registration Statement to be listed in the Nasdaq National Market, if
requested by the Holders of a majority of such Registrable Securities
or the managing underwriter, if any;
With respect to any registration statement contemplated by
Section 2, each selling Holder of Registrable Securities shall provide such
information with respect to it, and its intended method of distribution for
inclusion in any such registration statement, as the Company shall reasonably
request from time to time in writing.
5. Registration Expenses
The Registration Expenses of all Piggyback Registrations shall
be borne by the Company.
6. Indemnification
(a) Indemnification by Company
The Company agrees to indemnify and hold harmless each
Indemnified Holder from and against all Claims arising out of or based upon any
Misstatement or alleged Misstatement, except insofar as such Misstatement or
alleged Misstatement was based upon information furnished to the Company by
such Indemnified Holder or the underwriter expressly for use in the document
containing such Misstatement or alleged Misstatement.
The foregoing notwithstanding, the Company shall not be liable
to the extent that any such Claim arises out of or is based upon a Misstatement
or alleged Misstatement made in any preliminary prospectus if (i) such
Indemnified Holder failed to send or deliver a copy of the Prospectus with or
prior to the delivery of written confirmation of the sale of Registrable
Securities giving rise to such Claim and (ii) the Prospectus would have
corrected such untrue statement or omission.
In addition, the Company shall not be liable to the extent
that any such Claim arises out of or is based upon a Misstatement or alleged
Misstatement in a Prospectus, (x) if such Misstatement or alleged Misstatement
is corrected in an amendment or supplement to such Prospectus and (y) having
previously been furnished by or on behalf of the Company with copies of the
Prospectus as so amended or supplemented, such Indemnified Holder thereafter
fails to deliver such Prospectus as so amended or supplemented prior to or
concurrently with the sale to the person who purchased a Registrable Security
from such Indemnified Holder and who is asserting such Claim.
The Company shall also indemnify underwriters, selling
brokers, dealer managers and similar securities industry professionals
participating in a distribution covered by a Registration Statement, their
officers and directors and each Person who controls such Persons (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange
7
<PAGE> 9
Act) to the same extent as provided above with respect to the indemnification
of the Indemnified Holders of Registrable Securities.
(b) Indemnification Procedures
If any action or proceeding (including any governmental
investigation or inquiry) shall be brought or asserted against an Indemnified
Holder in respect of which indemnity may be sought from the Company, such
Indemnified Holder shall promptly notify the Company in writing, and the
Company shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such Indemnified Holder and the payment of all
expenses.
Such Indemnified Holder shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such separate counsel shall be the expense of such
Indemnified Holder unless (i) the Company has agreed to pay such fees and
expenses or (ii) the Company shall have failed to assume the defense of such
action or proceeding or has failed to employ counsel reasonably satisfactory to
such Indemnified Holder in any such action or proceeding.
If such Indemnified Holder notifies the Company in writing
that it elects to employ separate counsel at the expense of the Company as
permitted by the provisions of the preceding paragraph, the Company shall not
have the right to assume the defense of such action or proceeding on behalf of
such Indemnified Holder. The foregoing notwithstanding, the Company shall not
be liable for the reasonable fees and expenses of more than one separate firm
of attorneys at any time for such Indemnified Holder and any other Indemnified
Holders (which firm shall be designated in writing by such Indemnified Holders)
in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances.
The Company shall not be liable for any settlement of any such
action or proceeding effected without its written consent, but if settled with
its written consent, or if there be a final judgment for the plaintiff in any
such action or proceeding, the Company agrees to indemnify and hold harmless
such Indemnified Holders from and against any loss or liability by reason of
such settlement or judgment.
(c) Indemnification by Holder of Registrable Securities.
Each Holder of Registrable Securities agrees to indemnify and
hold harmless the Company, its directors and officers and each Person, if any,
who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to such Holder, but only with respect to
information relating to such Holder furnished in writing by such Holder
expressly for use in any Registration Statement, Prospectus or preliminary
prospectus.
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<PAGE> 10
In case any action or proceeding shall be brought against the
Company or its directors or officers or any such controlling person, in respect
of which indemnity may be sought against a Holder of Registrable Securities,
such Holder shall have the rights and duties given the Company and the Company
or its directors or officers or such controlling person shall have the rights
and duties given to each Holder by Sections 6(a) and 6(b) above.
The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as provided
above with respect to information so furnished in writing by such Persons
specifically for inclusion in any Prospectus or Registration Statement.
(d) Contribution
If the indemnification provided for in this Section 6 is
unavailable to an indemnified party under Section 6(a) or Section 6(c) above
(other than by reason of exceptions provided in those Sections) in respect of
any Claims referred to in such Sections, then each applicable indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such Claims in
such proportion as is appropriate to reflect the relative fault of the Company
on the one hand and of the Indemnified Holder on the other in connection with
the statements or omissions which resulted in such Claims as well as any other
relevant equitable considerations. The amount paid or payable by a party as a
result of the Claims referred to above shall be deemed to include, subject to
the limitations set forth in Section 6(b), any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim.
The relative fault of the Company on the one hand and of the
Indemnified Holder on the other shall be determined by reference to, among
other things, whether the Misstatement or alleged Misstatement relates to
information supplied by the Company or by the Indemnified Holder and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such Misstatement or alleged Misstatement.
The Company and each Holder of Registrable Securities agree
that it would not be just and equitable if contribution pursuant to this
Section 6(d) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to above.
No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
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<PAGE> 11
7. Requirements for Participation in Underwritten Offerings
No Person may participate in any underwritten offering
pursuant to a Registration hereunder unless such Person (a) agrees to sell such
Person's securities on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
cooperates fully in connection with the offering, including without limitation
the completion and execution of all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents required under the
terms of such underwriting arrangements.
8. Suspension of Sales
Upon receipt of written notice from the Company that a
Registration Statement or Prospectus contains a Misstatement, each Holder of
Registrable Securities shall forthwith discontinue disposition of Registrable
Securities until such Holder has received copies of the supplemented or amended
Prospectus required by Section 4(i) hereof, or until such Holder is advised in
writing by the Company that the use of the Prospectus may be resumed, and, if
so directed by the Company, such Holder shall deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the 90-day period referred to in Section 4(a) hereof
shall be extended by the number of days during the period from and including
the date of the giving of such notice to and including the date when each
seller of Registrable Securities covered by such Registration Statement either
has received the copies of the supplemented or amended prospectus contemplated
by Section 4(i) hereof or has been advised in writing by the Company that the
use of the Prospectus may be resumed.
9. Miscellaneous
(a) Remedies.
Each Holder of Registrable Securities, in addition to being
entitled to exercise all rights provided herein, in the Warrant Agreement and
granted by law, including recovery of damages, shall be entitled to specific
performance of its rights under this Agreement.
(b) Amendments and Waivers
The provisions of this Agreement, including the provisions of
this sentence, may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given unless the
Company has obtained the written consent of the Holders of at least a majority
of the outstanding shares of Registerable Securities. The foregoing
notwithstanding, a waiver or consent to departure from the provisions hereof
that relates exclusively to the rights of Holders of shares of Registerable
Securities whose shares are being sold pursuant to a Registration Statement and
that does not directly or indirectly
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<PAGE> 12
affect the rights of other Holders of shares of Registerable Securities may be
given by the Holders of a majority of the shares of Registerable Securities
being sold pursuant to such Registration Statement.
(c) Notices
All notices, demands or other communications to any party
under this Agreement shall be in writing Including facsimile transmission);
shall be sent only by facsimile, by first class United States mail, by
nationally recognized courier service, or by personal delivery; and shall be
given, if to the Company to:
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Attention: W. Tucker Lemon, Vice President, General Counsel
and Secretary
Fax: (310) 280-0476
and with a copy to:
Latham & Watkins
633 W. 5th Street, Suite 4000
Los Angeles, California 90071
Attention: John R. Light, Esq.
Fax: (213) 891-8763
if to Investor, to:
Mr. Jack Erlanger
2 East 88th Street
New York, New York 10128
The Company or the Investor by notice to the other pursuant to
this Section 9(c) may designate additional or different addresses for
subsequent notices or communications.
(d) Successors and Assigns
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties.
The foregoing notwithstanding, the registration rights granted
the Holders of Registerable Securities under this Agreement may not be
transferred without the prior written consent of the Company.
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<PAGE> 13
(e) Counterparts
This Agreement may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
(f) Table of Contents and Headings
The table of contents and headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(h) Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
(i) Severability
In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
(j) Forms
All references in this Agreement to particular forms of
registration statements are intended to include all successor forms which are
intended to replace, or to apply to similar transactions as, the forms herein
referenced.
(k) Entire Agreement.
This Agreement and the Warrant Agreement are intended by the
parties as the final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein or therein with respect to the registration rights
granted by the Company with respect to the securities sold pursuant to the
Warrant Agreement. This Agreement and the Warrant Agreement supersede all
prior agreements and understandings between the parties with respect to such
subject matter.
[signature pages follow]
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<PAGE> 14
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
SHOWSCAN ENTERTAINMENT INC.
By: /s/ DENNIS POPE
----------------------------------------
Title: Executive Vice President
-------------------------------------
INVESTOR
/s/ JACK ERLANGER
------------------------------------------
Jack Erlanger
13
<PAGE> 1
EXHIBIT 4.24
WARRANT AGREEMENT
BETWEEN
SHOWSCAN ENTERTAINMENT INC.
and
INTRALINK FILM GRAPHIC DESIGN
______________________________
Dated as of October 3, 1995
______________________________
<PAGE> 2
WARRANT AGREEMENT
This Warrant Agreement, dated as of October 3, 1995 (this
"Agreement"), is by and between Showscan Entertainment Inc., a Delaware
corporation (the "Company"), and Intralink Film Graphic Design, a California
corporation ("Holder").
WHEREAS, the Company proposes to issue to Holder, or its
designee, common stock purchase warrants, as hereinafter described (the
"Warrants"), to purchase up to an aggregate of 30,000 shares of Common Stock,
$.001 per share par value (the "Common Stock"), of the Company (the Common
Stock issuable on exercise of the Warrants being referred to herein as the
"Warrant Shares"), pursuant to a Consulting Agreement, dated as of August 1,
1995, by and between the Company and Holder (the "Consulting Agreement").
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Warrant Certificates. The certificates evidencing
the Warrants (the "Warrant Certificates") to be delivered pursuant to this
Agreement shall be in registered form only and shall be substantially in the
form set forth in Exhibit A attached hereto.
SECTION 2. Execution of Warrant Certificates. Warrant
Certificates shall be signed on behalf of the Company by its Chairman of the
Board or its President or a Vice President and by its Secretary or an Assistant
Secretary under its corporate seal.
SECTION 3. Registration. The Company shall number and
register the Warrant Certificates in a register as they are issued. The
Company may deem and treat the registered holder(s) of the Warrant Certificates
as the absolute owner(s) thereof (notwithstanding any notation of ownership or
other writing thereon made by anyone), for all purposes, and shall not be
affected by any notice to the contrary.
SECTION 4. Registration of Transfers and Exchanges; Right of
Refusal.
(a) Registration of Transfers and Exchange. The Company
shall from time to time register the transfer of any outstanding Warrant
Certificates in a Warrant register to be maintained by the Company upon
surrender thereof accompanied by a written instrument or instruments of
transfer in form satisfactory to the Company, duly executed by the registered
holder or holders thereof or by the duly appointed legal representative thereof
or by a duly authorized attorney. Upon any such registration of transfer, a
new Warrant Certificate shall be issued to the transferee(s) and the
surrendered Warrant Certificate shall be canceled and disposed of by the
Company. The Warrants shall in no event be transferred in an amount which
represents the right to purchase fewer than the lesser of (i) 5,000 shares of
Common Stock or (ii) the full number of shares of Common Stock for which the
Warrants held by the proposed transferor are then exercisable.
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<PAGE> 3
The Warrant holders agree that prior to any proposed transfer
of Warrants or of the Warrant Shares, if such transfer is not made pursuant to
an effective Registration Statement under the Securities Act of 1933, as
amended (the "Act"), or an opinion of counsel, reasonably satisfactory in form
and substance to the Company, that the Warrants or Warrant Shares may be sold
publicly without registration under the Act, the Warrant holder will, if
requested by the Company, deliver to the Company:
(1) an investment covenant reasonably satisfactory to the
Company signed by the proposed transferee;
(2) an agreement by such transferee to the impression of
the restrictive investment legend set forth below on the Warrant or
the Warrant Shares;
(3) an agreement by such transferee that the Company may
place a notation in the stock books of the Company or a "stop transfer
order" with any transfer agent or registrar with respect to the
Warrant Shares; and
(4) an agreement by such transferee to be bound by the
provisions of this Section 4 relating to the transfer of such Warrant
or Warrant Shares.
The Warrant holders agree that each certificate representing
Warrant Shares will bear the following legend:
"The securities evidenced or constituted hereby have been
acquired for the purpose of investment only and have not been
registered under the Securities Act of 1933, as amended. Such
securities may not be sold, transferred, pledged or
hypothecated unless the registration provisions of said Act
have been complied with or unless the Company has received an
opinion of counsel reasonably satisfactory to the Company that
such registration is not required."
Warrant Certificates may be exchanged at the option of the
holder(s) thereof, when surrendered to the Company at its office for another
Warrant Certificate or other Warrant Certificates of like tenor and
representing in the aggregate a like number of Warrants. Warrant Certificates
surrendered for exchange shall be canceled and disposed of by the Company.
(b) Company's Right of First Refusal. Prior to any
proposed transfer of Warrants or of Warrant Shares in a negotiated private
sale, Holder will give notice (the "Sale Notice") of such proposed transfer to
the Company. The Sale Notice will disclose in reasonable detail the identity
of the prospective transferee(s), the number of Warrants or Warrant Shares to
be transferred and the terms and conditions of the proposed transfer. The
Company may elect to purchase all (but not less than all) the securities to be
transferred upon
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<PAGE> 4
the same terms and conditions as those set forth in the Sale Notice by
delivering a written notice of such election to Holder within 10 days after the
Sale Notice has been given to the Company. Such notice shall contain the time
and place for the closing of the transaction, which time shall be within 20
days after the Sale Notice has been given to the Company. If the Company does
not elect to purchase all of the securities specified in the Sale Notice,
Holder may transfer the securities specified in the Sale Notice, subject to
Section 4(a) hereof, at a price and on terms no more favorable to the
transferee(s) thereof than specified in the Sale Notice during the 60-day
period immediately following the date 10 days after the Sale Notice has been
given to the Company. Any Warrants or Warrant Shares not transferred within
such 60- day period will be subject to the provisions of this Section 4(b) upon
subsequent transfer.
SECTION 5. Warrants; Exercise of Warrants. Subject to the
terms of this Agreement and the vesting set forth below, each Warrant holder
shall have the right, which may be exercised commencing at the opening of
business on August 1, 1996 and until 5:00 p.m., Los Angeles time on October 3,
1998, to receive from the Company the number of fully paid and nonassessable
Warrant Shares which the holder may at the time be entitled to receive on
exercise of such Warrants and payment of the Exercise Price then in effect for
such Warrant Shares. The Holder shall be entitled to exercise fifty percent
(50%) of the Warrants beginning on August 1, 1996 and the remaining fifty
percent (50%) shall vest on August 1, 1997. In each case, the vesting shall be
conditioned upon the Consulting Agreement being in full force and effect and
unterminated on each such date. Termination of the Consulting Agreement shall
terminate and cancel all unvested Warrants on the date of termination. Each
vested Warrant not exercised prior to 5:00 p.m., Los Angeles time, on October
3, 1998 shall become void and all rights thereunder and all rights in respect
thereof under this agreement shall cease as of such time. No adjustments as to
dividends will be made upon exercise of the Warrants.
