<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from_________ to __________
Commission file number 0-15939
SHOWSCAN ENTERTAINMENT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3940004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3939 LANDMARK STREET
CULVER CITY, CALIFORNIA 90232
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 558-0150
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
As of November 10, 1996, the Registrant had 5,629,885 shares of
Common Stock, $.001 par value, issued and outstanding.
This report contains 73 consecutively numbered pages. The exhibit index is on
page 17.
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SHOWSCAN ENTERTAINMENT INC.
INDEX
<TABLE>
<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1996
and March 31, 1996 3
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended September 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 1996 and 1995 6
Notes to the Condensed Consolidated Financial Statements 8
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
Signatures 16
Exhibit Index 17
</TABLE>
2
<PAGE> 3
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Share Information)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1996 1996
------------- -----------
(unaudited) (Note)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 3,249 $ 5,055
Short-term investments 997 3,086
Accounts receivable (net of allowances) 4,751 3,241
Unbilled receivables on uncompleted
equipment contracts 1,535 1,122
Equipment sales inventory 1,589 1,547
Prepaid expenses and other current assets 145 122
---------- ----------
Total current assets 12,266 14,173
Film library (net of amortization) 4,897 3,481
Equipment and leasehold improvements, less
accumulated depreciation and amortization 1,087 1,313
Investment in owned and operated theatres (Note 2) 3,902 4,045
Patents and other intellectual properties (net of
amortization) 1,553 1,770
Other assets, including note receivable
from affiliated company 1,684 1,975
---------- ----------
Total assets $ 25,389 $ 26,757
========== ==========
</TABLE>
Note: The balance sheet at March 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to unaudited condensed consolidated financial
statements.
(Continued)
3
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SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Balance Sheets (continued)
(Dollars in Thousands Except Share Information)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1996 1996
------------- ---------
(unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 476 $ 603
Customer advances on uncompleted
equipment contracts 3,267 2,143
Accrued expenses and other current liabilities 2,476 3,351
----------- ---------
Total current liabilities 6,219 6,097
----------- ---------
8% convertible notes (Note 3) 5,760 6,620
Stockholders' equity:
Series C Convertible Preferred Stock, $.001 par value;
100,000 shares authorized; 49,000 shares issued and
outstanding - -
Common stock, $.001 par value; 20,000,000 shares
authorized; 5,629,885 and 5,480,324 shares
issued and outstanding, respectively 6 5
Additional paid-in capital 43,228 42,446
Accumulated deficit (29,824) (28,411)
----------- ---------
Total stockholders' equity 13,410 14,040
----------- ---------
Total liabilities and stockholders' equity $ 25,389 $ 26,757
=========== =========
</TABLE>
Note: The balance sheet at March 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to unaudited condensed consolidated financial
statements.
4
<PAGE> 5
SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Film licensing $ 1,189 $ 1,373 $ 2,072 $ 3,969
Equipment sales and related services 4,286 2,543 6,647 4,761
-------- -------- -------- --------
5,475 3,916 8,719 8,730
Costs of revenues 3,687 2,207 5,832 4,840
-------- -------- -------- --------
Gross profit 1,788 1,709 2,887 3,890
Costs and expenses:
General and administrative expenses 1,790 1,891 3,475 3,662
Depreciation and amortization 242 244 484 488
-------- -------- -------- --------
2,032 2,135 3,959 4,150
-------- -------- -------- --------
Operating income (loss) (244) (426) (1,072) (260)
Other income (expense):
Equity in operations of owned and
operated theatres (126) (74) (186) (113)
Other income, including interest of
$58, $37, $154, $58, respectively 60 69 162 98
Interest and other expenses (114) (59) (317) (95)
-------- -------- -------- --------
(180) (64) (341) (110)
-------- -------- -------- --------
Net income (loss) (424) $ (490) $(1,413) $ (370)
======== ======== ======== ========
Net income (loss) per common share $ (.08) $ (.09) $ (.25) $ (.07)
======== ======== ======== ========
(Note 4)
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
5
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SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,413) $ (370)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 484 488
Amortization of film library 325 359
Equity in operations of owned and operated
theatres 186 113
Accrued interest on debt 241 57
Provision for doubtful accounts 60 10
Changes in operating assets and liabilities:
Accounts receivable (1,570) (433)
Equipment sales inventory (42) 885
Unbilled receivables on uncompleted equipment
contracts (413) 168
Prepaid expenses and other assets (23) (284)
Investment in owned and operated theatres (43) (2,160)
Accounts payable, accrued expenses and other
current liabilities (1,243) 695
Customer advances on uncompleted equipment
contracts 1,124 12
---------- --------
Net cash used in operating activities (2,327) $ (460)
---------- --------
Cash flows from investing activities:
Redemptions of short term investments 2,089 -
Purchases of equipment and leasehold
improvements (42) (91)
Additions to film library (1,741) (525)
Other assets 292 112
---------- --------
Net cash provided by (used in)
investing activities $ 598 $ (504)
---------- --------
</TABLE>
(Continued)
6
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SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1996 1995
----------------------------
(Unaudited)
<S> <C> <C>
Balance forwarded $ (1,729) $ (964)
---------- ----------
Cash flows from financing activities:
Payments on subordinated note payable - (3,131)
Proceeds from issuance of 8% convertible notes
(net of expenses) - 6,463
Proceeds from exercise of stock options - 30
Other (77) (62)
---------- ----------
Net cash provided by (used in) financing activities (77) 3,300
---------- ----------
Net increase (decrease) in cash and cash
equivalents (1,806) 2,336
Cash and cash equivalents, beginning of period 5,055 6,791
---------- ----------
Cash and cash equivalents, end of period $ 3,249 $ 9,127
========== ==========
Supplemental disclosures of cash flow information:
Interest paid (for 1995, interest paid is included
in subordinated note payment above) $ 246 $ 1,567
========== ==========
Income taxes paid $ - $ -
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
7
<PAGE> 8
SHOWSCAN ENTERTAINMENT INC.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1--Introduction:
The accompanying unaudited condensed consolidated financial statements
of Showscan Entertainment Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period and six-month period ended
September 30, 1996 are not necessarily indicative of the results that may be
expected either for any other quarter in the fiscal year ending March 31, 1997
or for the entire fiscal year ended March 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended March 31, 1996.
Note 2--Owned and Operated theatres:
The Company retains an ownership interest, ranging from 25% to 50%, in
selected Showscan motion simulation theatre attractions ("Showscan
Attractions") through various joint venture arrangements. The Company
currently operates and/or has an ownership interest in Showscan Attractions at
Universal CityWalk in Los Angeles (November 1993), Trocadero in London
(September 1994), Framingham, Massachusetts (May 1995), Osaka, Japan (August
1995) and San Antonio, Texas (March 1996). The Company accounts for its
investment in owned and operated theatres under the equity method of
accounting.
Note 3--8% Convertible Notes:
On September 1, 1995, the Company completed a private placement of
$7,000,000 in secured convertible notes through a European financial
institution, Banca del Gottardo. The notes have a four-year maturity and an 8%
interest rate and are convertible at the option of the holder into 1,217,391
shares of the Company's $.001 par value Common Stock (the "Common Stock") at a
conversion price of $5.75 per share. Interest payments are made semi-annually
commencing March 1, 1996. Through September 30, 1996, $1,240,000 of notes had
been converted into 215,646 shares of Common Stock leaving an outstanding
balance of $5,760,000.
Note 4--Earnings per common share:
Loss per common share for the three months ended September 30, 1996
and September 30, 1995 has been determined by using 5,577,447 and 5,250,637
weighted average shares of Common Stock, respectively. For the six months
ended September 30, 1996 and September 30, 1995, the weighted average shares of
Common Stock to determine loss per common share were 5,551,616 and 5,247,748,
respectively. The impact of common stock equivalents and potentially dilutive
securities, such as the assumed conversion of Series C Convertible Preferred
Stock and the assumed conversion of the 8% Convertible Notes due September 1,
1999 has not been included, as such items are anti-dilutive for all periods
presented.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview:
Showscan Entertainment Inc. (the "Company") is a leading provider of
movie-based motion simulation theatre attractions ("Showscan Attractions") to
the 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 Showscan Attractions and specialty theatres; (iv) producing
films using the Showscan process; and (v) operating Showscan Attractions in
which the Company has an ownership interest ("O&O Theatres"). The Company is
also committed to the continued recognition of the Showscan(R) brand name
worldwide. The Company announced in January 1996 the new ShowMax(TM) product
line, a complete 15/70 giant screen theatre package.
Currently, 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. 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 the six months ended September 30, 1996 and 1995:
Revenues for the six-month period ended September 30, 1996 (the "Six
Month Period") of $8.7 million were only slightly less than the revenues for
the six-month period ended September 30, 1995. The decrease in film licensing
revenues of $1,897,000 was offset by the increase in equipment sales and
related services of $1,886,000.
Film licensing revenues decreased by 48% to $2.1 million for the Six
Month Period. The decrease was due primarily to (a) the renewal of an
agreement with the Company's major Japanese customer (Imagine Japan), which
renewal changed the timing of film licensing revenue recognition such that
approximately $738,000 was recognized in the prior year six month period that
was not recognized in the Six Month Period, (b) the inclusion in the
corresponding prior year six month period of revenues from two specific
one-time license agreements, which revenues constituted all of the revenues to
be received with respect to such agreements, in the amounts of $550,000 and
$300,000 respectively, and (c) the early renewals in fiscal year 1996 of
certain film licensing agreements, which renewals changed the timing of film
licensing revenue recognition (reflected in fourth quarter fiscal 1996 rather
than the Six Month Period) of approximately $750,000. After adjusting for the
aforementioned items, the recurring film licensing revenues amounted to $1.6
million for the prior year six month period; therefore, recurring film
licensing revenues increased 27% in the Six Month Period, when comparing the
adjusted revenues to the prior year six month period.
9
<PAGE> 10
Revenues from film licensing are based on new license agreements as
well as renewals of existing agreements and results fluctuate from quarter to
quarter, with such fluctuations being a result of the seasonality in the way
that licensing agreements are entered into and how the license agreements are
structured. On an annual basis, recurring film licensing revenues should
increase over time as the number of operating Showscan Attractions increases.
Revenues from equipment sales and related services for the Six Month
Period increased 40% to $6.6 million from $4.8 million in the corresponding
prior year period. The increase can be attributed to an increase in the number
of Showscan Attractions ordered and recognized during the Six Month Period as
compared to the corresponding prior year period. The actual number of Showscan
Attractions ordered and recognized increased from seven units in the six month
period ended September 30, 1995 to nine units in the Six Month Period.
The Company recognizes equipment sales under the
percentage-of-completion method of accounting, generally measured by the
percentage that the labor hours incurred to date bears to the estimated total
labor hours of each contract. This results in a disparity in the comparison of
equipment sales revenues over different time periods, as the Company records
revenues under this method rather than on the date that the sales agreement is
signed. The actual signing of a Showscan Attraction sale precedes its delivery
and installation by an average of six to seven months. Accordingly, the
recognition of revenue for equipment sales during the current and future
quarters is affected by (i) the timing of such sales, (ii) the schedule of the
build out of the Showscan Attractions and (iii) the shipment, delivery and
installation of the equipment and related services.
Costs of revenues were 67% of revenues in the Six Month Period as
compared to 55% in the corresponding prior year six month period. The increase
was principally the result of (i) two one-time agreements which were recognized
($550,000 and $660,000 respectively) in the prior year six month period, each
of which had significantly lower associated cost of revenues, and (ii) a lower
gross profit percentage associated with sales to a major customer in the Six
Month Period. Cost of revenues also increased as a percentage of total
revenues because film licensing revenues (which traditionally have a higher
gross profit margin) represented less of a percentage of total revenues than in
the corresponding prior year six month period. Amortization expense of the
film library remained fairly constant as the amount for the Six Month Period
and the corresponding prior year six month period was $325,000 and $359,000,
respectively.