A Warrant may be exercised upon surrender to the Company at
its office designated for such purpose (the address of which is set forth in
Section 13 hereof) of the certificate or certificates evidencing the Warrants
to be exercised with the form of election to purchase on the reverse thereof
duly filled in and signed, and upon payment to the Company of the exercise
price (the "Exercise Price") which is set forth in the form of Warrant
Certificate attached hereto as Exhibit A as adjusted as herein provided, for
the number of Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price shall be made (i) in cash
or by certified or official bank check payable to the order of the Company, or
(ii) through the surrender of debt or preferred equity securities of the
Company having a principal amount or liquidation preference, as the case may
be, equal to the aggregate Exercise Price to be paid (the Company will pay the
accrued interest or dividends on such surrendered debt or preferred equity
securities in cash at the time of surrender notwithstanding the stated terms
thereof).
Subject to the provisions of Section 6 hereof, upon such
surrender of Warrants and payment of the Exercise Price the Company shall issue
and cause to be delivered with all
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<PAGE> 5
reasonable dispatch to or upon the written order of the holder and in such name
or names as the Warrant holder may designate, a certificate or certificates for
the number of full Warrant Shares issuable upon the exercise of such Warrants
together with cash as provided in Section 11; provided, however, that if any
consolidation, merger or lease or sale of assets is proposed to be effected by
the Company as described in subsection (c) of Section 10 hereof, or a tender
offer or an exchange offer for shares of Common Stock of the Company shall be
made, upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Company shall, as soon as possible, but in any event not later
than two business days thereafter, issue and cause to be delivered the full
number of Warrant Shares issuable upon the exercise of such Warrants in the
manner described in this sentence together with cash as provided in Section 11.
Such certificate or certificates shall be deemed to have been issued and any
individual, partnership, corporation, association, joint stock company, trust,
joint venture, unincorporated organization or governmental entity or any
subdivision thereof (each a "Person") so designated to be named therein shall
be deemed to have become a holder of record of such Warrant Shares as of the
date of the surrender of such Warrants and payment of the Exercise Price.
The Warrants shall be exercisable, at the election of the
holders thereof, either in full or from time to time in part and, in the event
that a certificate evidencing Warrants is exercised in respect of fewer than
all of the Warrant Shares issuable on such exercise at any time prior to the
date of expiration of the Warrants, a new certificate evidencing the remaining
Warrant or Warrants will be issued and delivered pursuant to the provisions of
this Section and of Section 2 hereof. Warrants shall be exercisable for
Warrant Shares only in an amount which is at least equal to the lesser of (i)
5,000 Warrant Shares or (ii) the full number of Warrant Shares for which the
Warrants held by the Warrant holder are then exercisable.
All Warrant Certificates surrendered upon exercise of Warrants
shall be canceled and disposed of by the Company. The Company shall keep
copies of this Agreement and any notices given or received hereunder available
for inspection by the holders during normal business hours at its office. The
Company covenants that all Warrant Shares which may be issued upon exercise of
Warrants will, upon issue, be fully paid, nonassessable, free of preemptive
rights and free from all taxes, liens, charges and security interests with
respect to the issue thereof.
SECTION 6. Payment of Taxes. The Company will pay all
documentary stamp taxes attributable to the initial issuance of Warrant Shares
upon the exercise of Warrants; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any
transfer involved in the issue of any Warrant Certificates or any certificates
for Warrant Shares in a name other than that of the registered holder of a
Warrant Certificate surrendered upon the exercise of a Warrant or to a Person
outside of the United States, and the Company shall not be required to issue or
deliver such Warrant Certificates unless or until the Person or Persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
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<PAGE> 6
SECTION 7. Mutilated or Missing Warrant Certificates. In
case any of the Warrant Certificates shall be mutilated, lost, stolen or
destroyed, the Company shall issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Warrant Certificate and an
indemnity, if requested, also reasonably satisfactory to it. Applicants for
such substitute Warrant Certificates shall also comply with such other
reasonable regulations and pay such other reasonable charges as the Company may
prescribe.
SECTION 8. Reservation of Warrant Shares. The Company will
at all times reserve and keep available, free from preemptive rights, out of
the aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
SECTION 9. Obtaining Stock Exchange Listings. The Company
will use its best efforts to obtain approval for the listing, upon official
notice of issuance, of the Warrant Shares on the principal securities exchanges
and markets within the United States of America, if any, on which other shares
of Common Stock are then listed.
SECTION 10. Adjustments of Exercise Price and Number of
Warrant Shares. The Exercise Price shall be subject to adjustment from time to
time as hereinafter provided. Upon each adjustment of the Exercise Price
pursuant to subsection (a), (b), (d) or (e) of this Section 10, the Warrant
holder shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of shares of Common Stock obtained
by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of shares of Common Stock issuable upon exercise of
such Warrant immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
(a) Adjustment for Certain Special Dividends. In
case the Company shall declare a dividend upon the Common Stock payable
otherwise than out of earnings or earned surplus, determined in accordance with
generally accepted accounting principles, and otherwise than in Common Stock or
securities convertible into Common Stock, the Exercise Price in effect
immediately prior to the declaration of such dividend shall be reduced by an
amount equal, in the case of a dividend in cash, to the amount per share of the
Common Stock so declared as payable otherwise than out of earnings or earned
surplus or, in the case of any other dividend, to the fair value per share of
the Common Stock or the property so declared as payable otherwise than out of
earnings or earned surplus, as determined, reasonably and in good faith, by the
board of directors of the Company. For the purposes of the foregoing a
dividend other than in cash shall be considered payable out of earnings or
earned surplus (other
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<PAGE> 7
than revaluation or paid-in surplus) only to the extent that such earnings or
earned surplus are charged an amount equal to the fair value of such dividend
as determined, in good faith and in the exercise of reasonable business
judgment, by the board of directors of the Company. Such reductions shall take
effect as of the record date for such dividend or, if a record is not taken, on
the date as of which the holders of Common Stock of record entitled to such
dividend are determined.
(b) Subdivision or Combination of Stock. In case
the Company shall at any time subdivide the outstanding shares of Common Stock
into a greater number of shares, whether through a stock split, stock dividend
or otherwise, the number of shares of Common Stock for which the Warrants are
exercisable shall be proportionately increased and the Exercise Price in effect
immediately prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the number of shares of Common Stock for which
the Warrants are exercisable shall be proportionately reduced and the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased.
(c) Adjustments for Consolidation, Merger, Sale
of Assets, Reorganization, Etc. In case the Company (i) consolidates with or
merges into any other Person and is not the continuing or surviving corporation
of such consolidation or merger, or (ii) permits any other Person to
consolidate with or merge into the Company and the Company is the continuing or
surviving corporation but in connection with such consolidation or merger, the
Common Stock is changed into or exchanged for stock or other securities of any
other corporation or cash or any other assets, or (iii) transfers all or
substantially all of its properties and assets to any other Person, or (iv)
effects a capital reorganization or reclassification of the capital stock of
the Company in such a way that holders of Common Stock shall be entitled to
receive stock, securities, cash or assets with respect to or in exchange for
Common Stock (each of the foregoing events in clauses (i) through (iv) being a
"Fundamental Change"), then in each such case proper provision shall be made so
that, upon the basis and upon the terms and in the manner provided in this
subsection (c), the Warrant holders, upon the exercise of the Warrants at any
time after the consummation of such Fundamental Change, shall be entitled to
receive (at the aggregate Exercise Price in effect for all shares of Common
Stock issuable upon such exercise immediately prior to such consummation as
adjusted to the time of such transaction), in lieu of shares of Common Stock
issuable upon such exercise prior to such consummation, the stock and other
securities, cash and assets to which such Warrant holders would have been
entitled upon such consummation if such Warrant holders had exercised such
Warrants immediately prior thereto (subject to adjustments subsequent to such
corporate action as nearly equivalent as possible to the adjustments provided
for in this Section 10). In the case of any Fundamental Change the Company
shall require the successor or acquiring corporation to assume the obligation
to perform each and every covenant and condition of this Agreement to be
performed and observed by the Company and all liabilities and obligations of
the Company hereunder.
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<PAGE> 8
(d) Rights, Options, Etc. In case the Company
shall issue rights, options, warrants or convertible securities to all or
substantially all holders of its Common Stock, without any charge to such
holders, entitling them to subscribe for or purchase Common Stock at a price
per share which is lower at the record date mentioned below than 95% of the
then-Current Market Price (as defined below), the Exercise Price in effect
immediately prior to such issuance shall be adjusted by multiplying such
Exercise Price by a fraction, of which the numerator shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
rights, options, warrants or convertible securities plus the number of shares
which the aggregate offering price (i.e., the consideration required to be
paid, if any, in connection with the exercise of any such rights) of the total
number of shares offered would purchase at such Current Market Price and of
which the denominator shall be the number of shares of Common stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities plus the number of additional shares of Common Stock
offered for subscription or purchase. Such adjustment shall be made whenever
such rights, options, warrants or convertible securities are issued, and shall
become effective immediately and retroactively to the record date for the
determination of stockholders entitled to receive such rights, options,
warrants or convertible securities. To the extent any of such rights, options,
warrants or convertible securities shall lapse, without the exercise thereof,
then the Exercise Price shall thereupon be readjusted as though such rights,
options, warrants or convertible securities were never issued.
(e) Adjustment of Price upon Issuance of Common
Stock. If and whenever after the date hereof the Company shall issue or sell
any shares of Common Stock for a consideration per share less than 95% of the
Current Market Price at the time of such issue or sale, then, forthwith upon
such issue or sale, the Exercise Price shall be reduced to the price
(calculated to the nearest cent) determined by multiplying the Exercise Price
in effect immediately prior to such time of such issue or sale by a fraction,
the numerator of which shall be the sum of (A) the number of shares of Common
Stock outstanding immediately prior to such issue or sale multiplied by the
Current Market Price immediately prior to such issue or sale plus (B) the
consideration received by the Company upon such issue or sale, and the
denominator of which shall be the product of (C) the total number of shares of
Common Stock outstanding immediately after such issue or sale, multiplied by
(D) the Current Market Price immediately prior to such issue or sale.
No adjustment of the Exercise Price, however, shall be made in
an amount less than $.01 per share, but any such lesser adjustment shall be
carried forward and shall be made at the time of, and together with, the next
subsequent adjustment which together with any adjustments so carried forward
shall amount to $.01 per share or more.
For purposes of this subsection (e) of this section, the
following clauses shall also be applicable:
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<PAGE> 9
(i) Issuance of Rights or Options. If at any
time after the Effective Date the Company grants (whether directly or
by assumption in a merger or otherwise) any rights (other than the
Warrants) to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock or other securities convertible
into or exchangeable for Common Stock (such convertible or
exchangeable securities being called "Convertible Securities") whether
or not such rights or options or the right to convert or exchange any
such Convertible Securities are immediately exercisable, and the price
per share for which Common Stock is issuable upon the exercise of such
rights or options or upon conversion or exchange of such Convertible
Securities (determined as provided below) is less than 95% of the
Current Market Price determined as of the date of granting such rights
or options, as the case may be, then the total maximum number of
shares of Common Stock issuable upon the exercise of such rights or
options or upon conversion or exchange of the total maximum amount of
such Convertible Securities issuable upon the exercise of such rights
or options shall (as of the date of granting of such rights or
options) be deemed to be outstanding and to have been issued for such
price per share. Except as provided in clause (iii) of this
subsection, no further adjustments of the Exercise Price shall be made
upon the actual issue of such Common Stock or of such Convertible
Securities upon exercise of such rights or options or upon the actual
issue of such Common Stock upon conversion or exchange of such
Convertible Securities. For the purposes of this clause (i), the
price per share for which Common Stock is issuable upon the exercise
of any such rights or options or upon conversion or exchange of any
such Convertible Securities shall be determined by dividing (A) the
total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the
minimum aggregate amount of additional consideration payable to the
Company upon the exercise of all such rights or options, plus, in the
case of such rights or options which relate to Convertible Securities,
or in the case of Convertible Securities, the minimum aggregate amount
of additional consideration, if any, payable upon the issue or sale of
such Convertible Securities and upon their conversion or exchange by
(B) the total number of shares of Common Stock issuable upon the
exercise of such rights or options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such
rights or options.
(ii) Issuance of Convertible Securities. If the
Company after the Effective Date issues (whether directly or by
assumption in a merger or otherwise) or sells any Convertible
Securities (other than pursuant to right or options for which an
adjustment to the Exercise Price has been made pursuant to Section
10(e)(i)), whether or not the rights to exchange or convert under such
securities are immediately exercisable, and the price per share for
which Common Stock is issuable upon conversion or exchange of such
Convertible Securities (determined as provided below) is less than 95%
of the Current Market Price determined as of the date of such issue or
sale of such Convertible Securities, as the case may be, then the
total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such
8
<PAGE> 10
Convertible Securities shall (as of the date of the issue or sale of
such Convertible Securities) be deemed to be outstanding and to have
been issued for such price per share, provided that (A) except as
provided in clause (iii) of this subsection no further adjustments of
the Exercise Price shall be made upon the actual issue of such Common
Stock upon conversion or exchange of such Convertible Securities, and
(B) if any such issue or sale of Convertible Securities occurs for
which adjustments of the Exercise Price have been or are to be made
pursuant to other provisions of this subsection (e), no further
adjustment of the Exercise Price shall be made by reason of such issue
or sale. For the purpose of this clause (ii), the price per share for
which Common Stock is issuable upon conversion or exchange of
Convertible Securities shall be determined by dividing (1) the total
amount received or receivable by the Company as consideration for the
issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (2) the total
number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities.
(iii) Change in Option Price or Conversion Rate.
If the purchase price provided for in any rights or options referred
to in clause (i) above, or the additional consideration, if any,
payable upon the conversion or exchange of Convertible Securities
referred to in clause (i) or (ii) above, or the rate at which any
Convertible Securities referred to in clause (i) or (ii) above are
convertible into or exchangeable for Common Stock, changes (other than
under or by reason of provisions designed to protect against
dilution), then the Exercise Price in effect at the time of such event
shall forthwith be readjusted to the Exercise Price which would have
been in effect at such time had such rights, options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at
the time initially granted, issued or sold, and on the expiration of
any such option or right or the termination of any such right to
convert or exchange such Convertible Securities, the Exercise Price
then in effect hereunder shall forthwith be increased to the Exercise
Price which would have been in effect at the time of such expiration
or termination had such right, option or Convertible Security, to the
extent outstanding immediately prior to such expiration or
termination, never been issued, and the Common Stock issuable
thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such right or option referred to in
clause (i) above or the rate at which any Convertible Securities
referred to in clause (i) or (ii) above are convertible into or
exchangeable for Common Stock shall decrease at any time under or by
reason of provisions with respect thereto designed to protect against
dilution, then in case of the delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of
any such Convertible Security, the Exercise Price then in effect
hereunder shall forthwith be adjusted to such amount as would have
obtained had such right, option or Convertible Security never been
issued as to such Common Stock and had adjustments been made upon the
issuance of the
9
<PAGE> 11
shares of Common Stock delivered as aforesaid, but only if as a result
of such adjustment the Exercise Price then in effect hereunder is
thereby decreased.
(iv) Consideration for Stock. If any shares of
Common Stock or Convertible Securities or any rights or options to
purchase any such Common Stock or Convertible Securities are issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Company therefor, without deduction of
any expenses incurred or any underwriting commissions or concessions
paid or allowed by the Company in connection with such issuance or
sale. If any shares of Common Stock or Convertible Securities or any
rights or options to purchase any such Common Stock or Convertible
Securities are issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Company
shall be deemed to be the fair market value of such consideration as
determined, in good faith and in the exercise of reasonable business
judgement, by the board of directors of the Company, without deduction
of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Company in connection with such
issuance or sale. If any shares of Common Stock or Convertible
Securities or any rights or options to purchase such shares of Common
Stock or Convertible Securities are issued in connection with any
merger or consolidation in which the Company is the surviving
corporation (other than any consolidation or merger in which the
previously outstanding shares of Common Stock of the Company shall be
changed into or exchanged for the stock or other securities of another
corporation), the amount of consideration for such shares or rights or
options shall be deemed to be the fair market value as determined, in
good faith and in the exercise of reasonable business judgment, by the
board of directors of the Company of such portion of the assets and
business of the non-surviving corporation as the board of directors
determines, in good faith and in the exercise of reasonable business
judgment, to be attributable to such shares of Common Stock,
Convertible Securities, rights or options, as the case may be.
(v) Determination of Current Market Price under
Certain Circumstances. Anything herein to the contrary
notwithstanding, in determining for any purpose hereunder whether in
consideration received by the Company is less than the Current Market
Price, the Current Market Price shall be determined as of the date the
Company and the other party to the transaction agree in writing on the
consideration to be received by the Company for the Common Stock or
Convertible Securities rather than on the date of payment of such
consideration.
(vi) Certain Issues Excepted. Anything herein to
the contrary notwithstanding, the Company shall not be required to
make any adjustment pursuant to this Section 10(e), either (A) if an
adjustment was made pursuant to the provisions of Sections 10(a), (b),
(c) or (d) upon such issuance, or (B) with respect to (1) the exercise
of one or more of the Warrants or any other options, warrants or
convertible
10
<PAGE> 12
securities (including without limitation the Series C Convertible
Preferred Stock, the Series A Convertible Preferred Stock and the 8%
Convertible Notes due September 1, 1999) which have been issued and
are outstanding as of the Effective Date, or (2) the issuance to
Holder of any Common Stock, or securities exchangeable or exercisable
for or convertible into Common Stock (or the exercise or conversion
thereof), for consideration below the Current Market Price, or (3) the
declaration or payment of dividends on the Series C Preferred Stock in
the form of shares of Series C Preferred Stock, or (4) the issuance of
Common Stock, or the issuance or exercise of options, rights or
warrants therefor, in connection with employee benefit plans,
employment or consultant agreements or similar transactions, and
pursuant to contracts entered into by the Company prior to the
Effective Date.
(f) Other Equitable Adjustments. If any event occurs as
to which the other provisions of this Section 10 are not strictly applicable
(or if strictly applicable would not fairly protect the rights of the Warrant
holders in accordance with the basic intent and principles of such provisions)
but, in the reasonable opinion of the Company's board of directors, an
adjustment should be made to fairly protect the rights of the Warrant holders
in accordance with the basic intent and principles of such provisions, then the
Company shall appoint a firm of independent certified public accountants (which
may be the regular auditors of the Company) of recognized national standing,
which shall give its opinion upon the adjustment, if any, to be made to protect
the Warrant holders against dilution on a basis consistent with the basic
intent and principles established in the other provisions of this Section 10.
Upon receipt of such opinion, the Company shall forthwith make the adjustments,
if any, described therein.
(g) Notice of Adjustment. Upon any adjustment of the
Exercise Price, then and in each such case the Company shall promptly deliver a
notice to the Warrant holders, which notice shall state the Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of each Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(h) Other Notices. In case at any time:
(i) the Company shall declare any cash dividend
on its Common Stock;
(ii) the Company shall pay any dividend payable in
stock upon its Common Stock or make any distribution (other than
regular cash dividends) to the holders of its Common Stock;
(iii) the Company shall offer for subscription pro
rata to the holders of its Common Stock any additional shares of stock
of any class or other rights;
11
<PAGE> 13
(iv) the Company shall authorize the distribution
to all holders of its Common Stock of evidences of its indebtedness or
assets (other than cash dividends or cash distributions payable out of
earnings or earned surplus or dividends payable in Common Stock);
(v) there shall be any capital reorganization, or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with another corporation (other than a
subsidiary of the Company in which the Company is the surviving or
continuing corporation and no change occurs in the Company's Common
Stock), or sale of all or substantially all of its assets to, another
Person;
(vi) there shall be a voluntary or involuntary
dissolution, liquidation, bankruptcy, assignment for the benefit of
creditors, or winding up of the Company; or
(vii) the Company proposes to take any other action
or an event occurs which would require an adjustment of the Exercise
Price pursuant to this Section 10;
then, in any one or more of said cases, the Company shall give written notice,
addressed to the Warrant holders at their addresses as shown on the books of
the Company, of (1) the date on which the books of the Company shall close or a
record shall be taken for such dividend, distribution or subscription rights,
or (2) the date (or, if not then known, a reasonable approximation thereof by
the Company) on which such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit
of creditors, winding up or other action, as the case may be, shall take place.
Such notice shall also specify (or, if not then known, reasonably approximate)
the date as of which the holders of Common Stock of record shall participate in
such dividend, distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger sale, dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors, winding up,
or other action, as the case may be. Such written notice shall be given at
least ten days prior to the action in question and not less than ten days prior
to the record date or the date on which the Company's transfer books are closed
in respect thereto. Notwithstanding any other provision of this Section 10(h),
the Company shall not be required to give any notice to Warrant holders
pursuant to this Section 10(h) if the giving of such notice would violate
applicable federal or state securities laws or the Company's obligations
thereunder.
(i) Adjustments below Par Value. Before taking any
action which would cause an adjustment pursuant to this Section 10 to reduce
the Exercise Price below the then par value (if any) of the Warrant Shares, the
Company will take any corporate action which may, in the opinion of its counsel
(which may be counsel employed by the Company), be necessary in order that the
Company may validly and legally issue fully paid and nonassessable Warrant
Shares at the Exercise Price as so adjusted.
12
<PAGE> 14
SECTION 11. Fractional Interests. The Company shall not be
required to issue fractional Warrant Shares on the exercise of Warrants. If
more than one Warrant shall be presented for exercise in full at the same time
by the same holder, the number of full Warrant Shares which shall be issuable
upon the exercise thereof shall be computed on the basis of the aggregate
number of Warrant Shares purchasable on exercise of the Warrants so presented.
If any fraction of a Warrant Share would, except for the provisions of this
Section 11, be issuable on the exercise of any Warrants (or specified portion
thereof), the Company shall pay an amount in cash equal to the fair market
value of such fractional share.
SECTION 12. No Stockholder Rights. Nothing contained in this
Agreement or in any of the Warrant Certificates shall be construed as
conferring upon the holders thereof the right to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or
the election of Directors of the Company or any other matter, or any rights
whatsoever as stockholders of the Company.
SECTION 13. Notices to Company and Warrant Holder. All
notices, demands or other communications to any party under this Agreement
shall be in writing Including facsimile transmission); shall be sent only by
facsimile, by first class United States mail, by nationally recognized courier
service, or by personal delivery; and shall be given, if to the Company to:
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Attention: W. Tucker Lemon, Vice President,
General Counsel and Secretary
Fax: (310) 280-0476
if to Holder, to:
Intralink Film Graphic Design
155 North LaPeer Drive
Los Angeles, CA 90048
Attention: Mr. Anthony Goldschmidt
The Company or the Holder by notice to the other pursuant to
this Section 13 may designate additional or different addresses for subsequent
notices or communications.
SECTION 14. Supplements and Amendments. The Company may from
time to time supplement or amend this Agreement without the approval of any
holders of Warrant Certificates in order to cure any ambiguity or to correct or
supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company may
13
<PAGE> 15
deem necessary or desirable and which shall not in any way adversely affect the
interests of the holders of Warrant Certificates.
SECTION 15. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company shall bind and inure to the
benefit of its respective successors and assigns hereunder.
SECTION 16. Termination. This Agreement shall terminate at
5:00 p.m., Los Angeles time on October 3, 1998. Notwithstanding the foregoing,
this Agreement will terminate on any earlier date if all Warrants have been
exercised.
SECTION 17. Governing Law. This Agreement and each Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the internal laws of said State.
SECTION 19. Benefits of This Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the Company and
the registered holders of the Warrant Certificates any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for
the sole and exclusive benefit of the Company and the registered holders of the
Warrant Certificates.
SECTION 20. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
[Signature Page Follows]
14
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
SHOWSCAN ENTERTAINMENT INC.
By: /s/ WILLIAM SOADY
_______________________________________
Title: President and CEO
_______________________________________
[Seal]
Attest: /s/ W. TUCKER LEMON
________________________
Title: Vice President
INTRALINK FILM GRAPHIC DESIGN
By: /s/ DAVID H. STERN
__________________________________________
Title: Senior Vice President
_______________________________________
15
<PAGE> 17
EXHIBIT A
[Form of Warrant Certificate]
[Face]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. SAID SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT.
EXERCISABLE ON OR AFTER AUGUST 1, 1996 AND
ON OR BEFORE OCTOBER 3, 1998
30,000 Warrants
Warrant Certificate
SHOWSCAN ENTERTAINMENT INC.
This Warrant Certificate certifies that Intralink Film Graphic
Design, or registered assigns, is the registered holder of Warrants expiring
October 3, 1998 (the "Warrants") to purchase Common Stock, par value $.001 per
share (the "Common Stock"), of Showscan Entertainment Inc., a Delaware
corporation (the "Company"). Each Warrant entitles the holder upon exercise to
receive from the Company on or before 5:00 p.m. Los Angeles Time on October 3,
1998, one fully paid and nonassessable share of Common Stock (a "Warrant
Share") at the initial exercise price (the "Exercise Price") of $6.4375 payable
in lawful money of the United States of America upon surrender of this Warrant
Certificate and payment of the Exercise Price at the office of the Company
designated for such purpose, but only subject to the conditions set forth
herein and in the Warrant Agreement referred to on the reverse hereof.
No Warrant may be exercised after 5:00 p.m., Los Angeles Time
on October 3, 1998 and to the extent not exercised by such time such Warrants
shall become void.
Reference is hereby made to the further provisions of this
Warrant Certificate set forth on the reverse hereof and such further provisions
shall for all purposes have the same effect as though fully set forth at this
place.
This Warrant Certificate shall not be valid unless
countersigned by the Company, as such term is used in the Warrant Agreement.
A-1
<PAGE> 18
IN WITNESS WHEREOF, Showscan Entertainment Inc. has
caused this Warrant Certificate to be signed by its President and by
its Secretary and has caused its corporate seal to be affixed hereunto
or imprinted hereon.
Dated: October 3, 1995
SHOWSCAN ENTERTAINMENT INC.
By _____________________________
President
By _____________________________
Secretary
A-2
<PAGE> 19
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants expiring October 3, 1998 entitling the
holder on exercise to receive shares of Common Stock, par value $.001 per
share, of the Company (the "Common Stock"), and are issued or to be issued
pursuant to a Warrant Agreement dated as of October 3, 1995 (the "Warrant
Agreement"), duly executed and delivered by the Company, which Warrant
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants. A copy of the Warrant Agreement
may be obtained by the holder hereof upon written request to the Company.
Warrants may be exercised at any time on or after August 1,
1996 and on or before October 3, 1998. The holder of Warrants evidenced by
this Warrant Certificate may exercise them by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with payment of the Exercise Price in cash at
the office of the Company designated for such purpose. In the event that upon
any exercise of Warrants evidenced hereby the number of Warrants exercised
shall be less than the total number of Warrants evidenced hereby, there shall
be issued to the holder hereof or its assignee a new Warrant Certificate
evidencing the number of Warrants not exercised. No adjustment shall be made
for any dividends on any Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price set forth on the face hereof may, subject to
certain conditions, be adjusted. If the Exercise Price is adjusted, the
Warrant Agreement provides that the number of shares of Common Stock issuable
upon the exercise of each Warrant shall be adjusted. No fractions of a share
of Common Stock will be issued upon the exercise of any Warrant, but the
Company will pay the cash value thereof determined as provided in the Warrant
Agreement.
Warrant Certificates, when surrendered at the office of the
Company by the registered holder thereof in person or by legal representative
or attorney duly authorized in writing, may be exchanged, in the manner and
subject to the limitations provided in the Warrant Agreement, but without
payment of any service charge, for another Warrant Certificate or Warrant
Certificates of like tenor evidencing in the aggregate a like number of
Warrants.
Upon due presentation for registration of transfer of this
Warrant Certificate at the office of the Company a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in
A-3
<PAGE> 20
exchange for this Warrant Certificate, subject to the limitations provided in
the Warrant Agreement, without charge except for any tax or other governmental
charge imposed in connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
A-4
<PAGE> 21
[Form of Election to Purchase]
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to receive __________ shares of
Common Stock and herewith tenders payment for such shares to the order of
Showscan Entertainment Inc. in the amount of $______ in accordance with the
terms hereof. The undersigned requests that a certificate for such shares be
registered in the name of ________________, whose address is
_______________________________ and that such shares be delivered to
________________ whose address is ___________ ______________________. If said
number of shares is less than all of the shares of Common Stock purchasable
hereunder, the undersigned requests that a new Warrant Certificate representing
the remaining balance of such shares be registered in the name of
______________, whose address is _________________________, and that such
Warrant Certificate be delivered to _________________, whose address is
__________________.
Signature:
Date:
Signature:
A-5
<PAGE> 1
Exhibit 10.33
OPERATING AGREEMENT
OF
SHOWSCAN MALONEY, LLC
August 25, 1995
<PAGE> 2
OPERATING AGREEMENT
OF SHOWSCAN MALONEY, LLC
This Operating Agreement ("Agreement") is entered into as of August
25, 1995, by and among SHOWSCAN ATTRACTIONS VENTURE, a California general
partnership ("SHOWSCAN"), and MALONEY DEVELOPMENT PARTNERSHIP LTD., a Texas
limited partnership ("MALONEY"), as the sole members (SHOWSCAN and MALONEY are
referred to herein individually as a "Member" and collectively as the
"Members"), all of whom do hereby form a limited liability company pursuant to
the Texas Limited Liability Company Act (the "Act"), upon the following terms
and conditions:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement, the terms set forth in Exhibit
"A," when used herein with initial capitalization and not otherwise defined
herein, shall have the meanings set forth on Exhibit "A". All other terms used
herein with initial capitalization shall have the meanings set forth herein
where the terms first are defined.
ARTICLE 2
FORMATION, OPERATING AGREEMENT, NAME, PRINCIPAL EXECUTIVE OFFICE AND AGENT
2.1 Creation of Company. The parties hereto form a limited
liability company (the "Company") pursuant to the provisions of the Act, and
adopt and enter into this Agreement upon the terms and conditions set forth
herein. To the extent the rights or obligations of the Members are different
by reasons of any provision of this Agreement than they would be in the absence
of such provisions, this Agreement, shall, to the extent permitted by the Act,
control.
2.2 Name. The name of the Company shall be SHOWSCAN MALONEY,
LLC, a Texas limited liability company. The business of the Company may be
2
<PAGE> 3
conducted under any name chosen by the Members, and the Members may, in their
sole discretion, by unanimous agreement, at any time and from time to time,
change the name of the Company.
2.3 Principal Office. The principal place of business of the
Company shall be located at 245 East Commerce Street, San Antonio, Texas 78205,
or at such other place in the State of Texas as the Members may from time to
time determine by unanimous agreement.
2.4 Agent. The name and address of the agent for service of
process is MALONEY, 245 East Commerce Street, San Antonio, Texas 78205.
ARTICLE 3
PURPOSES, OBJECTIVES AND TERM OF THE COMPANY
3.1 Term. The Company's term commenced with the filing of its
Articles of Organization with the Secretary of State of the State of Texas on
September 29, 1995 as document 7014146-22, and shall continue until December
31, 2045, unless terminated or dissolved sooner, in accordance with the
provisions of this Agreement.
3.2 Purpose. The primary purpose of the Company shall be to
acquire, own, develop and operate a high definition based SHOWSCAN simulation
Theatre (the "Showscan Theatre"), comprised of one twenty four seat, H. D.,
Intamin Maxi-Motion motion base and seats, to be located on the San Antonio
RiverWalk in San Antonio, Texas. In addition, the Company has been formed for
the purpose of purchasing, acquiring, holding, owning, maintaining, managing,
improving, developing, operating, selling, transferring, conveying, leasing,
mortgaging, exchanging or otherwise disposing of or dealing in or with property
of every and any nature whatsoever, including without limitation interests in
other limited liability companies, partnerships, corporations or other entities
and engaging in any lawful act or activity for which a limited liability
company may be organized under Texas law and which is related to the primary
purpose of the Company. The Company may do and perform everything which may be
necessary, advisable, suitable or proper for the carrying out of its purpose
and any such business and perform any and all acts in connection with
accomplishing any of the purposes set forth in this Section.