The Company accounts for its net ownership position in O&O Theatres
using the equity method of accounting. The equity loss of $186,000 on the
operations of O&O Theatres for the Six Month Period was 65% higher than the
corresponding prior year six month period equity loss of $113,000 and is
primarily the result of the following factors: (i) expenses incurred in
connection with the acquisition and development of future O&O Theatre
locations, (ii) operating losses, including start-up and marketing expenses at
the Riverwalk in San Antonio, Texas, (iii) operating losses at the Trocadero in
London, due to heavy construction adjacent to the theatre that directly
affected all of the businesses in the area of construction, (iv) operating
losses at the Framingham theatres and at CityWalk, and (v) offset by the
operating profit of the O&O Theatre in Osaka. The Company earns film licensing
and management fees (from some of the O&O Theatres) which are recorded
separately in the accompanying condensed consolidated statements of operations,
thereby inherently increasing the operating expenses at the specific O&O
Theatres. At the Trocadero O&O Theatre location, the Company is currently
assessing its rights in the construction matter.
10
<PAGE> 11
The Company incurred a net loss in the Six Month Period of $1,413,000
as compared to a $370,000 loss in the corresponding prior year six month
period, primarily due to the decrease in film licensing revenues and the
increase in cost of revenues in the Six Month Period as compared to the prior
year six month period.
Comparison of the three months ended September 30, 1996 and 1995:
Revenues for the three-month period ended September 30, 1996 (the
"1997 Second Quarter") increased $1,559,000 or 40% from revenues for the
three-month period ended September 30, 1995 (the "1996 Second Quarter") due to
the increase in revenues recognized from equipment sales and related services
in the 1997 Second Quarter.
Film licensing revenues decreased by 13% to $1,189,000 in the 1997
Second Quarter. The decrease was due to (i) revenues of $300,000 recognized in
the 1996 Second Quarter from a specific one-time license agreement, which
revenues constitute all of the revenues to be received with respect to such
agreement, and (ii) the renewal of the agreement with Imagine Japan, which
renewal changed the timing of film licensing revenue recognition such that
approximately $369,000 was recognized in the 1996 Second Quarter that was not
recognized in the 1997 Second Quarter. After adjustment for the aforementioned
items, recurring film licensing revenues increased 69% from $704,000 in the
1996 Second Quarter to $1,189,000 in the 1997 Second Quarter, which was
primarily the result of the fact that there were additional Showscan
Attractions open in the 1997 Second Quarter.
Revenues from equipment sales and related services for the 1997 Second
Quarter increased 69% to $4.3 million from $2.5 million in the 1996 Second
Quarter. The increase in the number of Showscan Attraction orders and
installations in the 1997 Second Quarter and the preceding quarter as compared
to the corresponding prior year periods resulted in the increase in revenues.
Costs of revenues were 67% of revenues in the 1997 Second Quarter as
compared to 56% in the 1996 Second Quarter. The increase was principally the
result of the recognition of a specific one-time license agreement ($300,000)
in the 1996 Second Quarter which had a significantly lower associated cost of
revenues. The costs related to equipment sales and related services increased
to 78% in the 1997 Second Quarter from 76% in the 1996 Second Quarter.
Equipment sales recorded in the 1997 Second Quarter generally had a higher cost
of revenue associated with each unit sold (due to the sales at lower margins to
a major customer) than sales of units in the 1996 Second Quarter. Amortization
of the film library for the 1997 Second Quarter and the 1996 Second Quarter was
$192,000 and $159,000, respectively.
The loss on investment in Owned and Operated Theatres in the 1997
Second Quarter is primarily the result of operating losses (i) at the
Framingham theatres, (ii) at the Trocadero theatre, due to heavy construction
adjacent to the theatre which directly affected all of the businesses in the
area of construction, and (iii) expenses incurred in connection with the
acquisition and development of future O&O Theatre locations, offset by the
operating profit of the O&O Theatre at Osaka.
The Company's net loss decreased in the 1997 Second Quarter to
$424,000 from $490,000 in the 1996 Second Quarter, due to the increase in units
sold in the 1997 Second Quarter from the 1996 Second Quarter.
11
<PAGE> 12
Liquidity and Capital Resources:
At September 30, 1996, the Company's working capital decreased to
$6,047,000 from $8,076,000 at March 31, 1996. The decrease in working capital
was primarily due to the expenditures related to the production of two new
motion simulation films and the operating loss for the Six Month Period.
Cash and cash equivalents at September 30, 1996 decreased by
$1,806,000 from March 31, 1996. The decrease in cash was primarily due to (i)
the financing of the production of two new films in the amount of $1,741,000,
and (ii) account receivables and unbilled receivables on uncompleted equipment
contracts increased by a combined 44%, while accounts payable, customer
advances on uncompleted equipment contracts and accrued expenses and other
current liabilities increased by only 2%, offset by (iii) a $2,089,000
redemption of short-term investments. The changes to receivables, payables,
advances and accrued expenses are primarily attributable to variations in the
timing of Showscan Attractions sales and the specific contract terms of such
sales, which terms generally affect the timing of collections, shipments,
deliveries to customers, installations and the related payments to vendors.
The specific contract terms of each sale also dictate when invoicing occurs.
The increase in accounts receivable is primarily due to the issuance of certain
large invoices just prior to September 30, 1996.
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 O&O 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 business
strategy, specifically with regard to the timing of new film productions and
the number of new O&O Theatres. At October 31, 1996, the Company has reserved
4,585,746 shares of Common Stock for issuance on the exercise of stock options,
warrants, preferred stock and convertible notes. Furthermore, the Company's
current backlog is approximately $25 million, comprising 38 screens of which 9
screens are scheduled to be open by the end of fiscal year 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Portions of this report on Form 10-Q (this "Report") may contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The reader is cautioned that all
forward-looking statements are necessarily speculative and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward- looking statements. The
discussion below, together with portions of the discussion elsewhere in this
Report and in the Company's other reports on file with the Securities and
Exchange Commission, highlight some of the more important risks identified by
the management of the Company but should not be assumed to be the only things
that could affect future performance.
12
<PAGE> 13
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 Showscan
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 Showscan Attractions sold, (d) the timing of film
licensing revenues from existing Showscan Attractions and the performance of
those Showscan 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 (quarterly and/or annually) may not be indicative of the
results for any future period.
The Company's performance depends primarily upon the number of
Showscan 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 Showscan
Attractions.
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 political instability, changes in foreign currency
exchange rates, 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.
Competition
The Company faces intense competition in all of its product lines. In
the motion simulation business, the Company's main competitor is Iwerks
Entertainment, Inc. 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
Corporation 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.
13
<PAGE> 14
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 fifteen attractions. The second concentration relates to the
Company's sales backlog where United Artists Theatre Circuit, Inc. 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.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on August 26,
1996. The matters voted upon at the meeting were (a) the election of a board
of directors to serve until the next annual meeting of stockholders, and (b)
the ratification of the appointment of Ernst & Young LLP as the independent
auditors for the Company.
The voting on each proposal was as set forth in the tables below.
1. Election of directors:
<TABLE>
<CAPTION>
Withhold
For Authority
--------- ---------
<S> <C> <C>
William D. Eberle 6,515,625 7,050
William C. Soady 6,515,825 6,850
Charles B. Moss, Jr. 6,515,825 6,850
Thomas R. DiBenedetto 6,515,825 6,850
Kurt C. Hall 6,515,625 7,050
</TABLE>
2. Ratification of the appointment of Ernst & Young LLP as the
independent auditors of the Company for the fiscal year ending
March 31, 1997.
<TABLE>
<S> <C> <C>
For Against Abstentions
--------- ------- ------------
6,517,324 3,001 2,350
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The exhibits listed below are filed as part of this Report.
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
10.35 Agreement, dated August 7, 1996, between the
Company and William C. Soady.
10.36 Agreement, dated August 7, 1996, between the
Company and Dennis Pope.
10.37 Agreement, dated August 7, 1996, between the
Company and W. Tucker Lemon.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, in the City of
Culver City, State of California on the 13th day of November, 1996.
Showscan Entertainment Inc.
(Registrant)
By \s\ DENNIS POPE
--------------------------------
Dennis Pope
Executive Vice President
- Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
By \s\ GREGORY W. BETZ
--------------------------------
Gregory W. Betz
Vice President - Director of Finance
(Authorized Officer and Principal
Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page Number
- ----------- ----------- -----------
<S> <C>
10.35 Agreement, dated August 7, 1996,
between the Company and William C. Soady.
10.36 Agreement, dated August 7, 1996,
between the Company and Dennis Pope.
10.37 Agreement, dated August 7, 1996,
between the Company and W. Tucker Lemon.
27 Financial Data Schedule.
</TABLE>
17
<PAGE> 1
SHOWSCAN ENTERTAINMENT INC.
3939 LANDMARK STREET
CULVER CITY, CALIFORNIA 90232-2315
August 7, 1996
William C. Soady
President, Chief Executive Officer
and Director
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Dear Mr. Soady:
Showscan Entertainment Inc. (the "Corporation") considers it
essential to the best interests of its stockholders to foster the continuous
employment of key management personnel. In connection with this, the
Corporation's Board of Directors (the "Board") recognizes that, as is the case
with many publicly held corporations, the possibility of a change in control of
the Corporation may exist and that such possibility, and that such uncertainty
and questions that it may raise among management, could result in the departure
or distraction of management personnel to the detriment of the Corporation and
its stockholders.
The Board has decided to reinforce and encourage the continued
attention and dedication of members of the Corporation's management, including
yourself, to their assigned duties without distraction arising from the
possibility of a change in control of the Corporation.
In order to induce you to remain in its employ, the
Corporation hereby agrees that after this letter agreement (this "Agreement")
has been fully executed, you shall receive the severance and other benefits set
forth in this Agreement. If an employment agreement between you and the
Corporation also entitles you to benefits upon a change in control (as defined
in such employment agreement), you shall be required to choose between the
benefits upon a change in control provided by any such employment agreement and
the benefits upon a Change in Control provided by this Agreement.
Unless otherwise defined herein, all capitalized terms used
herein shall have the meanings assigned to such terms in Appendix A attached
hereto.
<PAGE> 2
William C. Soady
August 7, 1996
Page 2
1. Term of Agreement. This Agreement shall commence on
August 7, 1996, and shall continue in effect through December 31, 1999;
provided, however, that commencing on January 1, 2000, and each January 1
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than September 30 of the preceding year, the
Corporation shall have given notice that it does not wish to extend this
Agreement; provided, that if a Change in Control or Potential Change in
Control, occurs during the original or extended term of this Agreement, this
Agreement shall continue in effect for a period of not less than twenty-four
(24) months beyond the month in which such Change in Control or Potential
Change in Control occurred. Notwithstanding anything to the contrary contained
in this Agreement, in no event shall the term of this Agreement extend beyond
the end of the calendar month in which your 65th birthday occurs.
2. Change in Control and Potential Change in Control.
No benefits shall be payable hereunder until there has been a Change in
Control. You agree that, subject to the terms and conditions of this
Agreement, in the event of a Potential Change in Control, you shall remain in
the employ of the Corporation until the date of occurrence of a Change in
Control, unless you terminate your employment before then for Good Reason or by
reason of death, Disability or retirement, or the Corporation terminates your
employment for any reason.
3. Termination Following Change in Control or Potential
Change in Control.
(a) General. If any of the events constituting a Change
in Control shall have occurred, you shall be entitled to the benefits provided
in Section 4(b) upon the subsequent termination of your employment during the
term of this Agreement, if such termination is (i) by the Corporation other
than for Cause within twenty-four (24) months after a Change in Control, (ii)
by you for Good Reason within twenty-four (24) months after a Change in
Control, (iii) by you in the case of your voluntary termination of employment
for any reason, if you continue in the employ of the Corporation for a period
of six (6) months after a Change in Control (the "Transition Employment
Period"), and the termination of your employment occurs within thirty (30) days
immediately following the end of the Transition Employment Period, as provided
in Section 3(b), or (iv) because of your death, Disability (as defined in
Section 3(c)) or retirement, as long as such termination occurs within
twenty-four (24) months after a Change in Control. You shall not be entitled
to the benefits provided in Section 4(b) if the termination of your employment
occurs more than twenty-four (24) months after a Change in Control.