3
<PAGE> 4
ARTICLE 4
CAPITAL CONTRIBUTIONS, LLC INTERESTS, PERCENTAGES AND CAPITAL ACCOUNTS
4.1 Purchase of LLC Interests. The Members shall purchase equal
interests ("LLC Interests") in the Company for a Capital Contribution of
$1,000, each, in cash. The LLC Interests for each Member shall be 50%. Each
LLC Interest, upon payment in full of the purchase price of $1,000, shall,
except as described below, be fully paid and nonassessable and no Member shall
be required to make further Capital Contributions to the Company. Unless
otherwise agreed, the Members agree to contribute to the Company equally such
funds as may be required to fund Company operations, as may be determined from
time to time by unanimous consent of the Members.
4.2 Additional Required Capital Contributions. The Members shall
make in kind capital contributions as follows:
4.2.1 Showscan. SHOWSCAN shall make in-kind capital
contributions to the Company of equipment, including motion bases, seats and
related mechanical equipment, shipping, installation and pre-show equipment
(the "Showscan Equipment"). Such equipment shall be valued at {text redacted}
of Showscan's {text redacted} for such equipment, estimated at {text redacted}
(the actual price to be determined following installation), which value the
parties hereto ascribe to be the fair market value of such capital
contribution.
4.2.2 Maloney. MALONEY shall make in-kind capital
contributions to the Company by constructing the tenant improvements to the
premises to be occupied by the Company for the Showscan Theatre at 245 East
Commerce Street, San Antonio, Texas 78205 (the "Premises") and contributing
{text redacted} and {text redacted} to the Premises for the {text redacted} of
{text redacted} of the Showscan Theatre. The tenant improvements shall be
valued at their actual direct cost for the goods and services provided, which
value the parties hereto ascribe to be the fair market value of such capital
contribution. The parties agree that the present value of the minimum
guaranteed rent and common area maintenance charges, which the parties agree is
{text redacted}, is the fair market value of MALONEY s contribution.
Accordingly, to equalize the initial Capital Contributions of the Members, as
described in Section 4.2.3 below, it is currently estimated that MALONEY will
be required to make a cash Capital Contribution of approximately {text
redacted}, which sum MALONEY
4
<PAGE> 5
agrees to pay {text redacted} at the time that SHOWSCAN orders the motion bases
included in the Showscan Equipment and {text redacted} in accordance with
Section 4.2.3, all of which sums shall be immediately disbursed, as a return of
capital, to SHOWSCAN.
4.2.3 Equalization of Capital Accounts; Working Capital.
Upon the opening of the Showscan Theatres (which shall be the first date of
paid public admissions to the Showscan Theatres), the Members shall certify to
each other (with documentation) the direct cost of their respective in-kind
contributions. Upon acceptance of such cost statements, the Member with the
lower in-kind capital contribution shall contribute cash to the Company in an
amount equal to fifty percent (50%) of such deficit, which cash will be
immediately disbursed to the other Member, as a return of Capital, so as to
equalize the capital accounts of the Members. After such equalization of
Capital Contributions, the Members shall agree on the working capital needs of
the Company and, to the extent necessary make additional, equal, cash
contributions to the capital of the Company.
4.3 Further Contributions, Interest on Capital and Withdrawal of
Capital Contributions. There shall be no required capital contributions other
than as expressly set forth in this Agreement. No Member shall have the right
to make voluntary capital contributions to the Company, other than as expressly
set forth in this Agreement, without the prior written consent of the other
Member. There shall be no interest payable on any capital contributions made
by any Member to the Company. No Member shall have the right or power to (a)
withdraw or reduce his contribution to the capital of the Company except as a
result of the dissolution of the Company or as otherwise provided by law, or
(b) demand or receive property other than cash in return for his contribution.
Except as described herein, no Member shall have priority over any other Member
either as to the return of contributions of capital or as to net income, net
loss, tax credits, other items or distributions.
4.4 Capital Accounts. A capital account ("Capital Account") shall
be established for each Member, in accordance with the definition contained in
Exhibit A. The provisions of this Agreement relating to the maintenance of
Capital Accounts are intended to comply with Regulations Section 1.704-1(b),
and shall be interpreted and applied in a manner consistent with such
Regulations. To the extent such provisions are inconsistent with such
Regulations or are incomplete with respect thereto, Capital Accounts shall be
maintained in accordance with such Regulations. In the event a Member, or the
holder of an Economic Interest, transfers an LLC Interest in accordance
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with the terms of this Agreement, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the transferred LLC
Interest.
4.5 Loans by Members. With the approval of each of the Members,
either Member may loan funds to the Company at such terms and rates as the
Company may deem reasonable at the time. It is agreed among the Members that
any liability of the Company shall be satisfied from Company assets only.
4.6 No Personal Liability. Members shall not be bound by, or be
personally liable for, any judgment of a court, or in any other manner for any
of the debts, expenses, liabilities, contracts, leases or obligations of the
Company.
4.7 Liability for Certain Distributions. A Member or Assignee of
Record may be obligated to return an improper Distribution received from the
Company to the extent that (a) the Member or assignee of record has actual
knowledge of the facts indicating the impropriety of the Distribution and (b)
immediately after giving effect to such Distribution, all liabilities of the
Company, other than liabilities to Members or Assignees of Record on account of
their LLC Interest and liabilities as to which recourse of creditors is limited
to specified property of the Company, exceed the fair market value of the
Company's assets, provided that the fair market value of any property that is
subject to a liability as to which recourse of creditors is so limited shall be
included in the Company's assets only to the extent that the fair market value
of the property exceeds the liability.
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ARTICLE 5
MANAGEMENT OF THE COMPANY
5.1 Time Devoted to the Company. The Members shall devote such
time on behalf of the Company as may be necessary to conduct the Company
business.
5.2 Management. SHOWSCAN is hereby appointed as the sole Manager
of the Company. SHOWSCAN shall have such rights, duties and powers as are
specified in this Agreement, by the Act or conferred upon it by Vote of the
Members.
5.2.1 Duties of the Manager The Manager is the general
manager and chief executive officer of the Company and has, subject to the
control of the Members, general supervision, direction, and control of the
business of the Company. The Manager shall preside at all meetings of the
Members. The Manager shall have the general powers and duties of management
typically vested in the office of president of a corporation, and such other
powers and duties as may be prescribed by the Members. Until the Members shall
have elected more than one Manager, the term "Manager" as used in this
Agreement, shall mean the Person who alone has the powers and duties specified
in this Section.
5.2.2 Subordinate Officers. The Members may appoint a
secretary, a chief financial officer, and such other officers of the Company as
the business of the Company may require, each of whom shall hold office for
such period, have such authority and perform such duties as are provided in
this Agreement, or as the Members determine.
5.2.3 Removal and Resignation. Any Manager or other officer
of the Company may be removed, with or without cause, by the Vote of the
Members. Any Manager or other officer of the Company may resign at any time
without prejudice to any rights of the Company under any contract to which the
Manager or other officer of the Company is a party, by giving written notice to
the Members, or to the Manager, as applicable. Any such resignation shall take
effect at the date of the receipt of such notice or at any later time specified
therein; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
5.2.4 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled by a
Vote of the Members
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through the appointment of a successor officer who shall hold the office for
the unexpired term.
5.3 Acts Requiring Unanimous Consent. Notwithstanding the foregoing,
neither the Manager or any other Member shall have the authority, without the
written consent or ratification of all the other Members, to do any of the acts
enumerated below:
5.3.1 Borrow money in the Company's name in the ordinary
course of business for trade credit in an aggregate amount which exceeds
$50,000 or for any purposes not in the ordinary course of business;
5.3.2 Transfer, hypothecate, compromise or release any
Company claim except on payment in full;
5.3.3 Except as to operation of the Showscan Theatre in the
ordinary course of business, lease, license, hypothecate or otherwise dispose
of any Company property, or enter into any contract for any such purpose;
5.3.4 Knowingly suffer or cause anything to be done whereby
Company property may be seized or attached;
5.3.5 Do any act in contravention of, or amend, this
Agreement;
5.3.6 Do any act which would make it impossible to carry on
the ordinary business of the Company;
5.3.7 Make an assignment for the benefit of creditors;
5.3.8 Contest a judgment against the Company, submit a
Company claim to arbitration, commence any legal action on behalf of the
Company, settle any arbitration or litigation or confess a judgment against the
Company;
5.3.9 Possess Company property or assign rights to specific
Company property except in the ordinary course of Company business;
5.3.10 Enter into any contract for any such purpose
containing a payment obligation in excess of an aggregate of $50,000;
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5.3.11 Make any expenditures or enter into any agreement
obligating the Company to make any expenditures in excess of an aggregate of
$50,000;
5.3.12 Loan any Company funds;
5.3.13 Guaranty or secure the obligations of any person on
behalf of the Company;
5.3.14 Employ any employee or independent contractor to
perform services for the Company where the aggregate compensation for such
person will exceed $50,000;
5.3.15 Enter into and execute any agreements on behalf of the
Company which are restricted by this Section 5.3, except in accordance with
Section 5.4;
5.3.16 Except as provided in Section 6.2 below, make
distributions of cash or property from the Company; or
5.3.17 Appoint or discharge the Company's independent
auditors; provided that Ernst & Young are approved as the Company s independent
auditors.
Any Member who violates any of the terms, provisions and
conditions of this Agreement, in addition to being subject to all remedies,
liabilities and obligations which may imposed upon it therefor by law, shall
indemnify and save harmless the other Member from any and all claims, losses
and liabilities, demands and actions which may arise out of or result from such
violation.
5.4 Documents. All documents of any description, type or kind, to
bind the Company, shall require the signature of all Members, except those
agreements not restricted by Section 5.3 above which would require only one
signature.
5.5 Company Indemnification. The Company shall indemnify and hold
harmless each Member and its employees, agents and assigns, from any loss or
damage incurred by them or by the Company in connection with the business of
the Company, including costs and reasonable attorneys' fees and any amounts
expended in the settlement of any claims or loss or damage, provided that, if
such loss or liability arises out of any action or inaction of each Member, the
Member must have determined, in good faith, that such course of conduct was in
the best interests of the Company and did not constitute negligence or willful
misconduct by the Member and,
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provided further, that any such indemnification shall be recoverable only from
the assets of the Company and not from the assets of the Members.
5.6 Availability of Films. SHOWSCAN agrees to make available to
the Company, for exhibition at the Showscan Theatre, the full use of its entire
current and future library of film software unless SHOWSCAN has entered into a
written agreement with respect to future films which prohibits SHOWSCAN from
making a particular film available to third parties in general or in particular
geographic areas. In exchange for access to SHOWSCAN's film library, the
Company will pay to SHOWSCAN film rental ("Film Rental") as described below.
5.7 Other Projects. Subject to Section 5.11, each Member may,
independently or with others, engage in or possess an interest in other
business ventures of every nature and description. Subject to Section 5.11,
the Members may engage in or have an interest in other business ventures of any
kind, including businesses competing directly with the business of the Company,
independently or with others. Neither the Company nor any Member shall have by
virtue of this Agreement any rights in or to those independent ventures or to
be offered the opportunity to participate in those ventures.
5.8 Compensation.
5.8.1 Management Fee. For its services in providing the
day-to-day management of the Showscan Theatre, SHOWSCAN shall receive a
management fee (the "Management Fee") equal to {text redacted} of the {text
redacted} of the Company. The Management Fee shall be payable within thirty
(30) days of the end of each calendar month.
5.8.2 Film Rental. In addition to the foregoing, SHOWSCAN
shall be entitled to receive Film Rental for the use of SHOWSCAN owned or
controlled films, in an amount equal to {text redacted} of the {text redacted}
of the Showscan Theatre on the first {text redacted} and {text redacted} of
such receipts, and {text redacted} thereafter. Film Rental shall be payable
within thirty (30) days of the end of each calendar month.
5.8.3 Rent. The Company shall lease the Premises from
MALONEY. The lease shall be pursuant to a separate lease agreement which shall
provide for the lease of three thousand one hundred twenty-five (3,125) square
feet of street level area, all according to terms as may be mutually agreed
between the Members in such
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agreement; provided however, that the {text redacted} and {text redacted} shall
be contributed to the Company as provided in Section 4.2.2 above.
5.8.4 No Other Fees Unless Agreed. Except as may be
otherwise agreed upon by the Members, no Member or their Affiliates shall be
entitled to any salary or other compensation, however defined, directly or
indirectly, from the Company, and shall only be entitled to reimbursement of
ordinary and necessary expenses incurred on behalf of the Company.
5.8.5 Treatment of Fees. Payment of fees in accordance with
this Section to Members or affiliates of Members shall be treated as either an
I.R.S. Code Section 707(a) or 707(c) expenditure and not as a Company
distribution, and accordingly will be treated as an expense deduction of the
Company in arriving at net income and/or net loss. As a result, any such
payment of fees will not affect the partners' capital accounts except to the
extent that they impact the determination of net income or net loss of the
Company.
5.9 Company Expenses; Reimbursement; Annual Budget. All Company
expenses shall, to the extent practical, be billed directly to and be payable
by the Company. Each Member or employees of the Company or of a Member may
charge the Company and be reimbursed by it for any and all reasonable, ordinary
and necessary expenses actually incurred by them in connection with the
performance of their responsibilities as a Member of the Company and the
operation of the Company's business. At least 90 days before commencement of
each fiscal year of the Company, the Members shall unanimously agree upon an
administrative budget for the Company and the capital contributions, if any, of
the Members required to fund such budget.
5.10 No Rebates. No rebates or give-ups shall be made either
directly or indirectly by the Company to a Member, nor shall any Member or
their Affiliates receive any fee, directly or indirectly, from a third party on
account of business being conducted with the Company.
5.11 Exclusivity. SHOWSCAN grants to the Company the exclusive
right (except for existing locations) to operate a SHOWSCAN motion simulation
Theatre in a {text redacted} of {text redacted}, as depicted on Exhibit B
hereof, of the {text redacted} (the "Exclusive Zone"). The Company and Maloney
grants to SHOWSCAN the exclusive right to provide any motion simulation systems
installed at any location now or hereafter owned or operated by the Company or
Maloney in the Exclusive Zone. The
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provisions of this Section 5.11 shall expire and be of no further force or
effect upon the termination or expiration of this Agreement.
5.12 Concessions and Merchandising. Concessions and merchandising
revenue generated by the Showscan Theatre shall be included in the gross
revenues of the Company.
5.13 Intellectual Property; Confidentiality. SHOWSCAN and MALONEY
expressly recognize and agree that all uses by any party of any patents,
trademarks or trade names of any other party shall be subject to the prior
express written approval of the party whose patent, trademark or trade name is
proposed to be used. This Agreement does not constitute any license or other
right to use any patent, trademark or trade name of any party. Any such
license for use of Showscan intellectual property in connection with the
operation of the Showscan Theatre will be part of a separate license agreement
between Showscan Entertainment Inc. and the Company. Each party agrees to
treat all non- public information received from any other party during the term
of this Agreement on a strictly confidential basis for use only in connection
with the operation of the Showscan Theatre and the administration of this
Agreement.
ARTICLE 6
ALLOCATION OF NET INCOME, NET LOSS
TAX CREDITS, OTHER ITEMS AND DISTRIBUTIONS
6.1 Allocation of Net Income and Net Loss. All Company Net Income
and Net Loss shall be allocated on the Company books in the following manner:
6.1.1 Allocation of Net Loss. Net Loss shall be allocated in
the following manner and order of priority:
6.1.1.1 First, Net Loss shall be allocated in the
amount of and in the same manner as Net Income, if any, was previously
allocated under subparagraph 6.1.2.2;
6.1.1.2 Second, Net Loss shall be allocated among
the Members in proportion to the aggregate Net Capital Contributions made by
each Member until each Member has been allocated Net Loss pursuant to this
Section 6.1.1.2 equal to the amount of such Member's Net Capital Contributions.