Furthermore, you shall not be entitled to the benefits provided in Section 4(b)
if, upon termination of your employment, you fail to comply with the
Corporation's standard termination procedures, including execution of a copy of
the separation agreement, a form of which is attached hereto as Exhibit 1. In
the event your employment with the Corporation is terminated for any reason and
subsequently a Potential Change in Control or a Change in Control occurs, you
shall not be entitled to any
<PAGE> 3
William C. Soady
August 7, 1996
Page 3
benefits hereunder. Notwithstanding anything in this Agreement to the
contrary, if your employment is terminated within one (1) year immediately
prior to the Change in Control, but following a Potential Change in Control,
such termination shall be deemed to have occurred on the date immediately
following a Change in Control and to have been (A) by the Corporation without
Cause, if your employment is terminated without Cause, or (B) by you with Good
Reason, if you terminate your employment with Good Reason and the act (or
failure to act) which constitutes Good Reason occurs following such Potential
Change in Control, or (C) by you because of your death, Disability or
retirement, if you terminate your employment because of your death, Disability
or retirement and your death, Disability or retirement occurs following such
Potential Change in Control.
(b) Voluntary Termination Within 30 Days Immediately
Following the End of the Transition Employment Period. Notwithstanding any
other provision in this Agreement, if you voluntarily terminate your employment
for any reason, and the Date of Termination and/or Notice of Termination occurs
within the first thirty (30) days immediately following the end of the
Transition Employment Period, you shall be entitled to the benefits provided in
Section 4(b).
(c) Disability. If you are unable to perform your duties
of employment for in excess of ninety (90) consecutive days or an aggregate of
one hundred and twenty (120) days in any twelve (12) month period during the
term of your employment as a result of a physical or mental condition, as
determined in good faith by the Board of Directors, your employment may be
terminated for "Disability."
(d) Good Reason. Your right to terminate your employment
for Good Reason shall not be affected by your incapacity due to physical or
mental illness. Your continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
(e) Notice of Termination. Any purported termination of
your employment by the Corporation or by you (other than termination due to
death which shall terminate your employment automatically) shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 7.
4. Compensation Upon Termination or During Disability.
Following a Change in Control, you shall be entitled to the benefits described
below during a period of disability, or upon termination of your employment, as
the case may be, provided that such period or termination occurs during the
term of this Agreement. The benefits to which you are entitled, subject to the
terms and conditions of this Agreement, are:
(a) If your employment shall be terminated by the
Corporation for Cause, or by the Corporation without Cause and more than
twenty-four (24) months after a
<PAGE> 4
William C. Soady
August 7, 1996
Page 4
Change in Control, or by you other than for Good Reason either before, or more
than thirty (30) days after, the end of the Transition Employment Period, or by
you for Good Reason and more than twenty-four (24) months after a Change in
Control, the Corporation shall pay you your full base salary, when due, through
the Date of Termination at the rate in effect at the time Notice of Termination
is given, plus all other amounts to which you are entitled under any
compensation plan of the Corporation at the time such payments are due, and the
Corporation shall have no further obligations to you under this Agreement.
(b) If your employment by the Corporation shall
be terminated by you for Good Reason within twenty-four (24) months after a
Change in Control or by the Corporation other than for Cause within twenty-four
(24) months after a Change in Control or by you for any reason within thirty
(30) days immediately following the end of your Transition Employment Period or
by you because of your death, Disability or retirement within twenty-four (24)
months after a Change in Control, then you shall be entitled to the benefits
provided below:
(i) the Corporation shall pay to you your full base
salary, when due, through the Date of Termination at the rate in effect
at the time Notice of Termination is given, at the time specified in
Section 4(d), plus all other amounts to which you are entitled under
any compensation plan of the Corporation at the time such payments are
due;
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of Termination, the Corporation
shall pay as severance pay to you, at the time specified in Section
4(d), a lump sum severance payment (the "Severance Payments") equal to
300% of the average of your salary with respect to the three (3) fiscal
years (or your total years of employment with the Corporation, if less
than three (3)) preceding the Date of Termination or immediately prior
to the Change in Control, whichever is greater, and 300% of the average
of the annual bonuses awarded to you pursuant to the Corporation's
bonus plan for executive officers, or any successor bonus plan thereto,
with respect to the three (3) fiscal years (or your total years of
employment with the Corporation, if less than three (3)) preceding the
Date of Termination or immediately prior to the Change in Control,
whichever is greater;
(iii) the Corporation shall pay to you all legal fees
and legal expenses incurred by you as a result of such termination
(including all such reasonable legal fees and legal expenses, if any,
incurred in contesting or disputing any such termination or in seeking
to obtain or enforce any right or benefit provided by this Agreement
(as set forth in Section 11 of this Agreement) or in connection with
any tax audit or proceeding to the extent attributable to the
application of section 4999 of the Code, to any payment or benefit
provided hereunder); and
<PAGE> 5
William C. Soady
August 7, 1996
Page 5
(iv) for a twenty-four (24) month period after the
Date of Termination, the Corporation shall arrange to provide you with
life, disability, accident and group health insurance benefits
substantially similar to those that you were receiving immediately
prior to the Notice of Termination. Benefits otherwise receivable by
you pursuant to this Section 4(b)(iv) shall be reduced to the extent
comparable benefits are actually received by you during the
twenty-four (24) month period following the Date of Termination, and
any such benefits actually received by you shall be reported to the
Corporation.
(c) You shall bear all expense of, and be solely
responsible for, all federal, state, local or foreign taxes due with respect to
any payment received hereunder, including, without limitation, any excise tax
imposed by Section 4999 of the Code; provided, however, that any payment or
benefit received or to be received by you in connection with a Change in
Control or the termination of your employment (whether payable pursuant to the
terms of this Agreement ("Contract Payments") or any other plan, arrangements
or agreement with the Corporation or an Affiliate (collectively with the
Contract Payments, the "Total Payments")) that would constitute a "parachute
payment" within the meaning of Section 280G of the Code, shall be reduced to
the extent necessary so that no portion thereof shall be subject to the excise
tax imposed by Section 4999 of the Code but only if, by reason of such
reduction, the net after-tax benefit received by you shall exceed the net
after-tax benefit received by you if no such reduction was made. For purposes
of this Section 4(c), "net after-tax benefit" shall mean (i) the Total Payments
which you receive or are then entitled to receive from the Corporation that
would constitute "parachute payments" within the meaning of Section 280G of the
Code, less (ii) the amount of all federal, state and local income taxes payable
with respect to the foregoing calculated at the maximum marginal income tax
rate for each year in which the foregoing shall be paid to you (based on the
rate in effect for such year as set forth in the Code as in effect at the time
of the first payment of the foregoing), less (iii) the amount of excise taxes
imposed with respect to the payments and benefits described in (i) above by
Section 4999 of the Code. The foregoing determination will be made by a
nationally recognized accounting firm (the "Accounting Firm") selected by you
and reasonably acceptable to the Corporation (which may be, but will not be
required to be, the Corporation's independent auditors). You will direct the
Accounting Firm to submit its determination and detailed supporting
calculations to both you and the Corporation within fifteen (15) days after the
Date of Termination. If the Accounting Firm determines that such reduction is
required by this Section 4(c), you, in your sole and absolute discretion, may
determine which Total Payments shall be reduced to the extent necessary so that
no portion thereof shall be subject to the excise tax imposed by Section 4999
of the Code, and the Corporation shall pay such reduced amount to you. You and
the Corporation will each provide the Accounting Firm access to and copies of
any books, records, and documents in the possession of you or the Corporation,
as the case may be, reasonably requested by the Accounting Firm, and otherwise
cooperate with the Accounting Firm in connection with the preparation and
issuance of the determinations and calculations contemplated by this Section
<PAGE> 6
William C. Soady
August 7, 1996
Page 6
4(c). The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by this
Section 4(c) will be borne by the Corporation.
(d) The payments provided for in Section 4(b)(i)
shall be made not later than the Date of Termination. The payments provided
for in Section 4(b)(ii) shall be made not later than the Date of Termination;
provided, however, that if the amounts of such payments cannot be finally
determined on or before such day, the Corporation shall pay to you on such day
an estimate, as determined in good faith by the Corporation, of the minimum
amount of such payments and shall pay the remainder of such payments (together
with interest at the rate provided in section 1274(b)(2)(B) of the Code) as
soon as the amount thereof can be determined but in no event later than the
Date of Termination. In the event that the amount of the estimated payments
exceeds the amount subsequently determined to have been due, such excess shall
constitute a loan by the Corporation to you, payable on the demand by the
Corporation (together with interest at the rate provided in section
1274(b)(2)(B) of the Code).
(e) You shall not be required to mitigate the
amount of any payment provided for in this Section 4 by seeking other
employment or otherwise nor, except as provided in Section 4(b)(iv), shall the
amount of any payment or benefit provided for in this Section 4 be reduced by
any compensation earned by you as the result of employment by another employer
or self-employment, by retirement benefits, by offset against any amount
claimed to be owed by you to the Corporation, or otherwise.
5. Vesting of Stock Options Upon Change in Control.
Notwithstanding any other provision of this Agreement or of any stock option
plan or agreement, upon the occurrence of a Change in Control, all of your
stock options, if any, granted under any of the Corporation's stock option
plans or agreements shall become vested and exercisable effective as of the day
immediately prior to the date of the Change in Control.
6. Successors; Binding Agreement. (a) The Corporation
shall require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Corporation to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform it if no such succession had taken place. Failure of
the Corporation to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle you to terminate your employment and receive compensation from
the Corporation in the same amount and on the same terms to which you would be
entitled hereunder if you terminate your employment for Good Reason within
twenty-four (24) months after a Change in Control, except that for purposes of
implementing the foregoing, the day before the date on which any such
succession becomes effective shall be deemed the Date of Termination. Where
the context
<PAGE> 7
William C. Soady
August 7, 1996
Page 7
requires, "Corporation" shall mean the Corporation as hereinbefore defined and
any successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of
and be enforceable by you and your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable to you
hereunder had you continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement
to your devisee, legatee or other designee or, if there is no such designee, to
your estate.
7. Notice. For the purpose of this Agreement, notices
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed by United
States certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth on the first page of this
Agreement, provided that all notices to the Corporation shall be directed to
the attention of the Board with a copy to the Secretary of the Corporation, or
to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by you and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of California without regard to its
conflicts of law principles. All references to sections of the Exchange Act or
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law. The
obligations of the Corporation under Section 4 shall survive the expiration of
the term of this Agreement. The section headings contained in this Agreement
are for convenience only, and shall not affect the interpretation of this
Agreement.
9. Severability. The invalidity or unenforceability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect.
<PAGE> 8
William C. Soady
August 7, 1996
Page 8
10. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an original but all
of which together shall constitute one and the same instrument.
11. Arbitration; Dispute Resolution.
(a) Arbitration Procedure. Any disagreement,
dispute, controversy or claim arising out of or relating to this Agreement or
the interpretation of this Agreement or any arrangements relating to this
Agreement or contemplated in this Agreement or the breach, termination or
invalidity thereof shall be settled by arbitration in accordance with the
Commercial Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") (except as otherwise provided in this
Agreement) in Los Angeles, California. The arbitral tribunal shall consist of
one arbitrator. In making any decision, the arbitrator shall apply and follow
the substantive law of California without reference to the conflicts of law
provisions thereof. The parties to the arbitration jointly shall directly
appoint such arbitrator within thirty (30) days of initiation of arbitration.
If the parties shall fail to appoint such arbitrator as provided above, such
arbitrator shall be appointed by the AAA as provided in the Arbitration Rules.
You and the Corporation agree that the arbitral award may be enforced against
the parties to the arbitration proceeding or their assets wherever they may be
found and that a judgment upon the arbitral award may be entered in any court
having jurisdiction thereof. The Corporation shall pay all fees and expenses
of the Arbitrator regardless of the result and shall provide all witnesses and
evidence reasonably required by you to present your case. The Corporation
shall pay to you all reasonable arbitration expenses and legal fees incurred by
you as a result of a termination of your employment in seeking to obtain or
enforce any right or benefit provided by this Agreement (whether or not you are
successful in obtaining or enforcing such right or benefit). Such payments
shall be made within five (5) days after your request for payment accompanied
with such evidence of fees and expenses incurred as the Corporation reasonably
may require.
(b) Compensation During Dispute. Your
compensation during any disagreement, dispute, controversy or claim arising out
of or relating to this Agreement or the interpretation of this Agreement shall
be as follows:
(i) If a purported termination by you for Good
Reason within twenty-four (24) months after a Change in Control occurs
or is deemed to occur following a Change in Control and during the
term of this Agreement, and such termination is disputed in accordance
with Section 7 of Appendix A and Section 11(a) of this Agreement, the
Corporation shall continue to pay you the full compensation in effect
when the notice giving rise to the dispute was given (including, but
not limited to, salary) and continue you as a participant in all
compensation, benefit and insurance plans in which you were
participating when the notice giving rise to the dispute was given,
until the dispute is finally resolved in accordance with Section
<PAGE> 9
William C. Soady
August 7, 1996
Page 9
11(a). Amounts paid under this Section 11(b)(i) are in addition to
all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement. You
agree to remain in the employ of the Corporation during the resolution
of the dispute and to continue to provide services unless your
employment is terminated earlier by death, Disability or retirement,
or by action of the Corporation. If the dispute is resolved by a
determination that you did not have Good Reason, this Agreement, in
accordance with its terms, shall continue to apply to the
circumstances of your employment by the Corporation and any
termination thereof.
(ii) If there is a termination by the Corporation
followed by a dispute as to whether you are entitled to the payments
and other benefits provided under this Agreement, then, during the
period of that dispute the Corporation shall pay you 100% of the
amount specified in Section 4(b)(i) hereof and 50% of the amount
specified in Section 4(b)(ii) hereof, and the Corporation shall
provide you with the other benefits provided in Section 4(b) of this
Agreement, if, but only if, you agree in writing that if the dispute
is resolved against you, you shall promptly refund to the Corporation
all payments you receive under Section 4(b)(ii) of this Agreement plus
interest at the rate provided in Section 1274(d) of the Code,
compounded quarterly. If the dispute is resolved in your favor,
promptly after resolution of the dispute the Corporation shall pay you
the sum that was withheld during the period of the dispute plus
interest at the rate provided in Section 1274(d) of the Code,
compounded quarterly.
12. Entire Agreement. This Agreement sets forth the
entire agreement of the parties hereto in respect of your benefits upon a
Change in Control and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations or warranties, whether oral or
written, by any officer, employee or representative of any party hereto related
to the subject of your benefits upon a Change in Control; and any prior
agreement of the parties hereto in respect of your benefits upon a Change in
Control, is hereby terminated and cancelled. Notwithstanding the foregoing,
this Agreement shall not supersede any employment agreement between you and the
Corporation, except that if the provisions and definitions of such an
employment agreement in respect of your benefits upon a change in control (as
defined in such employment agreement), if any, differ from the provisions and
definitions of this Agreement in respect of your benefits upon a Change in
Control, you, in your sole and absolute discretion, may choose whether the
provisions and definitions of such employment agreement or this Agreement shall
govern all matters relating to your benefits upon a change in control.
13. No Employment Right Created. Nothing in this
Agreement shall confer on you any right to continue in the employ of the
Corporation or shall interfere with or restrict in any way the rights of the
Corporation, which are hereby expressly reserved, to
<PAGE> 10
William C. Soady
August 7, 1996
Page 10
discharge you at any time for any reason whatsoever, with or without good
cause, except as may be otherwise provided in any written employment agreement
between you and the Corporation. This Agreement shall not constitute an
agreement for employment.
If this letter sets forth our agreement on the subject matter
hereof, kindly sign and return to the Corporation the enclosed copy of this
letter, which shall then constitute our agreement on this subject.
Sincerely,
SHOWSCAN ENTERTAINMENT INC.
By /s/ DENNIS POPE
--------------------------
Name: Dennis Pope
Title: Executive Vice President
Agreed to this 12th day
of August 1996.
/s/ WILLIAM C. SOADY
- -------------------------
<PAGE> 11
William C. Soady
August 7, 1996
Page 11
APPENDIX A
DEFINITIONS
For purposes of this Agreement, the following terms have the
meanings indicated:
1. "Acquiring Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 20% or more of the Common Shares of the Corporation then
outstanding, but shall not include (i) the Corporation; (ii) any Subsidiary of
the Corporation; or (iii) any employee benefit plan of the Corporation or any
Subsidiary of the Corporation, or any entity holding Common Shares for or
pursuant to the terms of any such plan. Notwithstanding the foregoing, no
Person shall become an "Acquiring Person" as the result of an acquisition of
Common Shares by the Corporation which, by reducing the number of shares
outstanding, increases the proportionate number of shares beneficially owned by
such Person to 20% or more of the Common Shares of the Corporation then
outstanding; provided, however, that if a Person shall become the Beneficial
Owner of 20% or more of the Common Shares of the Corporation then outstanding
by reason of share purchases by the Corporation and shall, after such share
purchases by the Corporation, become the Beneficial Owner of any additional
Common Shares of the Corporation, then such Person shall be deemed to be an
"Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of
the Corporation determines in good faith that a Person who would otherwise be
an "Acquiring Person," has become such inadvertently, and such Person divests
as promptly as practicable a sufficient number of Common Shares so that such
Person would no longer be an "Acquiring Person," then such Person shall not be
deemed to be an "Acquiring Person" for any purposes of this Agreement.
2. "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as in effect on the date of this Agreement.
3. A Person shall be deemed the "Beneficial Owner" of
and shall be deemed to "beneficially own" any
securities:
(a) which such Person or any of such Person's
Affiliates or Associates beneficially owns, within the meaning of Rule
13d-3(a) under the Exchange Act, directly or indirectly;
(b) which such Person or any of such Person's
Affiliates or Associates has (i) the right to acquire (whether such
right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or
<PAGE> 12
William C. Soady
August 7, 1996
Page 12
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities), or upon the exercise of conversion
rights, exchange rights, rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the Beneficial
Owner of, or to beneficially own, securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange; or (ii) the right to vote
pursuant to any agreement, arrangement or understanding; provided,
however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, any security if the agreement, arrangement or
understanding to vote such security (A) arises solely from a revocable
proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act
and (B) is not also then reportable on Schedule 13D under the Exchange
Act (or any comparable or successor report); or
(c) which are beneficially owned, directly or
indirectly, by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities) for the purpose of acquiring, holding,
voting or disposing of any securities of the Corporation.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase "then outstanding," when used with reference to (and for
purposes of determining the percentage of) a Person's Beneficial Ownership of
securities of the Corporation, shall mean the number of such securities then
issued and outstanding together with the number of such securities not then
actually issued and outstanding which such Person (including such Person's
Affiliates and Associates but not including any other Person) would be deemed
to own beneficially hereunder.
4. Termination by the Corporation of your employment for
"Cause" shall mean termination (a) upon your willful and continued failure to
substantially perform your duties with the Corporation (other than any such
failure resulting from your incapacity due to physical or mental illness) or
any such actual or anticipated failure after your issuance of a Notice of
Termination, after a written demand for substantial performance is delivered to
you by the Board, which demand specifically identifies the manner in which the
Board believes that you have not substantially performed your duties, (b) upon
your willful participation in conduct which is demonstrably and materially
injurious to the Corporation, monetarily or otherwise, or (c) upon your
conviction of a felony involving moral turpitude after all appeals are final.
For purposes of this definition, no act, or failure to act, on your part shall
be deemed "willful" unless done, or omitted to be done, by you in bad faith.
<PAGE> 13
William C. Soady
August 7, 1996
Page 13
Notwithstanding the foregoing, you shall not be deemed terminated for Cause
unless and until there shall have been delivered to you a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters (3/4) of
the entire membership of the Board at a meeting of the Board (after reasonable
notice to you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the Board's good faith opinion you
were guilty of conduct set forth above in this definition and specifying the
particulars thereof in reasonable detail.
5. A "Change in Control" shall be deemed to occur if:
(a) any Person shall have become an Acquiring
Person;
(b) any Person is or becomes the Beneficial Owner,
directly or indirectly, of Common Shares of the Corporation
representing 20% or more of the combined voting power of the
Corporation's then outstanding Common Shares;
(c) during any period of two consecutive years (not
including any period prior to the execution of this Agreement),
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person who
has entered into an agreement with the Corporation to effect a
transaction described in Sections (a), (b), (d) or (e) of this
definition) whose election by the Board or nomination for election by
the Corporation's stockholders was approved by a vote of at least
two-thirds ( 2/3) of the directors then still in office who either
were directors at the beginning of such period or whose election or
nomination for election was previously so approved (hereinafter
referred to as "Continuing Directors"), cease for any reason to
constitute at least a majority thereof;
(d) the stockholders of the Corporation approve a
merger or consolidation of the Corporation with any other corporation
(or other entity), other than a merger or consolidation which would
result in the Common Shares of the Corporation outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into Common Shares of the surviving entity) more
than 66- 2/3% of the combined voting power of the Common Shares of the
Corporation or such surviving entity outstanding immediately after
such merger or consolidation; provided, however, that a merger or
consolidation effected to implement a recapitalization of the
Corporation (or similar transaction) in which no Person acquires more
than 20% of the combined voting power of the Corporation's then
outstanding Common Shares shall not constitute a Change in Control; or
<PAGE> 14
William C. Soady
August 7, 1996
Page 14
(e) the stockholders of the Corporation approve a
plan of complete liquidation of the Corporation or an agreement for
the sale or disposition by the Corporation of all or substantially all
of the Corporation's assets.
6. "Common Shares" when used with reference to the
Corporation shall mean the shares of common stock, par value $.001 per share,
of the Corporation; and in addition shall include all Common Shares issuable
upon exercise or conversion of outstanding Common Share Equivalents, which
Common Shares are deemed to be "outstanding" and the holder of which shall be
deemed to be a "record holder" of such Common Shares for purposes of this
Agreement. "Common Share Equivalents" shall mean all outstanding shares of
Series C Preferred Stock of the Corporation and of 8% Convertible Notes Due
September 1, 1999, and such other classes or series of capital stock and/or
debt of the Corporation as the Board of Directors of the Corporation shall
expressly designate as Common Share Equivalents within the meaning of this
Agreement. "Common Shares" when used to refer to shares issued by any Person
other than the Corporation shall mean the capital stock (or equity interest)
with the greatest voting power of such other Person or, if such other Person is
a Subsidiary of another Person, the Person or Persons which ultimately control
such first-mentioned Person.
7. "Date of Termination" shall mean (a) if your
employment is terminated due to your death, the date of your death; (b) if your
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30)-day period), and
(c) if your employment is terminated for Cause or Good Reason or for any other
reason (other than death or Disability), the date specified in the Notice of
Termination (which, in the case of a termination for Cause shall not be less
than thirty (30) days from the date such Notice of Termination is given, and in
the case of a termination for Good Reason or a voluntary termination shall not
be less than fifteen (15) nor more than sixty (60) days from the date such
Notice of Termination is given). Except for cases of voluntary termination,
notwithstanding anything to the contrary contained in this definition, if
within fifteen (15) days after any Notice of Termination is given, the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, then the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, or as set forth in Section 11 of the Agreement;
provided, however, that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
8. "Good Reason" shall mean, without your express
written consent, the occurrence after a Change in Control of any of the
following circumstances unless, in the case of Sections (a), (e), (f), (g) or
(h) of this definition, such circumstances are fully
<PAGE> 15
William C. Soady
August 7, 1996
Page 15
corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(a) the assignment to you of any duties
inconsistent with the position in the Corporation that you held
immediately prior to the Change in Control, or a significant adverse
alteration in the nature or status of your responsibilities or the
conditions of your employment from those in effect immediately prior
to such Change in Control, or a significant adverse alteration in the
level or authority of your position in the overall corporate structure
from that in effect immediately prior to such Change in Control;
(b) the Corporation's reduction of your annual
base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all management personnel of the
Corporation and all management personnel of any Person in control of
the Corporation;
(c) the relocation of the Corporation's offices
at which you are principally employed immediately prior to the date of
the Change in Control to a location that is more than fifteen (15)
miles further from your primary residence on the date of the Change in
Control than the location of the Corporation's offices at which you
are principally employed immediately prior to the date of the Change
in Control, or the Corporation's requiring you to be based anywhere
other than the Corporation's offices at such location except for
required travel on the Corporation's business to an extent
substantially consistent with your present business travel
obligations;
(d) the Corporation's failure to pay to you any
portion of your current compensation or to pay to you any portion of
an installment of deferred compensation under any deferred
compensation program of the Corporation within seven (7) days of the
date such compensation is due;
(e) the Corporation's failure to continue in
effect any material compensation or benefit plan in which you
participate immediately prior to the Change in Control, unless an
equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or the
Corporation's failure to continue your participation therein (or in
such substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount of benefits provided and the
level of your participation relative to other participants, as existed
at the time of the Change in Control;
<PAGE> 16
William C. Soady
August 7, 1996
Page 16
(f) the Corporation's failure to continue to
provide you with benefits substantially similar to those enjoyed by
you under any of the Corporation's life insurance, medical, health and
accident, or disability plans in which you were participating at the
time of the Change in Control, the taking of any action by the
Corporation which would directly or indirectly materially reduce any
of such benefits, or the failure by the Corporation to provide you
with the number of paid vacation days to which you are entitled on the
basis of years of service with the Corporation in accordance with the
Corporation's normal vacation policy in effect at the time of the
Change in Control;
(g) the Corporation's failure to obtain a
satisfactory agreement from any successor to assume and agree to
perform this Agreement, as contemplated in Section 6 of the Agreement;
or
(h) any purported termination of your employment
that is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 9 of this Appendix (and, if applicable,
the requirements of termination for Cause), which purported
termination shall not be effective for purposes of this Agreement.