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6.1.1.3 Third, any additional Net Loss shall be
allocated among the Members in proportion to their LLC Interests.
The Net Loss allocated pursuant to Sections 6.1.1.2 and
6.1.1.3 hereof shall not exceed the maximum amount of Net Loss that can be so
allocated without causing any Member to have an Adjusted Capital Account
Deficit at the end of any fiscal year. In the event some but not all of the
Members would have Adjusted Capital Account Deficits as a consequence of an
allocation of Net Loss pursuant to Sections 6.1.1.2 and 6.1.1.3, the limitation
set forth in this Section shall be applied on an LLC Interest Holder basis so
as to allocate the maximum permissible Net Loss to each Member under
Regulations Section l.704-1(b)(2)(ii)(d).
6.1.2 Allocation of Net Income. Net Income shall be
allocated in the following manner and order of priority:
6.1.2.1 First, to the extent any Net Loss has been
previously allocated among the Members under Section 6.1.1.2 or 6.1.1.3 and has
not been previously recouped under this Section 6.1.2.1, Net Income shall be
allocated among the Members in the same ratio as the prior Net Loss was
allocated. The order of recouping such Net Loss shall be first the Net Loss
allocated under Section 6.1.1.3, and then Section 6.1.1.2
6.1.2.2 Second, to the Members in the ratio of their
Preferred Returns, if any, until the Member(s) have been allocated an amount of
Net Income under this subparagraph 6.1.2.2 equal to the Preferred Return,
calculated to the last day of the current accounting period, on the Surplus
Contribution of the Member;
6.1.2.3 Third, Net Income shall be allocated among
the Members in proportion to their LLC Interests.
6.2 Definitional Issues Related to Allocation of Income, Gain,
Loss, Deduction and Credit. Distributions attributable to a year shall be
deemed to occur prior to allocations referable to such year. Each item of
Company income, gain, loss, deduction and credit shall be allocated at the end
of each fiscal year of the Company among the Members in accordance with their
LLC Interests.
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6.3 Distributions.
6.3.1 Required Tax Distributions. For each taxable year in
which the Company has a positive taxable income for federal income tax purposes
("Taxable Income"), the Company shall distribute to the Members, in the manner
described below, within ninety (90) days of the end of the taxable year, an
amount equal to the product of (a) the aggregate amount of Taxable Income for
the year and (b) the Combined Tax Rate (the "Tax Distribution"). The Tax
Distribution shall be distributed among the Members in proportion to their
share of taxable income allocated to each of them for the taxable year. The
"Combined Tax Rate" for a given year shall be equal to (a) the greater of the
highest corporate federal income tax rate or the highest individual federal tax
rate (including any surtax on high income taxpayers) for such year ("Federal
Rate") plus (b) the greater of the highest state corporate franchise income tax
rate or the sum of (i) the highest individual state income tax rate for such
year and (ii) the corporate franchise income tax on Subchapter S Corporations
("State Rate") less (c) an amount equal to the product of (i) the Federal Rate
and (ii) the State Rate. For example, if the Federal Rate is 40% and the State
Rate is 10%, the Combined Tax Rate is 46% [40% + 10% - (40% x 10%)]. The Tax
Distributions to be made under this subparagraph 6.3.1 are mandatory.
6.3.2 Definition and Distribution of Excess Cash Flow.
6.3.2.1 Excess Cash Flow. The entire Excess Cash
Flow (as defined below) of the Company during each fiscal year shall be
distributed as set forth in Section 6.3.2.2 of this Agreement. The term
"Excess Cash Flow" shall mean the amount by which gross cash receipts (not
including capital contributions or loans, but including any amounts released
from Working Capital (as defined below) of the Company during such fiscal year
exceed the aggregate of (a) all costs and expenditures (whether expended or
capitalized) paid during such calendar year and the payment of Tax
Distributions pursuant to Section 6.3.1 hereof (without deduction of any charge
for depreciation, amortization, or other expenses not paid in cash or
property), but excluding costs and expenditures paid from capital
contributions, loans or Working Capital; (b) the cost of debt servicing, if
any, including principal and interest, paid during each fiscal year on loans;
and (c) any amount which the Company shall add (except out of capital
contributions or loans) to working capital or reserves ("Working Capital").
The Members agree that the Working Capital of the Company shall be an amount
determined by the Members, from time to time, to be sufficient to meet the
reasonably foreseeable cash operating needs of the Company.
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6.3.2.2 Distributions of Excess Cash Flow shall be
distributed in the following order of priority:
6.3.2.2.1 First, to the Members, in the
ratio of their Preferred Return, until the Members have received an aggregate
amount pursuant to this Section 6.3.2.2.1 equal to such Preferred Return;
6.3.2.2.2 Second, to the Member with a
Surplus Contribution until such Member has been allocated an amount equal to
the Surplus Contribution (i.e. the Capital Contributions of the Members have
been equalized);
6.3.2.2.3 Third, to the Members, in the
ratio of their Net Capital Contributions until the Members have received an
aggregate amount pursuant to this Section 6.3.2.2.3 equal to such Net Capital
Contributions; and
6.3.2.2.4 Thereafter, to the Members in
accordance with their LLC Interests.
6.4 Residual Allocations. Except as otherwise provided in this
Agreement, all items of income, gain, loss, deduction, and any other
allocations not otherwise provided for shall be divided among the Members in
the same proportions as they share Net Income or Net Losses, as the case may
be, for the Fiscal Year.
6.5 Qualified Income Offset. If any Member unexpectedly receives
any adjustments, allocation or distributions described in clauses (4), (5) or
(6) of Regulations Section 1.704-1(b)(2)(ii)(d), items of income shall be
specially allocated to such Member in an amount and manner sufficient to
eliminate the Adjusted Capital Account Deficit created by such adjustments,
allocations or distributions as quickly as possible. This Section is intended
to constitute a "qualified income offset" within the meaning of Regulations
Section 1.704-1(b)(2)(ii)(d)(3).
6.6 Minimum Gain Chargeback. If there is a net decrease in
Minimum Gain during a Fiscal Year, each Member will be allocated, before any
other allocation under this Article, items of income and gain for such Fiscal
Year (and if necessary, subsequent years) in proportion to and to the extent of
an amount equal to such Member's share of the net decrease in Minimum Gain
determined in accordance with Regulations Section 1.704-2(g)(2). This Section
is intended to comply with, and shall be interpreted consistently with, the
"minimum gain chargeback" provisions of Regulations Section 1.704-2(f).
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6.7 Member Nonrecourse Debt Minimum Gain Chargeback.
Notwithstanding any other provision of this Article, with the sole exception of
the preceding Section, if there is a net decrease in Member Nonrecourse Debt
Minimum Gain attributable to Member Nonrecourse Debt during any Fiscal Year,
each Member who has a share of the Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Treasury Regulations Section 1.704-2(I)(5), shall be specially allocated items
of income and gain for such year (and, if necessary, subsequent years) in an
amount equal to such Member's share of the net decrease in Member Nonrecourse
Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in
accordance with Regulations Section 1.704- 2(I)(4). Allocations pursuant to
the previous sentence shall be made in proportion to the respective amounts
required to be allocated to each Member pursuant thereto. The items to be so
allocated shall be determined in accordance with Regulations Section
1.704-2(I)(4). This Section is intended to comply with a minimum gain
chargeback requirement of that Section of the Regulations and shall be
interpreted consistently therewith.
6.8 Member Nonrecourse Deductions. Any Member Nonrecourse
Deductions for any Fiscal Year or other period shall be specially allocated to
the Member who bears (or is deemed to bear) the economic risk of loss with
respect to the Member Nonrecourse Debt to which such Member Nonrecourse
Deductions are attributable in accordance with Regulations Section
1.704-2(I)(2).
6.9 Special Allocations. Any special allocations of items of Net
Income pursuant to the preceding Sections shall be taken into account in
computing subsequent allocations of Net Income pursuant to Section 6.1, so that
the net amount of any items so allocated and the gain, loss and any other item
allocated to each Member pursuant to Section 6.1 shall, to the extent possible,
be equal to the net amount that would have been allocated to each such Member
pursuant to the provisions of this Article if such special allocations had not
occurred.
6.10 Fees to Members or Affiliates. Notwithstanding the provisions
of Section 6.1, in the event that any fees, interest, or other amounts paid to
any Member or any Affiliate thereof pursuant to this Agreement or any other
agreement between the Company and any Member or Affiliate thereof providing for
the payment of such amount, and deducted by the Company in reliance on Section
707(a) and/or 707(c) of the Code, are disallowed as deductions to the Company
on its federal income tax return and are treated as Company distributions, then
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6.10.1 the Net Income or Net Loss, as the case may be, for
the Fiscal Year in which such fees, interest, or other amounts were paid shall
be increased or decreased, as the case may be, by the amount of such fees,
interest, or other amounts that are treated as Company distributions; and
6.10.2 there shall be allocated to the Member to which (or
to whose Affiliate) such fees, interest, or other amounts were paid, prior to
the allocations pursuant to Section 6.1, an amount of gross income for the
Fiscal Year equal to the amount of such fees, interest, or other amounts that
are treated as Company distributions.
6.11 Section 704(c) Allocation. Any item of income, gain, loss,
and deduction with respect to any property (other than cash) that has been
contributed by a Member to the capital of the Company and which is required or
permitted to be allocated to such Member for income tax purposes under Section
704(c) of the Code so as to take into account the variation between the tax
basis of such property and its fair market value at the time of its
contribution shall be allocated to such Member solely for income tax purposes
in the manner so required or permitted.
6.12 Interim Closing of Books. If the interest of a Member in the
Company changes during a fiscal year (whether by disposition of less than an
entire interest, by entry of new members, or otherwise), or if any Member shall
transfer its entire LLC Interest during any taxable year, the allocation of
items of income, gain, loss, deduction or credit for that fiscal year shall be
adjusted to take into account such Member's varying LLC Interest during that
fiscal year using the interim closing of the books method.
6.13 Compliance With the Treasury Regulations. The provisions of
this Article 6 shall be interpreted in accordance with the provisions of
Section 1.704-1(b) of the Treasury Regulations. To the extent that this
Agreement is silent as to the treatment of a particular item, or the provisions
of this Agreement conflict with the requirements of Section 1.704-1(b) of the
Treasury Regulations, such Treasury Regulations shall control.
6.14 Non-Cash Distributions. Property other than cash distributed
by the Company, if any, shall be valued at its fair market value at the time of
the distribution.
6.15 Section 754 Adjustment. To the extent an adjustment to the
adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code
Section 743(b)
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is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken
into account in determining Capital Accounts, the amount of such adjustment to
the Capital Accounts shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases such
basis) and such gain or loss shall be specially allocated to the Members in a
manner consistent with the manner in which their Capital Accounts are required
to be adjusted pursuant to such Section of the Regulations.
6.16 Members' Consent to Distribution and Allocation Methods. The
methods hereinabove set forth by which Distributions and allocations of Net
Income and Net Loss are made and apportioned are hereby expressly consented to
by each Member as an express condition to becoming a Member.
6.17 Sale for Cash and Notes. Should the Company's assets be sold
for a combination of cash and promissory notes, such promissory notes shall be
valued at their principal amount less underlying encumbrances, if any, and pro
rata individual portions thereof deemed divided and distributed among the
Members as if the Company were dissolved on the date of the sale for purposes
of Distributions and allocations thereafter.
ARTICLE 7
MEETINGS OF MEMBERS
7.1 Place of Meetings. Meetings of the Members shall be held at
the principal office of the Company, unless some other appropriate and
convenient location, either within or without the state where the Articles of
Organization were filed, shall be designated for that purpose from time to time
by the Manager, if there be one, or if not, a Majority in Interest of the
Members.
7.2 Annual Meetings of Members. An annual meeting of the Members
shall be held, each year, within ninety (90) days of the anniversary of the
date of this Agreement. At the annual meeting, the Members shall transact such
business as may be properly brought before the meeting.
7.3 Special Meetings. Special meetings of the Members may be
called at any time by the Manager, if there be one, or by one or more Members
holding in the aggregate more than ten percent (10%) of the LLC Interests.
Upon receipt of a written
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request, which request may be mailed or delivered personally to the Manager, if
there be one, or if not, then to all of the Members, by any Person entitled to
call a special meeting of Members, the Manager, or the Member calling the
meeting, as the case may be, shall cause notice to be given to the Members that
a meeting will be held at a time requested by the Person or Persons calling the
meeting, which time for the meeting shall be not less than ten (10) nor more
than sixty (60) days after the receipt of such request. If such notice is not
given within twenty (20) days after receipt of such request, the Persons
calling the meeting may give notice thereof in the manner provided by this
Agreement.
7.4 Notice of Meetings. Except as provided for in Section 7.3 for
special meetings, notice of meetings shall be given to the Members in writing
not less than ten (10) nor more than sixty (60) days before the date of the
meeting. Notices for regular and special meetings shall be given personally,
by mail, or by facsimile, and shall be sent to each Member's last known
business address appearing on the books of the Company. Such notice shall be
deemed given at the time it is delivered personally, or deposited in the mail,
or sent by facsimile. Notice of any meeting of Members shall specify the
place, the day and the hour of the meeting, and (a) in case of a special
meeting, the general nature of the business to be transacted, or (b) in the
case of an annual meeting, those matters which the Manager, if there be one, or
if not, the Member transmitting the notice of meeting, at the date of mailing,
intends to present for action by the Members.
7.5 Validation of Members' Meetings. The transactions of a
meeting of Members which was not called or noticed pursuant to the provisions
of Section 7.3 or 7.4 shall be valid as though transacted at a meeting duly
held after regular call and notice, if Members holding in the aggregate
fifty-one percent (51%) or more of the LLC Interests are present, and if,
either before or after the meeting, each of the Members entitled to vote but
not present (whether in person or by proxy, as that term is used in the Act) at
the meeting signs a written waiver of notice, or a consent to the holding of
such meeting, or an approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the records of the Company.
Attendance shall constitute a waiver of notice, unless objection shall be made.
7.6 Actions Without a Meeting. Any action which may be taken at
any annual or special meeting of Members may be taken without a meeting and
without prior notice if a consent in writing, setting forth the action so
taken, shall be signed by Members holding in the aggregate the number of votes
equal to or greater than the Vote, unless a lesser vote is provided for by this
Agreement or the Act; provided, however, that any
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action which by the terms of this Agreement or by the Act is required to be
taken pursuant to a greater vote of the Members may only be taken by a written
consent which has been signed by Members holding the requisite number of votes.
7.7 Quorum and Effect of Vote. Each Member shall have a vote
equal to the LLC Interest held by such Member, provided that if, pursuant to
the Act or the terms of this Agreement, a Member is not entitled to vote on a
specific matter, then such Member's number of votes and LLC Interest shall not
be considered for purposes of determining whether a quorum is present, or
whether approval by Vote of the Members has been obtained, in respect of such
specific matter. Members holding an aggregate of fifty-one percent (51%) or
more of the LLC Interests shall constitute a quorum at all meetings of the
Members for the transaction of business, and the Vote of Members shall be
`required to approve any action, unless a greater vote is required or a lesser
vote is provided for by this Agreement or by the Act.
ARTICLE 8
RESTRICTIONS ON TRANSFER OR CONVERSION
OF LLC INTERESTS; ADMISSION OF NEW MEMBERS
8.1 Transfer or Assignment of Member's LLC Interest. The LLC
Interest of each Member and the Economic Interest of a Person who is not a
Member constitutes personal property of the Member or Economic Interest holder.
Each Member and each Economic Interest holder has no interest in the assets or
property of the Company.
8.1.1 A Member's LLC Interest or an Economic Interest may be
transferred or assigned only as provided in this Agreement.