9. "Notice of Termination" shall mean a notice that shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of your employment under the provision so
indicated.
10. "Person" shall mean any individual, firm, corporation
or other entity, and shall include any successor (by merger or otherwise) of
such entity.
11. A "Potential Change in Control" shall be deemed to
occur if:
(a) the Corporation enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control;
(b) any Person (including the Corporation) publicly
announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control;
(c) any Person who, on the effective date of this
Agreement, is not a Beneficial Owner directly or indirectly of Common
Shares of the Corporation representing 10% or more of the combined
voting power of the Corporation's then outstanding Common Shares,
becomes, at any time after the effective date of this Agreement, the
Beneficial Owner directly or indirectly, of Common Shares of the
<PAGE> 17
William C. Soady
August 7, 1996
Page 17
Corporation representing 10% or more of the combined voting power of
the Corporation's then outstanding Common Shares;
(d) any Person who, on the effective date of this
Agreement, is a Beneficial Owner directly or indirectly of Common
Shares of the Corporation representing 10% or more of the combined
voting power of the Corporation's then outstanding Common Shares,
increases such Person's beneficial ownership of such Common Shares, at
any time after the effective date of this Agreement, by 5% or more over
the percentage so owned by such Person on the date hereof; or
(e) the Board adopts a resolution to the effect
that, for purposes of this Agreement, a Potential Change in Control
has occurred.
12. "Subsidiary" of any Person shall mean any corporation
or other entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, at the time of determination, directly
or indirectly, by such Person.
<PAGE> 1
SHOWSCAN ENTERTAINMENT INC.
3939 LANDMARK STREET
CULVER CITY, CALIFORNIA 90232-2315
August 7, 1996
Dennis Pope
Executive Vice President and
Chief Financial Officer
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Dear Mr. Pope:
Showscan Entertainment Inc. (the "Corporation") considers it
essential to the best interests of its stockholders to foster the continuous
employment of key management personnel. In connection with this, the
Corporation's Board of Directors (the "Board") recognizes that, as is the case
with many publicly held corporations, the possibility of a change in control of
the Corporation may exist and that such possibility, and that such uncertainty
and questions that it may raise among management, could result in the departure
or distraction of management personnel to the detriment of the Corporation and
its stockholders.
The Board has decided to reinforce and encourage the continued
attention and dedication of members of the Corporation's management, including
yourself, to their assigned duties without distraction arising from the
possibility of a change in control of the Corporation.
In order to induce you to remain in its employ, the
Corporation hereby agrees that after this letter agreement (this "Agreement")
has been fully executed, you shall receive the severance and other benefits set
forth in this Agreement. If an employment agreement between you and the
Corporation also entitles you to benefits upon a change in control (as defined
in such employment agreement), you shall be required to choose between the
benefits upon a change in control provided by any such employment agreement and
the benefits upon a Change in Control provided by this Agreement.
Unless otherwise defined herein, all capitalized terms used
herein shall have the meanings assigned to such terms in Appendix A attached
hereto.
<PAGE> 2
Dennis Pope
August 7, 1996
Page 2
1. Term of Agreement. This Agreement shall commence on
August 7, 1996, and shall continue in effect through December 31, 1999;
provided, however, that commencing on January 1, 2000, and each January 1
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than September 30 of the preceding year, the
Corporation shall have given notice that it does not wish to extend this
Agreement; provided, that if a Change in Control or Potential Change in Control,
occurs during the original or extended term of this Agreement, this Agreement
shall continue in effect for a period of not less than twenty-four (24) months
beyond the month in which such Change in Control or Potential Change in Control
occurred. Notwithstanding anything to the contrary contained in this Agreement,
in no event shall the term of this Agreement extend beyond the end of the
calendar month in which your 65th birthday occurs.
2. Change in Control and Potential Change in Control. No
benefits shall be payable hereunder until there has been a Change in Control.
You agree that, subject to the terms and conditions of this Agreement, in the
event of a Potential Change in Control, you shall remain in the employ of the
Corporation until the date of occurrence of a Change in Control, unless you
terminate your employment before then for Good Reason or by reason of death,
Disability or retirement, or the Corporation terminates your employment for any
reason.
3. Termination Following Change in Control or Potential
Change in Control.
(a) General. If any of the events constituting a Change
in Control shall have occurred, you shall be entitled to the benefits provided
in Section 4(b) upon the subsequent termination of your employment during the
term of this Agreement, if such termination is (i) by the Corporation other than
for Cause within twenty-four (24) months after a Change in Control, (ii) by you
for Good Reason within twenty-four (24) months after a Change in Control, (iii)
by you in the case of your voluntary termination of employment for any reason,
if you continue in the employ of the Corporation for a period of six (6) months
after a Change in Control (the "Transition Employment Period"), and the
termination of your employment occurs within thirty (30) days immediately
following the end of the Transition Employment Period, as provided in Section
3(b), or (iv) because of your death, Disability (as defined in Section 3(c)) or
retirement, as long as such termination occurs within twenty-four (24) months
after a Change in Control. You shall not be entitled to the benefits provided
in Section 4(b) if the termination of your employment occurs more than
twenty-four (24) months after a Change in Control. Furthermore, you shall not be
entitled to the benefits provided in Section 4(b) if, upon termination of your
employment, you fail to comply with the Corporation's standard termination
procedures, including execution of a copy of the separation agreement, a form of
which is attached hereto as Exhibit 1. In the event your employment with the
Corporation is terminated for any reason and subsequently a Potential Change in
Control or a Change in Control occurs, you shall not be entitled to any
<PAGE> 3
Dennis Pope
August 7, 1996
Page 3
benefits hereunder. Notwithstanding anything in this Agreement to the
contrary, if your employment is terminated within one (1) year immediately
prior to the Change in Control, but following a Potential Change in Control,
such termination shall be deemed to have occurred on the date immediately
following a Change in Control and to have been (A) by the Corporation without
Cause, if your employment is terminated without Cause, or (B) by you with Good
Reason, if you terminate your employment with Good Reason and the act (or
failure to act) which constitutes Good Reason occurs following such Potential
Change in Control, or (C) by you because of your death, Disability or
retirement, if you terminate your employment because of your death, Disability
or retirement and your death, Disability or retirement occurs following such
Potential Change in Control.
(b) Voluntary Termination Within 30 Days Immediately
Following the End of the Transition Employment Period. Notwithstanding any
other provision in this Agreement, if you voluntarily terminate your employment
for any reason, and the Date of Termination and/or Notice of Termination occurs
within the first thirty (30) days immediately following the end of the
Transition Employment Period, you shall be entitled to the benefits provided in
Section 4(b).
(c) Disability. If you are unable to perform your duties
of employment for in excess of ninety (90) consecutive days or an aggregate of
one hundred and twenty (120) days in any twelve (12) month period during the
term of your employment as a result of a physical or mental condition, as
determined in good faith by the Board of Directors, your employment may be
terminated for "Disability."
(d) Good Reason. Your right to terminate your employment
for Good Reason shall not be affected by your incapacity due to physical or
mental illness. Your continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
(e) Notice of Termination. Any purported termination of
your employment by the Corporation or by you (other than termination due to
death which shall terminate your employment automatically) shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 7.
4. Compensation Upon Termination or During Disability.
Following a Change in Control, you shall be entitled to the benefits described
below during a period of disability, or upon termination of your employment, as
the case may be, provided that such period or termination occurs during the
term of this Agreement. The benefits to which you are entitled, subject to the
terms and conditions of this Agreement, are:
(a) If your employment shall be terminated by the
Corporation for Cause, or by the Corporation without Cause and more than
twenty-four (24) months after a
<PAGE> 4
Dennis Pope
August 7, 1996
Page 4
Change in Control, or by you other than for Good Reason either before, or more
than thirty (30) days after, the end of the Transition Employment Period, or by
you for Good Reason and more than twenty-four (24) months after a Change in
Control, the Corporation shall pay you your full base salary, when due, through
the Date of Termination at the rate in effect at the time Notice of Termination
is given, plus all other amounts to which you are entitled under any
compensation plan of the Corporation at the time such payments are due, and the
Corporation shall have no further obligations to you under this Agreement.
(b) If your employment by the Corporation shall
be terminated by you for Good Reason within twenty-four (24) months after a
Change in Control or by the Corporation other than for Cause within twenty-four
(24) months after a Change in Control or by you for any reason within thirty
(30) days immediately following the end of your Transition Employment Period or
by you because of your death, Disability or retirement within twenty-four (24)
months after a Change in Control, then you shall be entitled to the benefits
provided below:
(i) the Corporation shall pay to you your full
base salary, when due, through the Date of Termination at the rate in
effect at the time Notice of Termination is given, at the time
specified in Section 4(d), plus all other amounts to which you are
entitled under any compensation plan of the Corporation at the time
such payments are due;
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of Termination, the Corporation
shall pay as severance pay to you, at the time specified in Section
4(d), a lump sum severance payment (the "Severance Payments") equal to
200% of the average of your salary with respect to the three (3)
fiscal years (or your total years of employment with the Corporation,
if less than three (3)) preceding the Date of Termination or
immediately prior to the Change in Control, whichever is greater, and
200% of the average of the annual bonuses awarded to you pursuant to
the Corporation's bonus plan for executive officers, or any successor
bonus plan thereto, with respect to the three (3) fiscal years (or
your total years of employment with the Corporation, if less than
three (3)) preceding the Date of Termination or immediately prior to
the Change in Control, whichever is greater;
(iii) the Corporation shall pay to you all legal
fees and legal expenses incurred by you as a result of such
termination (including all such reasonable legal fees and legal
expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement (as set forth in Section 11 of this
Agreement) or in connection with any tax audit or proceeding to the
extent attributable to the application of section 4999 of the Code, to
any payment or benefit provided hereunder); and
<PAGE> 5
Dennis Pope
August 7, 1996
Page 5
(iv) for a twenty-four (24) month period after the
Date of Termination, the Corporation shall arrange to provide you with
life, disability, accident and group health insurance benefits
substantially similar to those that you were receiving immediately
prior to the Notice of Termination. Benefits otherwise receivable by
you pursuant to this Section 4(b)(iv) shall be reduced to the extent
comparable benefits are actually received by you during the
twenty-four (24) month period following the Date of Termination, and
any such benefits actually received by you shall be reported to the
Corporation.