8.1.2 No transfer, hypothecation, encumbrance or assignment
("Transfer") of a Member's LLC Interest, or any part thereof, in the Company
will be valid without the consent of a Majority in Interest of the Members,
other than the Member proposing to dispose of its LLC Interest.
8.1.3 A Transfer of an Economic Interest may be done without
the consent of the other Members. Any holder of an Economic Interest shall
have no right to participate in the management of the business and affairs of
the Company or to become a Member thereof.
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8.2 Void Transfers. Any Transfer of an LLC Interest which does
not satisfy the requirement of Section 8.1.2 shall only effect a Transfer of an
Economic Interest, and the transferring Member shall continue to be obligated
under each and every provision of this Agreement.
8.3 Permitted Transfers/Right of First Refusal. A Member may
Transfer its LLC Interest to another or substitute another in its place or
stead (such assignee or substitute shall be known as a permitted transferee)
only to any other Member or to any other person only after (a) obtaining the
consent described in Section 8.1.2 above, (b) in the case of a Transfer for
consideration, offering such LLC Interests to the Company and the other Members
at the same terms and conditions as a bona fide third party offer (the "Right
of First Refusal"), and then only in accordance with this Article and (c) in
the case of a Transfer for no consideration, offering such LLC Interests to the
Company and the other Members at the fair market value of such LLC Interests.
The selling Member shall make the Right of First Refusal to the Company in
writing. If, within ten (10) days of receipt of the Right of First Refusal,
the Company does not notify the selling Member that it intends to acquire such
interest then such interest shall be offered to the remaining Members, pari
passu, on the same terms and conditions as the Right of First Refusal. If
within twenty (20) days of the original notice to the Company of the selling
Member's desire to sell, neither the Company nor the Members have purchased the
selling Member's LLC Interest, then such selling Member may sell its interest
to a third party but only upon such terms and conditions which have previously
been offered to the Company and the Members pursuant to this Section 8.3.
8.4 Prohibition on Assignments Changing Company's Tax Status.
Notwithstanding anything to the contrary in this Agreement, in no event shall
any transfer of an LLC Interest (including the transfer or assignment of any
Economic Interest) be permitted if such transfer is a result of "public
trading" as defined in Code Section 7704(b)(1) and (2). Both the Members and
the Non-Manager Members shall refuse to recognize any trades that occur as a
result of such "public trading" as determined in the sole subjective discretion
of the Members, and they shall take such actions as are necessary to assure
that such trades are not, in fact, recognized.
8.5 Admission of New Members. A new Member may be admitted into
the Company only upon the consent of a Majority in Interest of the Members.
8.5.1 The amount of Capital Contribution which must be made
by a new Member shall be determined by the vote of all existing Members.
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8.5.2 A new Member shall not be deemed admitted into the
Company until the Capital Contribution required of such Person shall have been
made and such Person has become a party to this Agreement.
ARTICLE 9
BOOKS, RECORDS, ACCOUNTINGS AND REPORTS
9.1 Maintenance of Books and Records. The Company shall cause
books and records of the Company to be maintained in accordance with United
States generally accepted accounting principles, and shall give reports to the
Members in accordance with prudent business practices and the Act. There shall
be kept at the principal office of the Company, as well as at the office of
record of the Company specified in Section 2.3, if different, all records
required to be maintained by the Company pursuant to the Act.
9.2 Inspection and Audit Rights. Each Member and each holder of
an Economic Interest in the Company who is not a Member has the right upon
reasonable request, for purposes reasonably related to the interest of that
Person, to inspect and copy during normal business hours any of the Company
books and records required to be maintained in accordance with this Article.
Such right may be exercised by the Person or by that Person's agent or
attorney. Any Member may require that the Company issue annual reviewed and/or
audited financial statements, all at the Company s expense.
9.3 Rights of Members and Non-Members. Upon the request of a
Member or a holder of an Economic Interest who is not a Member, for purposes
reasonably related to the interest of that Person, the Manager, if there be
one, or if not, the other Members, shall promptly deliver to the Member or
holder of an Economic Interest, at the expense of the Company, a copy of this
Agreement and a copy of the information required to be maintained and made
available to Members pursuant to the Act.
9.4 Method of Accounting. All decisions as to accounting
elections with respect to the keeping of accounts, books, and records of the
Company shall be made by unanimous consent of the Members.
The Company shall use the accrual method of accounting
("accrual method") to the extent permissible, and the books and records shall
be kept using
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United States generally accepted accounting principles applied in a consistent
manner by the Company and shall reflect all Company transactions and be
appropriate and adequate for the Company's business.
9.5 Fiscal Year. The fiscal year of the Company shall be the year
ending March 31. If the Company shall terminate for any reasons as provided
herein, the period commencing on the date following the last day of the fiscal
year of the Company next preceding the period in which such termination shall
occur and ending on such date of termination shall also be deemed to be a
fiscal year of the Company, provided such expenses are included in the
administrative budget described in Section 5.9 or are otherwise unanimously
approved by the Members.
9.6 Reports and Tax Returns. The Company accounts and books shall
be closed at the end of each fiscal year of the Company. Financial statements
and tax returns shall be prepared by the accountants chosen by the Members, and
there shall be delivered to the Members, within ninety (90) days of the end of
such fiscal year, federal and state income tax informational returns and
financial statements of the Company prepared by said accountants.
9.7 Banking. All funds of the Company shall be deposited in the
name of the Company in such bank account or accounts as shall be determined by
the Members. All withdrawals therefrom shall be made upon checks signed on
behalf of the Company by the Manager or by such persons as may be authorized by
the Manager to sign checks on behalf of the Company.
9.8 Costs. All reasonable costs, expenses and fees incurred by
the Company in maintaining the accounts, books and records of the Company and
otherwise carrying out the provisions of this Article shall be Company expenses
charged to and paid by the Company.
9.9 Tax Matters. SHOWSCAN shall be designated as "Tax Matters
Partner" (as defined in Code section 6231), to represent the Company (at the
Company's expense) in connection with all examinations of the Company's affairs
by tax authorities, including resulting judicial and administrative
proceedings, and to expend LLC funds for professional services and costs
associated therewith. In its capacity as "Tax Matters Partner," the designated
Person shall oversee the Company tax affairs in the overall best interests of
the Company.
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ARTICLE 10
DISSOLUTION, WINDING UP AND
TERMINATION OF THE COMPANY
10.1 Dissolution. The Company shall be dissolved upon the
occurrence of any of the following events:
10.1.1 When the Term of the Company expires;
10.1.2 The written approval by a Majority In Interest of the
Members to dissolve the Company;
10.1.3 The withdrawal, resignation, expulsion, bankruptcy or
dissolution of a Member or the occurrence of any other event which terminates
the Member's continued membership in the Company, unless the business of the
Company is continued by the unanimous vote of all remaining Members within
ninety (90) days of the happening of that event.
10.1.4 The election by a Member to dissolve the Company after
the occurrence of a Deadlock (as hereinafter defined) and after the expiration
of the Resolution Notice (as hereinafter defined). As used herein, "Deadlock"
shall mean the bona fide inability of all Members to reach unanimous agreement
for the sale or license (more than $50,000 consideration) of Company Property
or any matter described in Section 5.3 where the aggregate consideration is
more than $50,000. In the event of the occurrence of such Deadlock, any Member
may deliver written notice ("Resolution Notice") to the other Member stating
that if such Deadlock is not resolved to the satisfaction of such Member within
fourteen (14) days after the date of the notice, such Member shall after the
expiration of such fourteen day period have the power at its option, for a
period of five (5) days ("Dissolution Option Period") to cause a dissolution of
the Company. Failure of any Member to deliver such Resolution Notice shall
prevent such Member from dissolving the Company pursuant to this Section. The
withdrawal of any Resolution Notice shall in no way prevent any Member from
giving any other Resolution Notice pursuant to this Section, at any time, in
connection with any Deadlock and subsequently dissolving the Company. Failure
of any Member after the expiration of the Dissolution Option Period to cause
the dissolution of the Company shall prevent such Member from dissolving the
Company pursuant to this Section until the occurrence of a Deadlock and the
delivery of a new Resolution Notice.
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10.2 Statement of Intent to Dissolve. As soon as possible after
the occurrence of any of the events specified in Section 10.1 above, the
Company shall execute a Statement of Intent to Dissolve in such form as
prescribed by the Secretary of State.
10.3 Conduct of Business. Upon the filing of the Statement of
Intent to Dissolve with the Secretary of State, the Company shall cease to
carry on its business, except insofar as may be necessary for the winding up of
its business, but the Company's separate existence shall continue until the
Articles of Dissolution have been filed with the Secretary of State or until a
decree dissolving the Company has been entered by a court of competent
jurisdiction.
10.4 Distribution of Net Proceeds. The Members shall continue to
divide Net Income and Losses and Available Cash Flow during the winding-up
period in the same manner and the same priorities as provided for in Article 6.
The proceeds from the liquidation of Property shall be applied in the following
order:
10.4.1 To the payment of creditors, in the order of priority
as provided by law, except to Members on account of their contributions;
10.4.2 To the payment of loans or advances that may have been
made by any of the Members for working capital or other requirements of the
Company;
10.4.3 To the Members in accordance with the positive
balances in their Capital Accounts after adjustments for all allocations of Net
Income and Net Loss, until the Capital Accounts have been reduced to zero;
10.4.4 To the Members in accordance with their LLC Interests
Where the distribution pursuant to this Section 10.4 consists both of
cash (or cash equivalents) and non-cash assets, the cash (or cash equivalents)
shall first be distributed, in a descending order, to fully satisfy each
category starting with the most preferred category above. In the case of
noncash assets, the distribution values are to be based on the fair market
value thereof as determined in good faith by the liquidator, and the shortest
maturity portion of such non-cash assets (e.g., notes or other indebtedness)
shall, to the extent such non-cash assets are readily divisible, be
distributed, in a descending order, to fully satisfy each category above,
starting with the most preferred category.
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The foregoing notwithstanding, if, after all allocations for the
period through dissolution and termination have been made, any Member shall
have a negative balance in its Capital Account, such Member shall not be
obligated to restore his negative capital account balance.
Upon completion of the dissolution and winding up of the Company, the
Company shall terminate.
10.5 Continued Existence. Subject to Section 10.1, the merger,
acquisition, bankruptcy, or insolvency of any Member shall not cause the
dissolution of the Company but the Company shall continue in existence and the
interest of such Member shall be held by its legal representatives, receivers
or trustees in bankruptcy or successors in interest as the case may be. In
such event, the legal representatives, or receivers or trustees in bankruptcy
or successors in interest, as the case may be, of such Member shall be entitled
to vote its Company interest and shall be entitled to receive allocations of
net income, net losses and cash available for distribution and shall be bound
by the same terms and provisions of this Agreement as if it were such Member,
including the provisions of this Article.
10.6 Withdrawal or Admission of a Member. The withdrawal of a
Member or an admission of a new Member shall not cause the dissolution of the
Company.
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ARTICLE 11
MISCELLANEOUS
11.1 Waiver. No consent or waiver, express or implied, by any Member
to or of any breach or default by any other Member in the performance by the
other of its obligations hereunder shall be deemed or construed to be a consent
or waiver to or of any other breach or default in the performance by such other
Members of the same or any other obligations of such Member hereunder.
11.2 Further Assurances. Each Member hereto agrees to execute and
deliver all such other and additional instruments and documents and do all such
other acts and things as may be necessary to more fully effectuate this
Agreement and carry on the business contemplated herein.
11.3 Attorney Fees. If the Company or any Member is a party to any
action or proceeding to enforce any of the terms of this Agreement or any
action or proceeding in any other way pertaining to Company affairs or this
Agreement, the prevailing party in such action or proceeding (as determined by
the judge or presiding official therein) shall be entitled to receive from the
opposing party or parties the prevailing party's costs and reasonable
accountants', experts' and attorneys' fees incurred in prosecuting, defending
or appearing in such action or proceeding.
11.4 Remedies Cumulative. Each right, power and remedy provided for
herein or now or hereafter existing at law, in equity, by statute or otherwise
shall be cumulative and concurrent and shall be in addition to every other
right, power or remedy provided for herein or now or hereafter existing at law,
in equity, by statute or otherwise, and the exercise or beginning of the
exercise or the forbearance of exercise by any party of any one or more of such
rights, powers or remedies shall not preclude the simultaneous or later
exercise by such party of any or all of such other rights, powers or remedies.
11.5 Article and Section Headings. The Article and Section headings
in no way define, limit, extend or interpret the scope of this Agreement or of
any particular Article or Section.
11.6 Binding. This Agreement shall inure to and bind all the parties,
their estates, heirs, successors in interest, personal representatives and
permitted assigns.
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11.7 Construction. This Agreement shall be deemed a contract made
under and shall be construed and enforced and the legality and validity of each
term and condition shall be determined in accordance with the internal, local
laws of the state of Texas applicable to contracts fully executed and to be
performed therein.
11.8 Integrated Agreement. This Agreement constitutes the entire
Agreement among the parties hereto with respect to the subject matter hereof
and supersedes all prior or contemporaneous agreements, representations,
warranties, statements, promises, information, arrangements and understandings,
either oral or written, express or implied with respect to the subject matter
hereof all of which are specifically incorporated into this Agreement. No
party hereto shall be bound by or charged with any oral or written agreements,
representations, warranties, statements, promises, information, arrangements or
understandings not specifically set forth herein. The parties hereto further
acknowledge and agree that in entering into this Agreement they have not in any
way relied and will not in any way rely on any oral or written agreements,
representations, warranties, statements, promises, information, arrangements or
understandings not specifically set forth herein.
11.9 Arbitration. Any controversy or dispute arising out of or
relating to this Agreement or the breach thereof, shall be settled by
arbitration. Arbitrators will be selected as hereinafter provided.
Arbitration shall be conducted in accordance with the rules existing at the
date thereof of the American Arbitration Association. The dispute shall be
submitted to three arbitrators, with each party choosing one of the
arbitrators, the third to be selected and appointed by the two arbitrators
appointed (or the third selected by the American Arbitration Association).
Should either party to this Agreement fail to appoint an arbitrator as required
by this Section within 30 days after any notification of any demand for
arbitration hereunder, the arbitrator appointed by the other party shall be
binding and conclusive on both parties to this Agreement (or, such arbitrator
shall be chosen by the American Arbitration Association). The meetings of the
arbitrators shall be held at such place or places as may be agreed upon by the
arbitrators. The cost and expense and fees of the arbitrators shall be borne
by the parties hereto equally or may be assessed by the arbitrators, in whole
or in part, against either party to this Agreement.
11.10 Pronouns. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as
the identity of the person, persons, entity or entities may require.
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11.11 Exhibits. Each and every Exhibit attached hereto is
incorporated herein by this reference as if set forth in full.
11.12 Severability. Every provision of this Agreement is severable.
If any term or provision hereof is held to be illegal or invalid for any reason
by any duly constituted court, agency or tribunal, such illegality or
invalidity shall not affect the validity of the remainder of this Agreement.
11.13 Notices. All notices, approvals, requests or demands
("Notices") which any party is required or may desire to give to the other
hereunder shall be in writing, unless otherwise specified, and shall be
addressed to the address provided for herein. All Notices shall be given in one
of the following ways: (a) by delivery to the address set forth below for such
party; or (b) by mail, registered or certified (return receipt requested),
postage prepaid, airmail (if available); or (c) by transmittal by any
electronic means whether now known or hereafter developed, including but not
limited to, telex, telecopier, or laser transmissions, able to be received by
the party intended to receive notice. Each Notice shall, except as herein
expressly provided, be conclusively deemed to be effective when received. The
addresses of the parties shall be those of which the other party actually
receives written Notice and until further notice are:
Showscan: Showscan Entertainment Inc.
3939 Landmark Street
Culver City, CA 90232-2315
Attention: Chuck Allen
With a copy to: W. Tucker Lemon and Dennis Pope
Tel: 310-558-0150
Fax: 310-280-0476
Maloney: Maloney Development Partnership, Ltd.