(c) If by reason of section 280G of the Code any payment
or benefit received or to be received by you in connection with a Change in
Control or the termination of your employment (whether payable pursuant to the
terms of this Agreement ("Contract Payments") or any other plan, arrangements
or agreement with the Corporation or an Affiliate (collectively with the
Contract Payments, the "Total Payments") would not be deductible (in whole or
part) by the Corporation, an Affiliate or other person making such payment or
providing such benefit, then the Severance Payments shall be reduced (to zero
if necessary) and, if Severance Payments are reduced to zero, other Contract
Payments shall be reduced (to zero if necessary) and, if Contract Payments are
reduced to zero, other Total Payments shall be reduced (to zero if necessary)
until no portion of the Total Payments is not deductible by reason of section
280G of the Code. For purposes of this limitation, (i) no portion of the Total
Payments the receipt or enjoyment of which you shall have effectively waived in
writing prior to the date of payment of the Severance Payments shall be taken
into account; (ii) no portion of the Total Payments shall be taken into account
which in the opinion of tax counsel selected by the Corporation's independent
auditors and acceptable to you does not constitute a "parachute payment" within
the meaning of section 280G(b)(2) of the Code (without regard to subsection
(A)(ii) thereof); (iii) the Severance Payments (and, thereafter, other Contract
Payments and other Total Payments) shall be reduced only to the extent
necessary so that the Total Payments (other than those referred to in clauses
(i) and (ii) of Section 4(b)) in their entirety constitute reasonable
compensation for services actually rendered within the meaning of section
280G(b)(4) of the Code, in the opinion of the tax counsel referred to in clause
(ii), and (iv) the value of any noncash benefit or any deferred payment or
benefit included in the Total Payments shall be determined by the Corporation's
independent auditors in accordance with the principles of sections 280G(d)(3)
and (4) of the Code. For purposes of this Section 4(c), the term "Affiliate"
means the Corporation's successors, any Person whose actions result in a Change
in Control or any corporation affiliated (or which, as a result of the
completion of the transactions causing a Change in Control shall become
affiliated) with the Corporation within the meaning of section 1504 of the
Code.
(d) The payments provided for in Section 4(b)(i)
shall be made not later than the Date of Termination. The payments provided
for in Section 4(b)(ii) shall be made not later than the Date of Termination;
provided, however, that if the amounts of such
<PAGE> 6
Dennis Pope
August 7, 1996
Page 6
payments cannot be finally determined on or before such day, the Corporation
shall pay to you on such day an estimate, as determined in good faith by the
Corporation, of the minimum amount of such payments and shall pay the remainder
of such payments (together with interest at the rate provided in section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but
in no event later than the Date of Termination. In the event that the amount
of the estimated payments exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by the Corporation to you,
payable on the demand by the Corporation (together with interest at the rate
provided in section 1274(b)(2)(B) of the Code).
(e) You shall not be required to mitigate the
amount of any payment provided for in this Section 4 by seeking other
employment or otherwise nor, except as provided in Section 4(b)(iv), shall the
amount of any payment or benefit provided for in this Section 4 be reduced by
any compensation earned by you as the result of employment by another employer
or self-employment, by retirement benefits, by offset against any amount
claimed to be owed by you to the Corporation, or otherwise.
5. Vesting of Stock Options Upon Change in Control.
Notwithstanding any other provision of this Agreement or of any stock option
plan or agreement, upon the occurrence of a Change in Control, all of your
stock options, if any, granted under any of the Corporation's stock option
plans or agreements shall become vested and exercisable effective as of the day
immediately prior to the date of the Change in Control.
6. Successors; Binding Agreement. (a) The Corporation
shall require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Corporation to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform it if no such succession had taken place. Failure of
the Corporation to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle you to terminate your employment and receive compensation from
the Corporation in the same amount and on the same terms to which you would be
entitled hereunder if you terminate your employment for Good Reason within
twenty-four (24) months after a Change in Control, except that for purposes of
implementing the foregoing, the day before the date on which any such
succession becomes effective shall be deemed the Date of Termination. Where
the context requires, "Corporation" shall mean the Corporation as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of
and be enforceable by you and your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be
<PAGE> 7
Dennis Pope
August 7, 1996
Page 7
payable to you hereunder had you continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to your devisee, legatee or other designee or, if there is no such
designee, to your estate.
7. Notice. For the purpose of this Agreement, notices
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed by United
States certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth on the first page of this
Agreement, provided that all notices to the Corporation shall be directed to
the attention of the Board with a copy to the Secretary of the Corporation, or
to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by you and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of California without regard to its
conflicts of law principles. All references to sections of the Exchange Act or
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law. The
obligations of the Corporation under Section 4 shall survive the expiration of
the term of this Agreement. The section headings contained in this Agreement
are for convenience only, and shall not affect the interpretation of this
Agreement.
9. Severability. The invalidity or unenforceability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect.
10. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an original but all
of which together shall constitute one and the same instrument.
<PAGE> 8
Dennis Pope
August 7, 1996
Page 8
11. Arbitration; Dispute Resolution.
(a) Arbitration Procedure. Any disagreement,
dispute, controversy or claim arising out of or relating to this Agreement or
the interpretation of this Agreement or any arrangements relating to this
Agreement or contemplated in this Agreement or the breach, termination or
invalidity thereof shall be settled by arbitration in accordance with the
Commercial Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") (except as otherwise provided in this
Agreement) in Los Angeles, California. The arbitral tribunal shall consist of
one arbitrator. In making any decision, the arbitrator shall apply and follow
the substantive law of California without reference to the conflicts of law
provisions thereof. The parties to the arbitration jointly shall directly
appoint such arbitrator within thirty (30) days of initiation of arbitration.
If the parties shall fail to appoint such arbitrator as provided above, such
arbitrator shall be appointed by the AAA as provided in the Arbitration Rules.
You and the Corporation agree that the arbitral award may be enforced against
the parties to the arbitration proceeding or their assets wherever they may be
found and that a judgment upon the arbitral award may be entered in any court
having jurisdiction thereof. The Corporation shall pay all fees and expenses
of the Arbitrator regardless of the result and shall provide all witnesses and
evidence reasonably required by you to present your case. The Corporation
shall pay to you all reasonable arbitration expenses and legal fees incurred by
you as a result of a termination of your employment in seeking to obtain or
enforce any right or benefit provided by this Agreement (whether or not you are
successful in obtaining or enforcing such right or benefit). Such payments
shall be made within five (5) days after your request for payment accompanied
with such evidence of fees and expenses incurred as the Corporation reasonably
may require.
(b) Compensation During Dispute. Your
compensation during any disagreement, dispute, controversy or claim arising out
of or relating to this Agreement or the interpretation of this Agreement shall
be as follows:
(i) If a purported termination by you for Good
Reason within twenty-four (24) months after a Change in Control occurs
or is deemed to occur following a Change in Control and during the
term of this Agreement, and such termination is disputed in accordance
with Section 7 of Appendix A and Section 11(a) of this Agreement, the
Corporation shall continue to pay you the full compensation in effect
when the notice giving rise to the dispute was given (including, but
not limited to, salary) and continue you as a participant in all
compensation, benefit and insurance plans in which you were
participating when the notice giving rise to the dispute was given,
until the dispute is finally resolved in accordance with Section
11(a). Amounts paid under this Section 11(b)(i) are in addition to
all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement. You
agree to remain in the employ of the Corporation during the resolution
of the dispute and to continue to provide services unless your
<PAGE> 9
Dennis Pope
August 7, 1996
Page 9
employment is terminated earlier by death, Disability or retirement,
or by action of the Corporation. If the dispute is resolved by a
determination that you did not have Good Reason, this Agreement, in
accordance with its terms, shall continue to apply to the
circumstances of your employment by the Corporation and any
termination thereof.
(ii) If there is a termination by the Corporation
followed by a dispute as to whether you are entitled to the payments
and other benefits provided under this Agreement, then, during the
period of that dispute the Corporation shall pay you 100% of the
amount specified in Section 4(b)(i) hereof and 50% of the amount
specified in Section 4(b)(ii) hereof, and the Corporation shall
provide you with the other benefits provided in Section 4(b) of this
Agreement, if, but only if, you agree in writing that if the dispute
is resolved against you, you shall promptly refund to the Corporation
all payments you receive under Section 4(b)(ii) of this Agreement plus
interest at the rate provided in Section 1274(d) of the Code,
compounded quarterly. If the dispute is resolved in your favor,
promptly after resolution of the dispute the Corporation shall pay you
the sum that was withheld during the period of the dispute plus
interest at the rate provided in Section 1274(d) of the Code,
compounded quarterly.
12. Entire Agreement. This Agreement sets forth the
entire agreement of the parties hereto in respect of your benefits upon a
Change in Control and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations or warranties, whether oral or
written, by any officer, employee or representative of any party hereto related
to the subject of your benefits upon a Change in Control; and any prior
agreement of the parties hereto in respect of your benefits upon a Change in
Control, is hereby terminated and cancelled. Notwithstanding the foregoing,
this Agreement shall not supersede any employment agreement between you and the
Corporation, except that if the provisions and definitions of such an
employment agreement in respect of your benefits upon a change in control (as
defined in such employment agreement), if any, differ from the provisions and
definitions of this Agreement in respect of your benefits upon a Change in
Control, you, in your sole and absolute discretion, may choose whether the
provisions and definitions of such employment agreement or this Agreement shall
govern all matters relating to your benefits upon a change in control.
13. No Employment Right Created. Nothing in this
Agreement shall confer on you any right to continue in the employ of the
Corporation or shall interfere with or restrict in any way the rights of the
Corporation, which are hereby expressly reserved, to discharge you at any time
for any reason whatsoever, with or without good cause, except as may be
otherwise provided in any written employment agreement between you and the
Corporation. This Agreement shall not constitute an agreement for employment.
<PAGE> 10
Dennis Pope
August 7, 1996
Page 10
If this letter sets forth our agreement on the subject matter
hereof, kindly sign and return to the Corporation the enclosed copy of this
letter, which shall then constitute our agreement on this subject.
Sincerely,
SHOWSCAN ENTERTAINMENT INC.
By /s/ WILLIAM C. SOADY
----------------------------
Name: William C. Soady
Title: President and CEO
Agreed to this 7th day
of August 1996.
/s/ DENNIS POPE
- ------------------------
Dennis Pope
<PAGE> 11
Dennis Pope
August 7, 1996
Page 11
APPENDIX A
DEFINITIONS
For purposes of this Agreement, the following terms have the
meanings indicated:
1. "Acquiring Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 20% or more of the Common Shares of the Corporation then
outstanding, but shall not include (i) the Corporation; (ii) any Subsidiary of
the Corporation; or (iii) any employee benefit plan of the Corporation or any
Subsidiary of the Corporation, or any entity holding Common Shares for or
pursuant to the terms of any such plan. Notwithstanding the foregoing, no
Person shall become an "Acquiring Person" as the result of an acquisition of
Common Shares by the Corporation which, by reducing the number of shares
outstanding, increases the proportionate number of shares beneficially owned by
such Person to 20% or more of the Common Shares of the Corporation then
outstanding; provided, however, that if a Person shall become the Beneficial
Owner of 20% or more of the Common Shares of the Corporation then outstanding
by reason of share purchases by the Corporation and shall, after such share
purchases by the Corporation, become the Beneficial Owner of any additional
Common Shares of the Corporation, then such Person shall be deemed to be an
"Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of
the Corporation determines in good faith that a Person who would otherwise be
an "Acquiring Person," has become such inadvertently, and such Person divests
as promptly as practicable a sufficient number of Common Shares so that such
Person would no longer be an "Acquiring Person," then such Person shall not be
deemed to be an "Acquiring Person" for any purposes of this Agreement.
2. "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as in effect on the date of this Agreement.
3. A Person shall be deemed the "Beneficial Owner" of and
shall be deemed to "beneficially own" any securities:
(a) which such Person or any of such Person's
Affiliates or Associates beneficially owns, within the meaning of Rule
13d-3(a) under the Exchange Act, directly or indirectly;
(b) which such Person or any of such Person's
Affiliates or Associates has (i) the right to acquire (whether such
right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or
<PAGE> 12
Dennis Pope
August 7, 1996
Page 12
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities), or upon the exercise of conversion
rights, exchange rights, rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the Beneficial
Owner of, or to beneficially own, securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange; or (ii) the right to vote
pursuant to any agreement, arrangement or understanding; provided,
however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, any security if the agreement, arrangement or
understanding to vote such security (A) arises solely from a revocable
proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act
and (B) is not also then reportable on Schedule 13D under the Exchange
Act (or any comparable or successor report); or
(c) which are beneficially owned, directly or
indirectly, by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities) for the purpose of acquiring, holding,
voting or disposing of any securities of the Corporation.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase "then outstanding," when used with reference to (and for
purposes of determining the percentage of) a Person's Beneficial Ownership of
securities of the Corporation, shall mean the number of such securities then
issued and outstanding together with the number of such securities not then
actually issued and outstanding which such Person (including such Person's
Affiliates and Associates but not including any other Person) would be deemed
to own beneficially hereunder.
4. Termination by the Corporation of your employment for
"Cause" shall mean termination (a) upon your willful and continued failure to
substantially perform your duties with the Corporation (other than any such
failure resulting from your incapacity due to physical or mental illness) or
any such actual or anticipated failure after your issuance of a Notice of
Termination, after a written demand for substantial performance is delivered to
you by the Board, which demand specifically identifies the manner in which the
Board believes that you have not substantially performed your duties, (b) upon
your willful participation in conduct which is demonstrably and materially
injurious to the Corporation, monetarily or otherwise, or (c) upon your
conviction of a felony involving moral turpitude after all appeals are final.
For purposes of this definition, no act, or failure to act, on your part shall
be deemed "willful" unless done, or omitted to be done, by you in bad faith.
<PAGE> 13
Dennis Pope
August 7, 1996
Page 13
Notwithstanding the foregoing, you shall not be deemed terminated for Cause
unless and until there shall have been delivered to you a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters (3/4) of
the entire membership of the Board at a meeting of the Board (after reasonable
notice to you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the Board's good faith opinion you
were guilty of conduct set forth above in this definition and specifying the
particulars thereof in reasonable detail.
5. A "Change in Control" shall be deemed to occur if:
(a) any Person shall have become an Acquiring Person;
(b) any Person is or becomes the Beneficial Owner,
directly or indirectly, of Common Shares of the Corporation
representing 20% or more of the combined voting power of the
Corporation's then outstanding Common Shares;
(c) during any period of two consecutive years (not
including any period prior to the execution of this Agreement),
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person who
has entered into an agreement with the Corporation to effect a
transaction described in Sections (a), (b), (d) or (e) of this
definition) whose election by the Board or nomination for election by
the Corporation's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of such period or whose election or
nomination for election was previously so approved (hereinafter
referred to as "Continuing Directors"), cease for any reason to
constitute at least a majority thereof;
(d) the stockholders of the Corporation approve a
merger or consolidation of the Corporation with any other corporation
(or other entity), other than a merger or consolidation which would
result in the Common Shares of the Corporation outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into Common Shares of the surviving entity) more
than 66-2/3% of the combined voting power of the Common Shares of the
Corporation or such surviving entity outstanding immediately after such
merger or consolidation; provided, however, that a merger or
consolidation effected to implement a recapitalization of the
Corporation (or similar transaction) in which no Person acquires more
than 20% of the combined voting power of the Corporation's then
outstanding Common Shares shall not constitute a Change in Control; or
<PAGE> 14
Dennis Pope
August 7, 1996
Page 14
(e) the stockholders of the Corporation approve a
plan of complete liquidation of the Corporation or an agreement for
the sale or disposition by the Corporation of all or substantially all
of the Corporation's assets.
6. "Common Shares" when used with reference to the
Corporation shall mean the shares of common stock, par value $.001 per share,
of the Corporation; and in addition shall include all Common Shares issuable
upon exercise or conversion of outstanding Common Share Equivalents, which
Common Shares are deemed to be "outstanding" and the holder of which shall be
deemed to be a "record holder" of such Common Shares for purposes of this
Agreement. "Common Share Equivalents" shall mean all outstanding shares of
Series C Preferred Stock of the Corporation and of 8% Convertible Notes Due
September 1, 1999, and such other classes or series of capital stock and/or
debt of the Corporation as the Board of Directors of the Corporation shall
expressly designate as Common Share Equivalents within the meaning of this
Agreement. "Common Shares" when used to refer to shares issued by any Person
other than the Corporation shall mean the capital stock (or equity interest)
with the greatest voting power of such other Person or, if such other Person is
a Subsidiary of another Person, the Person or Persons which ultimately control
such first-mentioned Person.
7. "Date of Termination" shall mean (a) if your
employment is terminated due to your death, the date of your death; (b) if your
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30)-day period), and
(c) if your employment is terminated for Cause or Good Reason or for any other
reason (other than death or Disability), the date specified in the Notice of
Termination (which, in the case of a termination for Cause shall not be less
than thirty (30) days from the date such Notice of Termination is given, and in
the case of a termination for Good Reason or a voluntary termination shall not
be less than fifteen (15) nor more than sixty (60) days from the date such
Notice of Termination is given). Except for cases of voluntary termination,
notwithstanding anything to the contrary contained in this definition, if
within fifteen (15) days after any Notice of Termination is given, the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, then the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, or as set forth in Section 11 of the Agreement;
provided, however, that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
8. "Good Reason" shall mean, without your express
written consent, the occurrence after a Change in Control of any of the
following circumstances unless, in the case of Sections (a), (e), (f), (g) or
(h) of this definition, such circumstances are fully
<PAGE> 15
Dennis Pope
August 7, 1996
Page 15
corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(a) the assignment to you of any duties
inconsistent with the position in the Corporation that you held
immediately prior to the Change in Control, or a significant adverse
alteration in the nature or status of your responsibilities or the
conditions of your employment from those in effect immediately prior
to such Change in Control, or a significant adverse alteration in the
level or authority of your position in the overall corporate structure
from that in effect immediately prior to such Change in Control;
(b) the Corporation's reduction of your annual
base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all management personnel of the
Corporation and all management personnel of any Person in control of
the Corporation;
(c) the relocation of the Corporation's offices
at which you are principally employed immediately prior to the date of
the Change in Control to a location that is more than fifteen (15)
miles further from your primary residence on the date of the Change in
Control than the location of the Corporation's offices at which you
are principally employed immediately prior to the date of the Change
in Control, or the Corporation's requiring you to be based anywhere
other than the Corporation's offices at such location except for
required travel on the Corporation's business to an extent
substantially consistent with your present business travel
obligations;
(d) the Corporation's failure to pay to you any
portion of your current compensation or to pay to you any portion of
an installment of deferred compensation under any deferred
compensation program of the Corporation within seven (7) days of the
date such compensation is due;
(e) the Corporation's failure to continue in
effect any material compensation or benefit plan in which you
participate immediately prior to the Change in Control, unless an
equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or the
Corporation's failure to continue your participation therein (or in
such substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount of benefits provided and the
level of your participation relative to other participants, as existed
at the time of the Change in Control;
<PAGE> 16
Dennis Pope
August 7, 1996
Page 16
(f) the Corporation's failure to continue to
provide you with benefits substantially similar to those enjoyed by
you under any of the Corporation's life insurance, medical, health and
accident, or disability plans in which you were participating at the
time of the Change in Control, the taking of any action by the
Corporation which would directly or indirectly materially reduce any
of such benefits, or the failure by the Corporation to provide you
with the number of paid vacation days to which you are entitled on the
basis of years of service with the Corporation in accordance with the
Corporation's normal vacation policy in effect at the time of the
Change in Control;
(g) the Corporation's failure to obtain a
satisfactory agreement from any successor to assume and agree to
perform this Agreement, as contemplated in Section 6 of the Agreement;
or
(h) any purported termination of your employment
that is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 9 of this Appendix (and, if applicable,
the requirements of termination for Cause), which purported
termination shall not be effective for purposes of this Agreement.
9. "Notice of Termination" shall mean a notice that
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of your employment under the provision so
indicated.
10. "Person" shall mean any individual, firm, corporation
or other entity, and shall include any successor (by merger or otherwise) of
such entity.
11. A "Potential Change in Control" shall be deemed to
occur if:
(a) the Corporation enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control;
(b) any Person (including the Corporation) publicly
announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control;
(c) any Person who, on the effective date of this
Agreement, is not a Beneficial Owner directly or indirectly of Common
Shares of the Corporation representing 10% or more of the combined
voting power of the Corporation's then outstanding Common Shares,
becomes, at any time after the effective date of this Agreement, the
Beneficial Owner directly or indirectly, of Common Shares of the
<PAGE> 17
Dennis Pope
August 7, 1996
Page 17
Corporation representing 10% or more of the combined voting power of
the Corporation's then outstanding Common Shares;
(d) any Person who, on the effective date of this
Agreement, is a Beneficial Owner directly or indirectly of Common
Shares of the Corporation representing 10% or more of the combined
voting power of the Corporation's then outstanding Common Shares,
increases such Person's beneficial ownership of such Common Shares, at
any time after the effective date of this Agreement, by 5% or more
over the percentage so owned by such Person on the date hereof; or
(e) the Board adopts a resolution to the effect
that, for purposes of this Agreement, a Potential Change in Control
has occurred.
12. "Subsidiary" of any Person shall mean any corporation
or other entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, at the time of determination, directly
or indirectly, by such Person.
<PAGE> 1
SHOWSCAN ENTERTAINMENT INC.
3939 LANDMARK STREET
CULVER CITY, CALIFORNIA 90232-2315
August 7, 1996
W. Tucker Lemon
Vice President, General Counsel
and Secretary
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Dear Mr. Lemon:
Showscan Entertainment Inc. (the "Corporation") considers it
essential to the best interests of its stockholders to foster the continuous
employment of key management personnel. In connection with this, the
Corporation's Board of Directors (the "Board") recognizes that, as is the case
with many publicly held corporations, the possibility of a change in control of
the Corporation may exist and that such possibility, and that such uncertainty
and questions that it may raise among management, could result in the departure
or distraction of management personnel to the detriment of the Corporation and
its stockholders.
The Board has decided to reinforce and encourage the continued
attention and dedication of members of the Corporation's management, including
yourself, to their assigned duties without distraction arising from the
possibility of a change in control of the Corporation.
In order to induce you to remain in its employ, the
Corporation hereby agrees that after this letter agreement (this "Agreement")
has been fully executed, you shall receive the severance and other benefits set
forth in this Agreement. If an employment agreement between you and the
Corporation also entitles you to benefits upon a change in control (as defined
in such employment agreement), you shall be required to choose between the
benefits upon a change in control provided by any such employment agreement and
the benefits upon a Change in Control provided by this Agreement.
Unless otherwise defined herein, all capitalized terms used
herein shall have the meanings assigned to such terms in Appendix A attached
hereto.
<PAGE> 2
W. Tucker Lemon
August 7, 1996
Page 2
1. Term of Agreement. This Agreement shall commence on
August 7, 1996, and shall continue in effect through December 31, 1999;
provided, however, that commencing on January 1, 2000, and each January 1
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than September 30 of the preceding year, the
Corporation shall have given notice that it does not wish to extend this
Agreement; provided, that if a Change in Control or Potential Change in
Control, occurs during the original or extended term of this Agreement, this
Agreement shall continue in effect for a period of not less than twenty-four
(24) months beyond the month in which such Change in Control or Potential
Change in Control occurred. Notwithstanding anything to the contrary contained
in this Agreement, in no event shall the term of this Agreement extend beyond
the end of the calendar month in which your 65th birthday occurs.
2. Change in Control and Potential Change in Control.
No benefits shall be payable hereunder until there has been a Change in
Control. You agree that, subject to the terms and conditions of this
Agreement, in the event of a Potential Change in Control, you shall remain in
the employ of the Corporation until the date of occurrence of a Change in
Control, unless you terminate your employment before then for Good Reason or by
reason of death, Disability or retirement, or the Corporation terminates your
employment for any reason.
3. Termination Following Change in Control or Potential
Change in Control.