The Maloney Building
239 East Commerce Street
San Antonio, Texas 78205
Tel: 210-226-8888
Fax: 210-222-8477
11.14 Force Majeure. Notwithstanding any other provision of this
Agreement neither party shall be liable to the other in damages or otherwise
because of any failure
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to perform its obligations hereunder, except for any obligation for the payment
of money, caused by fire, earthquake, flood, epidemic, catastrophic accident,
explosion, casualty, strike, lock-out, riot, civil disturbance, act of public
enemy, embargo, war, act of God, by any municipal, state or federal ordinance
or law, by any legally constituted authority, whether municipal, state or
federal, or by the issuance of any executive or judicial order.
11.15 Right to Rely upon the Authority of Members. No person dealing
with a Member shall be required to determine its authority to make any
commitment or undertaking on behalf of the Company, nor to determine any fact
or circumstance bearing upon the existence of its authority. In addition, no
purchaser of any asset owned by the Company shall be required to determine the
sole and exclusive authority of a Member to sign and deliver on behalf of the
Company any instrument of transfer with respect to such asset, or to ensure the
proper application or distribution of revenues or proceeds paid or credited in
connection therewith.
11.16 No Right to Withdraw and Waiver of Action for Partition. No
Member shall be permitted to withdraw from the Company. Each of the Members
hereby irrevocably waives, during the term of this Company and during the
period of its liquidation following any dissolution, any right that such Member
might have to maintain any action for partition with respect to any of the
assets of the Company.
11.17 Rights of Nonrecourse Creditors. No nonrecourse creditor of
the Company shall have or acquire, at any time as a result of making any loan
or advance, any direct or indirect interest in the profits, capital or property
of the Company other than as a secured creditor limited to the particular asset
which is the subject of recourse.
11.18 Mutual Indemnification. Each Member (in this capacity referred
to as "Indemnitor") does hereby and shall at all times indemnify and hold
harmless the Company and the other Member and its Affiliates, and all officers,
directors, agents, attorneys, and employees of the foregoing (in this capacity
individually referred to as an "Indemnitee") from and against any and all
costs, claims, charges, recoveries, losses, expenses (including but not limited
to attorneys' fees and disbursements), liabilities, damages, judgments,
settlements, injunctions, compromises, penalties, decrees or any other loss of
any kind or nature whatsoever (all referred to herein as "Loss") which may be
made, asserted, maintained or secured against, or suffered by, any Indemnitee
caused by or arising out of (a) any breach by Indemnitor of any of its
representations, warranties, agreements or undertakings herein, including
without
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limitation any consequential or special damages proximately caused by the
foregoing; or (b) any acts prohibited by this Agreement.
Indemnitees agree to give Indemnitor Notice of any claim, demand or
action which is or may be subject to this Section ("Claim") promptly after
obtaining knowledge thereof and shall on request make available to Indemnitor
all documents relating to the Claim, but failure to give Notice shall not
affect the right of any Indemnitee to indemnification herein if the Indemnitee
can establish that Indemnitor is not prejudiced by such failure. Promptly upon
receipt of such Notice or upon obtaining knowledge of any Claim, Indemnitor
agrees to assume the defense of the Claim on behalf of itself and Indemnitees
at the sole cost of Indemnitor. Indemnitees or each of them shall have the
right to participate in the defense of any Claim through counsel of their
choice at their own expense. If Indemnitor fails to promptly assume the
defense of any Claim, Indemnitees or any of them may do so and Indemnitor shall
promptly reimburse Indemnitees for all costs and expenses (including but not
limited to attorneys' fees and disbursements) incurred in connection therewith
as such are incurred; in such case, Indemnitees shall not settle or compromise
any Claim without the Consent of Indemnitor, such Consent not to be
unreasonably withheld. If Indemnitor shall fail to reimburse Indemnitees,
then, without waiving their rights otherwise to enforce such reimbursement, the
Company shall, on behalf of Indemnitees, have the right to deduct the said
amount of such payments, costs and expenses, or any part thereof, from any sums
accruing to or for the account of Indemnitor under this Agreement and pay the
same to the Indemnitee(s).
11.19 Counterparts. This Agreement may be executed in counterparts
and all so executed shall constitute one Agreement, binding on all of the
parties hereto, notwithstanding the fact that all the parties are not signatory
to the original or the same counterpart.
11.20 Amendment of Operating Agreement; Amendment of Articles of
Organization. This Agreement may be adopted, altered, amended, or repealed and
a new operating agreement may be adopted by a Majority In Interest of the
Members. Notwithstanding any provision to the contrary in the Articles of
Organization or this Agreement, in no event shall the Articles of Organization
be amended without the vote of Members representing a Majority In Interest of
the Members.
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IN WITNESS WHEREOF, this Agreement is executed by each of the parties
hereto as of the day and year first above written.
"SHOWSCAN"
SHOWSCAN ENTERTAINMENT INC.
By: /s/ CHUCK ALLEN
--------------------------
Authorized Officer
"MALONEY"
MALONEY DEVELOPMENT PARTNERSHIP, LTD.
By: /s/ PAT MALONEY, JR.
---------------------------
Authorized Officer
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EXHIBIT A
Definitions
The following terms used in this Agreement shall (unless expressly
provided herein or unless the context otherwise requires) have the following
respective meanings:
A.1 "Act" means the Texas Limited Liability Company Act of the
State of Texas, or any corresponding Act or provision or provisions of any
succeeding law.
A.2 "Adjusted Capital Account Deficit" means, with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of the
end of the relevant Fiscal Year, after giving effect to the following
adjustments:
A.2.1 increase such Capital Account by any amounts which such
Member is obligated to contribute to the Company (pursuant to the terms of this
Agreement or otherwise) or is deemed to be obligated to contribute to the
Company pursuant to Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and
A.2.2 reduce such Capital Account by the amount of the items
described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
A.3 "Affiliate" shall mean with respect to any Person: (a) any
Person who directly or indirectly controls or is controlled by or is under
common control with such Person; (b) any Person who owns or controls 10% or
more of the outstanding voting securities or beneficial interests of such
Person; (c) any officer, director, general partner, trustee or person acting in
a substantially similar capacity of such Person; and (d) if such Person is an
officer, director, Member or trustee of any entity, the entity for which such
Person acts in such capacity.
A.4 "Agreement" means this Operating Agreement of Showscan
Maloney, LLC, as originally executed and as amended from time to time, as the
context requires. Words such as "herein", "hereinafter", "hereto", "hereby"
and "hereunder", when used with reference to this Agreement, refer to this
Agreement as a whole, unless the context otherwise requires.
A.5 "{text redacted}" means, with respect to each Fiscal Year, the
total {text redacted} derived by the Company from the {text redacted} of {text
redacted} to the
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Showscan Theatre. {text redacted} does not include any {text redacted} from
{text redacted}, {text redacted}, or any other source.
A.6 "Articles of Organization" shall mean the instruments, and any
amendments thereto, required by law to be executed and filed in the office of
the Secretary of State of the State of Texas, and in the appropriate public
offices of other states in which the Company may do business, in order to
create and preserve the limited liability of the Members provided for in this
Agreement and available pursuant to the Act and the applicable laws of other
states.
A.7 "Assignee" shall mean a person who has acquired a beneficial
interest in an LLC Interest, but who is neither a Substituted Member nor an
Assignee of Record.
A.8 "Assignee of Record" shall mean a Person who has been assigned
the Economic Interest in one or more LLC Interests, or fraction thereof, by a
Member pursuant to this Agreement, and whose ownership of the Economic Interest
in the assigned LLC Interests (a) has been recorded on the books of the Company
and (b) is the subject of a written instrument of assignment, the effective
date of which assignment has passed.
A.9 "Available Cash Flow" means, with respect to any Fiscal Year
or other period, the sum of all cash receipts of the Company from any and all
sources, less all cash disbursements (including loan repayments, capital
improvements and replacements) and a reasonable allowance for Reserves,
contingencies and anticipated obligations as determined by the Manager, if
there be one, or if not, a Majority in Interest of the Members.
A.10 "Business Day" shall mean any day other than a Saturday,
Sunday or holiday scheduled by law for commercial banking institutions to be
open for business in the United States.
A.11 "Capital Account" means, with respect to any Member, the
Capital Account maintained for such Member in accordance with the following
provisions:
A.11.1 to each Member's Capital Account there shall be
credited such Member's Capital Contributions, such Member's distributive share
of Domestic Net Income, Foreign Net Income, and Other Net Income, and the
amount of any Company liabilities assumed by such Member or which are secured
by any Property distributed to such Member;
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A.11.2 to each Member's Capital Account there shall be
debited the amount of cash and the Gross Asset Value of any Property
distributed to such Member pursuant to any provision of this Agreement, such
Member's distributive share of Domestic Net Loss, Foreign Net Loss and Other
Net Loss, and the amount of any liabilities of such Member assumed by the
Company or which are secured by any property contributed by such Member to the
Company;
A.11.3 in the event all or a portion of an LLC Interest is
transferred in accordance with the terms of this Agreement, the transferee
shall succeed to the Capital Account of the transferor to the extent it relates
to the transferred interest; and
A.11.4 in determining the amount of any liability for
purposes of this Section there shall be taken into account Code Section 752(c)
and any other applicable provisions of the Code and Regulations.
The foregoing provisions and the other provisions of this Agreement relating to
the maintenance of Capital Accounts are intended to comply with Regulations
Section 1.704-1(b), and shall be interpreted and applied in a manner consistent
with such Regulations. In the event the Members shall determine that it is
prudent to modify the manner in which the Capital Accounts, or any debits or
credits thereto (including, without limitation, debits or credits relating to
liabilities which are secured by contributed or distributed property or which
are assumed by the Company or Members), are computed in order to comply with
such Regulations, the Members may make such modification, provided that it is
not likely to have any effect on the amounts distributable to any Person
pursuant to Section 6.2 hereof.
A.12 "Capital Contributions" means, with respect to any Member, the
amount of money and the initial Gross Asset Value of any property (other than
money) as and when actually contributed to the Company with respect to the LLC
Interest held by such Member.
A.13 "Code" shall mean the Internal Revenue Code of 1986, as amended,
or corresponding provisions of subsequent tax laws.
A.14 "Company" means the limited liability company created by the
filing of the Articles of Organization and pursuant to this Agreement, known as
Showscan Maloney, LLC.
A.15 "Deadlock" shall have the definition assigned to it in Section
10.1.4.
35
<PAGE> 36
A.16 "Depreciation" means, for each fiscal year or other period, an
amount equal to the depreciation, amortization, or other cost recovery
deduction allowable with respect to an asset for such year or other period,
except that if the Gross Asset Value of an asset differs from its adjusted
basis for federal income tax purposes at the beginning of such year or other
period, Depreciation shall be an amount which bears the same ratio to such
beginning Gross Asset Value as the federal income tax depreciation,
amortization, or other cost recovery deduction for such year or other period
bears to such beginning adjusted tax basis; provided however, that if the
federal income tax depreciation, amortization, or other cost recovery deduction
for such year is zero, Depreciation shall be determined with reference to such
beginning Gross Asset Value using any reasonable method selected by the
Members.
A.17 "Distribution" shall mean any cash or other property distributed
to some or all of the Members with respect to their interests in the Company.
A.18 "Dollars" or "$" shall mean the legal currency of the United
States.
A.19 "Economic Interest" means a Person's right to share in the Net
Income, Net Loss or similar items of, and to receive distributions from, the
Company, but does not include any other rights of a Member including, without
limitation, the right to vote or to participate in the management of the
Company, or, except as provided in Section 9.4, any right to information
concerning the business and affairs of the Company.
A.20 "Exclusive Zone" shall have the definition assigned to it in
Section 5.11.
A.21 "Film Rental" means the license fee payable to SHOWSCAN for use
of its library of films, which license fee is to be calculated and paid in
accordance with Section 5.8.2.
A.22 "Fiscal Year" means the period of January 1 to and including
March 31.
A.23 "Gross Asset Value" means, with respect to any asset, the
adjusted basis of such asset for federal income tax purposes, except as
follows:
A.23.1 the initial Gross Asset Value of any asset
contributed by a Member to the Company shall be the gross fair market value of
such asset, as determined by the contributing Member and the Company;
A.23.2 the Gross Asset Values of all Company assets shall be
adjusted to equal their respective gross fair market values, as determined by
the Members, as of the following times: (a) the acquisition of an additional
LLC Interest by
36
<PAGE> 37
any new or existing Member in exchange for more than a de minimis Capital
Contribution; (b) the distribution by the Company to a Member of more than a de
minimis amount of Property as consideration for an LLC Interest; and (c) the
liquidation of the Company within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses
(a) and (b) above shall be made only if the Members reasonably determine that
such adjustments are necessary or appropriate to reflect the relative economic
interests of the Members in the Company;
A.23.3 the Gross Asset Value of any Company asset
distributed to any Member shall be the gross fair market value of such asset on
the date of distribution; and
A.23.4 the Gross Asset Values of Company assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to
the extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided,
however, that Gross Asset Values shall not be adjusted pursuant to this
subsection to the extent the Members determine that an adjustment pursuant to
subsection A.23.2 above is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to this
subsection.
If the Gross Asset value of an asset has been determined or adjusted pursuant
to subsection A.23.1, 2 or 3 hereof, such Gross Asset Value shall thereafter be
adjusted by the Depreciation taken into account with respect to such asset for
purposes of computing Net Income and Net Loss.
A.24 "{text redacted} Receipts" means, with respect to each Fiscal
Year, the total {text redacted} derived by the Company from any source,
including but not limited to {text redacted}, {text redacted} and {text
redacted}.
A.25 "Interest" means interest on the amount advanced at the rate of
ten percent (10%) per annum, calculated from the time of advance until payment
in full.
A.26 "Law" means any present or future statute or ordinance, whether
municipal, state, national or territorial, any executive, administrative or
judicial regulation, order, judgment or decree, any treaty or international
convention, any rule or principle of common law or equity or any requirement,
custom or practice with equivalent force of law.
37
<PAGE> 38
A.27 "LLC Interest" means an ownership interest in the Company, which
includes the Economic Interest, the right to vote or participate in the
management of the Company, and the right to information concerning the business
and affairs of the Company, as provided in this Agreement and under the Act.
A.28 "Majority in Interest of the Members," unless otherwise provided
in the Agreement, means more than fifty percent (50%) of the interests of the
Members in the current profits of the Company.
A.29 "Management Fee" means the fee payable to SHOWSCAN for providing
day-to-day management of the Company, which fee is to be calculated and paid in
accordance with Section 5.8.1.
A.30 "Manager" means, if there is any Non-Manager Member, the
Person(s) elected to manage the Company pursuant to this Agreement. At any
time that the Members shall have elected to have more than one Manager, all
such Persons so elected shall be referred to as the "Managers." If all of the
Members are acting as Mangers, as defined in the Act, then any reference to
Manger in this Agreement shall apply to any and all of the Members.
A.31 "Manager Member" means, any Member who has the authority to act
as a Manager pursuant to the Act and this Agreement.
A.32 "Member" means a Person who:
A.32.1 Has been admitted to the Company as a member in
accordance with the Articles of Organization or this Agreement, or an assignee
of an LLC Interest, other than an Economic Interest, who has become a Member
pursuant to this Agreement.
A.32.2 Has not resigned, withdrawn or been expelled as a
Member or, if other than an individual, been dissolved.
Reference to a "Member" shall be to any one of the Members. Reference to an
"Initial Member" shall be to any one of the Members.
A.33 "Member Nonrecourse Debt" has the meaning set forth in
Regulations Section 1.704-2(b)(4).
A.34 "Member Nonrecourse Debt Minimum Gain" means an amount, with
respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that
38
<PAGE> 39
would result if such Member Nonrecourse Debt were treated as a nonrecourse
liability of the Company, determined in accordance with Regulations Sections
1.704-2(i)(2) and (3).
A.35 "Member Nonrecourse Deductions" has the meaning set forth in
Regulations Section 1.704-2(i)(2). The amount of Member Nonrecourse Deductions
with respect to a Member Nonrecourse Debt for a Fiscal Year of the Company
equals the excess (if any) of the net increase (if any) in the amount of Member
Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt
during that Fiscal Year over the aggregate amount of any distributions during
that Fiscal Year to the Member that bears (or is deemed to bear) the economic
loss for such Member Nonrecourse Debt to the extent such distributions are from
the proceeds of such Member Nonrecourse Debt and are allocable to an increase
in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse
Debt, determined in accordance with Regulations Section 1.704-2(i)(2).
A.36 "Minimum Gain" or "LLC Minimum Gain" has the meaning set forth
in Regulations Sections 1.704-2(d) and 1.704-2(d). For purposes of the
Regulations Section 1.704, Company shall mean partnership where the context of
such regulation require.
A.37 "Net Capital Contributions" with respect to a Member is an
amount equal to the excess of (a) aggregate Capital Contributions of the Member
over (b) the aggregate amount of any liabilities of such Member assumed by the
Company in connection with the Capital Contributions or which are secured by
any property contributed by such Member to the Company.
A.38 "Net Income" and "Net Loss" means, for each fiscal year or other
period, an amount equal to the Company's taxable income or loss for such year
or period, determined in accordance with Code Section 703(a) (for this purpose,
all items of income, gain, loss, or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or
loss), with the following adjustments:
A.38.1 any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Net Income or Net
Loss pursuant to this Section shall be added to such taxable income or loss;
A.38.2 any expenditures of the Company described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken
into account in
39
<PAGE> 40
computing Net Income or Net Loss pursuant to this Section shall be subtracted
from such taxable income or loss;
A.38.3 in the event the Gross Asset Value of any Company
asset is adjusted pursuant to Section A.17.2 or .4 of this Exhibit A, the
amount of such adjustment shall be taken into account as gain or loss from the
disposition of such asset for purposes of computing Net Income or Net Loss;
A.38.4 gain or loss from any disposition of Property with
respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of the property
disposed of, notwithstanding that the adjusted tax basis of such property
differs from its Gross Asset Value; and
A.38.5 in lieu of the depreciation, amortization, and other
cost recovery deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such fiscal year or
other period, computed in accordance with the Depreciation computed in Section
A.7, above, of this Exhibit A.
A.39 "Non-Manager Members" shall mean all Members who are not
entitled to be Managers.
A.40 "Notice" shall mean a written notice served on a party hereto in
accordance with the Agreement.
A.41 "Notice Date" shall mean the date of either party's receipt of a
Notice as set forth in the Agreement.
A.42 "Person" shall mean any entity, corporation, company,
association, partnership, joint venture, joint stock company, unincorporated
organization, trust, individual (including personal representatives, executors
and heirs of a deceased individual), nation, state, government (including
governmental agencies, departments, bureaus, boards, divisions and
instrumentalities thereof), trustee, receiver or liquidator.
A.43 "Preferred Return" shall mean an amount equal to Interest on the
Surplus Contribution of a Member, as such exists from time to time.
A.44 "Property" means all assets of the Company, both tangible and
intangible, or any portion thereof.
A.45 "Regulations" means the federal income tax regulations
promulgated by the Treasury Department under the Code, as such regulations may
be amended from
40
<PAGE> 41
time to time. All references herein to a specific section of the Regulations
shall be deemed also to refer to any corresponding provisions of succeeding
Regulations.
A.46 "Reserves or Working Capital" means funds set aside from Capital
Contributions or gross cash revenues as reserves. Such Reserves shall be
maintained in amounts reasonably deemed sufficient by the Manager, if there be
one, or if not, a Majority in Interest of the Members, for working capital and
the payment of taxes, insurance, debt service, repairs, replacements renewals,
or other costs or expenses incident to the Business of the Company, or in the
alternative, the Dissolution of the Company.
A.47 "Showscan Equipment" shall have the definition assigned to it in
Section 4.2.1.
A.48 "Showscan Theatre" shall have the definition assigned to it in
Section 3.2.
A.49 "Surplus Contribution" shall mean, at any given time, an amount
equal to the excess of (a) the aggregate amount of total Capital Contributions
of the Member with the greatest aggregate total Capital Contributions over (b)
the aggregate amount of total Capital Contributions of the other Member.
A.50 "Transfer" shall have the definition assigned to it in Section
8.1.2.
A.51 "Vote" means, except where superseded by another Section of this
Agreement, or required by the terms of the Act, Code or applicable Regulations
thereunder, all decisions made by the Company shall be approved by fifty-one
percent (51%) of the votes of the Members, wherein each Member casts a number
of votes equal to the Member's LLC Interest in the Company.
41
<PAGE> 42
EXHIBIT B
{REDACTED}
<PAGE> 1
EXHIBIT 10.34
SECOND AMENDMENT TO THEATER RIGHTS AGREEMENT
This Second Amendment to Theater Rights Agreement (this "Amendment")
is made as of December 31, 1995 by and among Showscan Entertainment Inc., a
Delaware corporation formerly known as Showscan Corporation ("Showscan"),
Showscan/United Artists Theatres Joint Venture, a Colorado general partnership
(the "Joint Venture"), and United Artists Theatre Circuit, Inc., a Maryland
corporation ("United Artists").
RECITALS
A. Showscan, the Joint Venture and United Artists are currently
party to that certain Theater Rights Agreement, dated as of August 19,
1994, as amended by that certain First Amendment to Theater Rights
Agreement, dated as of March 30, 1995 (as so amended, the
"Agreement"). Capitalized terms used in this Amendment without
definition shall have the meanings given thereto in the Agreement.
B. Showscan, the Joint Venture and United Artists now desire to
modify and amend the Agreement in the manner and on the terms and
conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Amendment of Sections 3.2(a) and (b). Sections 3.2 (a) and
(b) of the Agreement shall be amended in their entirety to read as follows:
"(a) During the period from the date of this Agreement
until the fifth anniversary of the date of this Agreement (the "Offer
Period"), United Artists agrees (i) to offer to the Joint Venture the
opportunity to Install Simulator Theater Units in an aggregate of 24
sites designated by United Artists, and (ii) to Install a total of 24
Simulator Theater Units with an aggregate of 576 seats in the sites
offered to the Joint Venture which are rejected by the Joint Venture
(which Simulator Theater Units may be Owned or co-Owned by United
Artists but which do not include Simulator Theater Units owned by
Showscan or the Joint Venture). The Joint Venture agrees to accept
during the Offer Period at least one of the sites offered to it by
United Artists pursuant to Section 2.10 or clause (a)(i) above. If by
the end of the Offer Period, the Joint Venture has not satisfied its
obligations pursuant to the immediately preceding sentence, then
Showscan shall pay to United Artists liquidated damages in an amount
equal to {text redacted}.
(b) If by the end of the Offer Period United Artists has
not either (i) satisfied its obligations pursuant to clause (a)(ii)
above either directly or by satisfaction of its obligations pursuant
to clause (a)(i) above, or (ii) actually paid to Showscan at least
{text redacted} in the aggregate for (A) Equipment Installed
<PAGE> 2
or to be Installed in Simulator Theater Units pursuant to Section
3.2(a)(ii) above, and any labor, shipping and related expenses (other
than travel, hotel, per diem, and other reimbursement items) with
respect to the Installation of such Equipment, and (B) equipment,
labor, shipping and related expenses (other than travel, hotel, per
diem and other reimbursement items) (collectively, the "{text
redacted} Cost") with respect to the sale of {text redacted} theater
systems (a "{text redacted} System") to United Artists pursuant to
Section 2.7 hereof, provided, however, that for the purposes of this
Section 3.2(b)(ii)(B) only {text redacted} of the {text redacted} Cost
of each of the first {text redacted} Systems ordered by United Artists
shall be counted and only if, in the case of the second {text
redacted} System only, such {text redacted} System is ordered on or
before {text redacted}, then United Artists will pay to Showscan
liquidated damages in the amount of {text redacted} for each Simulator
Theater Unit which has not been Installed as required by 3.2(a) above,
and United Artists will be deemed to have Installed one Simulator
Theater Unit with an aggregate of 24 seats each time such damages are
paid. If United Artists has Installed 24 Simulator Theater Units in
24 locations but all locations in which it has Installed such Units
collectively have fewer than 576 seats, United Artists will pay to
Showscan liquidated damages in an amount equal to the number of seats
which have not been Installed multiplied by {text redacted}. The
parties agree that such liquidated damages reflect a reasonable
estimate of the damages which Showscan would incur based on the
parties' current estimate of the economic detriment to Showscan from
the loss of profits it otherwise could have expected from the
Installation of such Simulator Theater Units, and that such liquidated
damages will be Showscan's sole remedy for any failure by United
Artists to satisfy its obligations pursuant to clause (a)(ii) above,
either directly or by satisfaction of its obligations pursuant to
clause (a)(i) above, by the end of the Offer Period. Notwithstanding
any other provision of this Section 3.2, the time periods for United
Artists' performance of an obligation pursuant to Section 3.2(a) will
be extended by any period during which a Force Majeure Event exists or
an act or failure to act by Showscan materially impairs United
Artists' ability to comply with its obligations, and liquidated
damages will be payable to Showscan pursuant to this paragraph only if
United Artists does not comply with its obligations within such
extended period of time."
2. Amendment of Section 3.3(f). Section 3.3(f) of the Agreement
shall be amended in its entirety to read as follows:
"(f) In any case where United Artists presents to the Joint Venture
a proposal relating to a Potential Site, the proposal will include a
proposed development fee that would be payable to United Artists
pursuant to the Development Agreements of the lesser of (a) {text
redacted} of the {text redacted} of such development (as more
particularly described in the Development Agreements), or (b) an amount
not more than (i) if the Potential Site would involve new construction
of a stand-alone Theater, {text redacted} for the first {text redacted}
such Potential Sites that the Joint Venture participates in during the
Offer Period and {text redacted} for each such Potential Site
thereafter, or (ii) if the Potential Site would involve new
construction of an integrated Theater or the renovation of an
integrated or stand-alone Theater, {text redacted} for the first
2
<PAGE> 3
{text redacted} such Potential Sites that the Joint Venture
participates in during the Offer Period and {text redacted} for each
such Potential Site thereafter."
3. Amendment of Section 3.7. Section 3.7 of the Agreement shall
be amended in its entirety to read as follows:
"Section 3.7 [This Section intentionally left blank]"
4. Amendment of Section 3.8. Section 3.8 of the Agreement shall
be amended in its entirety to read as follows:
"Section 3.8 [This Section intentionally left blank]"
5. Receivable/Payable. In connection with this Amendment, United
Artists hereby promises to pay to Showscan Six Hundred Sixty Thousand Dollars
($660,000) (the "Payable") in the manner and with the interest set forth below.
Interest shall accrue on the unpaid balance outstanding of the Payable from
January 1, 1996 until paid in full at a rate per annum equal to seven and
one-half percent (7.5%). Accrued and unpaid interest shall compound annually
and be added to the balance of the Payable. The outstanding balance of the
Payable and all accrued and unpaid interest thereon shall be paid in full on or
before December 31, 1996 (the "Maturity Date"); provided, however, that if on
or prior to the Maturity Date the Joint Venture has not yet accepted (the
"Joint Venture Acceptance Date") at least one of the sites offered to it by
United Artists pursuant to Section 2.10 or Section 3.2(a)(i) of the Agreement,
then the Maturity Date shall be extended to the day which is thirty (30) days
after the Joint Venture Acceptance Date, but in no event shall it be extended
later than August 19, 1999. Showscan, at its election, may accelerate the
Maturity Date if United Artists shall breach and fail to cure for a period of
15 days any provision of the Agreement as amended by this Amendment.
6. Malaysia/Asia Territory. If at any time or from time to time
during the Offer Period Showscan shall sell to a third party (e.g., not to
Showscan, United Artists, the Joint Venture or any affiliate of the foregoing)
a Simulator Theater Unit which will be Installed in the state of Malaysia or in
the Asia Territory as set forth on Exhibit 3.7 to the Agreement, then Showscan
shall pay to United Artists an amount equal to {text redacted} of the {text
redacted} of the {text redacted} to such {text redacted} during the Offer
Period. Showscan shall make the payments called for by this Section 6 within
fifteen (15) days of receipt of payment in full for such Equipment. Showscan
shall have no further obligations under this Section 6 once the aggregate
payments made hereunder equal {text redacted}.
7. ShowMax Pricing. If at any time during the Offer Period UATC
shall purchase from Showscan one or more ShowMax Systems, then for the first
{text redacted} such ShowMax Systems purchased, Showscan shall establish the
ShowMax Cost for each such ShowMax System by reducing by {text redacted} the
then {text redacted} that Showscan has provided a similarly configured ShowMax
System.
8. No Other Modifications. Except as expressly set forth in this
Amendment, the Agreement shall remain unmodified and in full force and effect.
9. Equality of Consideration. Each of Showscan, the Joint
Venture and UATC acknowledge and agree that the value of the rights under the
Agreement relinquished by UATC
3
<PAGE> 4
pursuant to the terms of this Amendment equal or exceed the value of the rights
under the Agreement relinquished by Showscan pursuant to the terms of this
Amendment, including, without limitation, the right to require the construction
of certain Simulation Theater Units by a certain date or receive liquidated
damages therefore.
10. Miscellaneous.
10.1 Further Assurances. Each party agrees to perform all
such acts, including without limitation, the execution of documents, as may
reasonably be requested by any party in order to more fully effectuate the
purposes of this Amendment.
10.2 Successors and Assigns. Except as otherwise
expressly provided in this Amendment, all covenants and agreements contained in
this Amendment by or on behalf of any of the parties will bind and inure to the
benefit of the respective successors and assigns of the parties whether so
expressed or not.
10.3 Severability. Whenever possible, each provision of
this Amendment will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Amendment is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Amendment.
10.4 Counterparts. This Amendment may be executed in two
or more counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
10.5 Choice of Law. This Amendment shall be interpreted
in accordance with the substantive law of the State of Colorado without regard
to its choice of law provisions.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
UNITED ARTISTS THEATRE CIRCUIT, INC.
By: /s/ JOHN R. NEAL
- -------------------------------
Title: Senior Vice President
SHOWSCAN ENTERTAINMENT INC.
By: /s/ DENNIS POPE
- ------------------------------------------
Title: Executive Vice President
and Chief Financial Officer
SHOWSCAN/UNITED ARTISTS THEATRES
JOINT VENTURE
By: Showscan Entertainment Inc. as Managing Partner
By: /s/ DENNIS POPE
- ---------------------------------------
Title: Executive Vice President
and Chief Financial Officer
5
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE COMPANY
1. Showscan Productions, Inc., a wholly-owned subsidiary, incorporated
under the laws of the State of Delaware.
2. Showscan CityWalk, Inc., a wholly-owned subsidiary, incorporated under
the laws of the State of California.
3. Showscan Attractions, Inc., a wholly-owned subsidiary, incorporated
under the laws of the State of California.
4. Showscan Framingham, Inc., a wholly-owned subsidiary, incorporated
under the laws of the State of Delaware.
5. Cinemania (U.K.) Limited, a private limited company, incorporated
under the laws of the United Kingdom. Showscan Attractions, Inc., a
wholly-owned subsidiary of the Company, owns 50% of the outstanding
capital stock of Cinemania (U.K.) Limited.
6. Showscan Entertainment B.V., a wholly-owned subsidiary, incorporated
under the laws of The Netherlands.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-78236) pertaining to the 1992 Stock Option Plan of Showscan
Entertainment Inc. of our report dated June 5, 1996, with respect to the
consolidated financial statements and schedule of Showscan Entertainment Inc.
included in the Annual Report (Form 10-K) for the year ended March 31, 1996.
Ernst & Young LLP
Los Angeles, California
June 28, 1996
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