(a) General. If any of the events constituting a Change
in Control shall have occurred, you shall be entitled to the benefits provided
in Section 4(b) upon the subsequent termination of your employment during the
term of this Agreement, if such termination is (i) by the Corporation other
than for Cause within twenty-four (24) months after a Change in Control, (ii)
by you for Good Reason within twenty-four (24) months after a Change in
Control, (iii) by you in the case of your voluntary termination of employment
for any reason, if you continue in the employ of the Corporation for a period
of six (6) months after a Change in Control (the "Transition Employment
Period"), and the termination of your employment occurs within thirty (30) days
immediately following the end of the Transition Employment Period, as provided
in Section 3(b), or (iv) because of your death, Disability (as defined in
Section 3(c)) or retirement, as long as such termination occurs within
twenty-four (24) months after a Change in Control. You shall not be entitled
to the benefits provided in Section 4(b) if the termination of your employment
occurs more than twenty-four (24) months after a Change in Control.
Furthermore, you shall not be entitled to the benefits provided in Section 4(b)
if, upon termination of your employment, you fail to comply with the
Corporation's standard termination procedures, including execution of a copy of
the separation agreement, a form of which is attached hereto as Exhibit 1. In
the event your employment with the Corporation is terminated for any reason and
subsequently a Potential Change in Control or a Change in Control occurs, you
shall not be entitled to any
<PAGE> 3
W. Tucker Lemon
August 7, 1996
Page 3
benefits hereunder. Notwithstanding anything in this Agreement to the
contrary, if your employment is terminated within one (1) year immediately
prior to the Change in Control, but following a Potential Change in Control,
such termination shall be deemed to have occurred on the date immediately
following a Change in Control and to have been (A) by the Corporation without
Cause, if your employment is terminated without Cause, or (B) by you with Good
Reason, if you terminate your employment with Good Reason and the act (or
failure to act) which constitutes Good Reason occurs following such Potential
Change in Control, or (C) by you because of your death, Disability or
retirement, if you terminate your employment because of your death, Disability
or retirement and your death, Disability or retirement occurs following such
Potential Change in Control.
(b) Voluntary Termination Within 30 Days Immediately
Following the End of the Transition Employment Period. Notwithstanding any
other provision in this Agreement, if you voluntarily terminate your employment
for any reason, and the Date of Termination and/or Notice of Termination occurs
within the first thirty (30) days immediately following the end of the
Transition Employment Period, you shall be entitled to the benefits provided in
Section 4(b).
(c) Disability. If you are unable to perform your duties
of employment for in excess of ninety (90) consecutive days or an aggregate of
one hundred and twenty (120) days in any twelve (12) month period during the
term of your employment as a result of a physical or mental condition, as
determined in good faith by the Board of Directors, your employment may be
terminated for "Disability."
(d) Good Reason. Your right to terminate your employment
for Good Reason shall not be affected by your incapacity due to physical or
mental illness. Your continued employment shall not constitute consent to, or
a waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
(e) Notice of Termination. Any purported termination of
your employment by the Corporation or by you (other than termination due to
death which shall terminate your employment automatically) shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 7.
4. Compensation Upon Termination or During Disability.
Following a Change in Control, you shall be entitled to the benefits described
below during a period of disability, or upon termination of your employment, as
the case may be, provided that such period or termination occurs during the
term of this Agreement. The benefits to which you are entitled, subject to the
terms and conditions of this Agreement, are:
(a) If your employment shall be terminated by the
Corporation for Cause, or by the Corporation without Cause and more than
twenty-four (24) months after a
<PAGE> 4
W. Tucker Lemon
August 7, 1996
Page 4
Change in Control, or by you other than for Good Reason either before, or more
than thirty (30) days after, the end of the Transition Employment Period, or by
you for Good Reason and more than twenty-four (24) months after a Change in
Control, the Corporation shall pay you your full base salary, when due, through
the Date of Termination at the rate in effect at the time Notice of Termination
is given, plus all other amounts to which you are entitled under any
compensation plan of the Corporation at the time such payments are due, and the
Corporation shall have no further obligations to you under this Agreement.
(b) If your employment by the Corporation shall be
terminated by you for Good Reason within twenty-four (24) months after a Change
in Control or by the Corporation other than for Cause within twenty-four (24)
months after a Change in Control or by you for any reason within thirty (30)
days immediately following the end of your Transition Employment Period or by
you because of your death, Disability or retirement within twenty-four (24)
months after a Change in Control, then you shall be entitled to the benefits
provided below:
(i) the Corporation shall pay to you your full base
salary, when due, through the Date of Termination at the rate in effect
at the time Notice of Termination is given, at the time specified in
Section 4(d), plus all other amounts to which you are entitled under
any compensation plan of the Corporation at the time such payments are
due;
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of Termination, the Corporation
shall pay as severance pay to you, at the time specified in Section
4(d), a lump sum severance payment (the "Severance Payments") equal to
150% of the average of your salary with respect to the three (3) fiscal
years (or your total years of employment with the Corporation, if less
than three (3)) preceding the Date of Termination or immediately prior
to the Change in Control, whichever is greater, and 150% of the average
of the annual bonuses awarded to you pursuant to the Corporation's
bonus plan for executive officers, or any successor bonus plan thereto,
with respect to the three (3) fiscal years (or your total years of
employment with the Corporation, if less than three (3)) preceding the
Date of Termination or immediately prior to the Change in Control,
whichever is greater;
(iii) the Corporation shall pay to you all legal fees
and legal expenses incurred by you as a result of such termination
(including all such reasonable legal fees and legal expenses, if any,
incurred in contesting or disputing any such termination or in seeking
to obtain or enforce any right or benefit provided by this Agreement
(as set forth in Section 11 of this Agreement) or in connection with
any tax audit or proceeding to the extent attributable to the
application of section 4999 of the Code, to any payment or benefit
provided hereunder); and
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W. Tucker Lemon
August 7, 1996
Page 5
(iv) for a twenty-four (24) month period after the
Date of Termination, the Corporation shall arrange to provide you with
life, disability, accident and group health insurance benefits
substantially similar to those that you were receiving immediately
prior to the Notice of Termination. Benefits otherwise receivable by
you pursuant to this Section 4(b)(iv) shall be reduced to the extent
comparable benefits are actually received by you during the
twenty-four (24) month period following the Date of Termination, and
any such benefits actually received by you shall be reported to the
Corporation.
(c) If by reason of section 280G of the Code any payment
or benefit received or to be received by you in connection with a Change in
Control or the termination of your employment (whether payable pursuant to the
terms of this Agreement ("Contract Payments") or any other plan, arrangements or
agreement with the Corporation or an Affiliate (collectively with the Contract
Payments, the "Total Payments") would not be deductible (in whole or part) by
the Corporation, an Affiliate or other person making such payment or providing
such benefit, then the Severance Payments shall be reduced (to zero if
necessary) and, if Severance Payments are reduced to zero, other Contract
Payments shall be reduced (to zero if necessary) and, if Contract Payments are
reduced to zero, other Total Payments shall be reduced (to zero if necessary)
until no portion of the Total Payments is not deductible by reason of section
280G of the Code. For purposes of this limitation, (i) no portion of the Total
Payments the receipt or enjoyment of which you shall have effectively waived in
writing prior to the date of payment of the Severance Payments shall be taken
into account; (ii) no portion of the Total Payments shall be taken into account
which in the opinion of tax counsel selected by the Corporation's independent
auditors and acceptable to you does not constitute a "parachute payment" within
the meaning of section 280G(b)(2) of the Code (without regard to subsection
(A)(ii) thereof); (iii) the Severance Payments (and, thereafter, other Contract
Payments and other Total Payments) shall be reduced only to the extent necessary
so that the Total Payments (other than those referred to in clauses (i) and (ii)
of Section 4(b)) in their entirety constitute reasonable compensation for
services actually rendered within the meaning of section 280G(b)(4) of the Code,
in the opinion of the tax counsel referred to in clause (ii), and (iv) the value
of any noncash benefit or any deferred payment or benefit included in the Total
Payments shall be determined by the Corporation's independent auditors in
accordance with the principles of sections 280G(d)(3) and (4) of the Code. For
purposes of this Section 4(c), the term "Affiliate" means the Corporation's
successors, any Person whose actions result in a Change in Control or any
corporation affiliated (or which, as a result of the completion of the
transactions causing a Change in Control shall become affiliated) with the
Corporation within the meaning of section 1504 of the Code.
(d) The payments provided for in Section 4(b)(i) shall
be made not later than the Date of Termination. The payments provided for in
Section 4(b)(ii) shall be made not later than the Date of Termination; provided,
however, that if the amounts of such
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W. Tucker Lemon
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Page 6
payments cannot be finally determined on or before such day, the Corporation
shall pay to you on such day an estimate, as determined in good faith by the
Corporation, of the minimum amount of such payments and shall pay the remainder
of such payments (together with interest at the rate provided in section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but
in no event later than the Date of Termination. In the event that the amount
of the estimated payments exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by the Corporation to you,
payable on the demand by the Corporation (together with interest at the rate
provided in section 1274(b)(2)(B) of the Code).
(e) You shall not be required to mitigate the
amount of any payment provided for in this Section 4 by seeking other
employment or otherwise nor, except as provided in Section 4(b)(iv), shall the
amount of any payment or benefit provided for in this Section 4 be reduced by
any compensation earned by you as the result of employment by another employer
or self-employment, by retirement benefits, by offset against any amount
claimed to be owed by you to the Corporation, or otherwise.
5. Vesting of Stock Options Upon Change in Control.
Notwithstanding any other provision of this Agreement or of any stock option
plan or agreement, upon the occurrence of a Change in Control, all of your
stock options, if any, granted under any of the Corporation's stock option
plans or agreements shall become vested and exercisable effective as of the day
immediately prior to the date of the Change in Control.
6. Successors; Binding Agreement. (a) The Corporation
shall require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Corporation to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform it if no such succession had taken place. Failure of
the Corporation to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle you to terminate your employment and receive compensation from
the Corporation in the same amount and on the same terms to which you would be
entitled hereunder if you terminate your employment for Good Reason within
twenty-four (24) months after a Change in Control, except that for purposes of
implementing the foregoing, the day before the date on which any such
succession becomes effective shall be deemed the Date of Termination. Where
the context requires, "Corporation" shall mean the Corporation as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of
and be enforceable by you and your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be
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W. Tucker Lemon
August 7, 1996
Page 7
payable to you hereunder had you continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to your devisee, legatee or other designee or, if there is no such
designee, to your estate.
7. Notice. For the purpose of this Agreement, notices
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed by United
States certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth on the first page of this
Agreement, provided that all notices to the Corporation shall be directed to
the attention of the Board with a copy to the Secretary of the Corporation, or
to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by you and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of California without regard to its
conflicts of law principles. All references to sections of the Exchange Act or
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law. The
obligations of the Corporation under Section 4 shall survive the expiration of
the term of this Agreement. The section headings contained in this Agreement
are for convenience only, and shall not affect the interpretation of this
Agreement.
9. Severability. The invalidity or unenforceability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect.
10. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an original but all
of which together shall constitute one and the same instrument.
<PAGE> 8
W. Tucker Lemon
August 7, 1996
Page 8
11. Arbitration; Dispute Resolution.
(a) Arbitration Procedure. Any disagreement,
dispute, controversy or claim arising out of or relating to this Agreement or
the interpretation of this Agreement or any arrangements relating to this
Agreement or contemplated in this Agreement or the breach, termination or
invalidity thereof shall be settled by arbitration in accordance with the
Commercial Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") (except as otherwise provided in this
Agreement) in Los Angeles, California. The arbitral tribunal shall consist of
one arbitrator. In making any decision, the arbitrator shall apply and follow
the substantive law of California without reference to the conflicts of law
provisions thereof. The parties to the arbitration jointly shall directly
appoint such arbitrator within thirty (30) days of initiation of arbitration.
If the parties shall fail to appoint such arbitrator as provided above, such
arbitrator shall be appointed by the AAA as provided in the Arbitration Rules.
You and the Corporation agree that the arbitral award may be enforced against
the parties to the arbitration proceeding or their assets wherever they may be
found and that a judgment upon the arbitral award may be entered in any court
having jurisdiction thereof. The Corporation shall pay all fees and expenses
of the Arbitrator regardless of the result and shall provide all witnesses and
evidence reasonably required by you to present your case. The Corporation
shall pay to you all reasonable arbitration expenses and legal fees incurred by
you as a result of a termination of your employment in seeking to obtain or
enforce any right or benefit provided by this Agreement (whether or not you are
successful in obtaining or enforcing such right or benefit). Such payments
shall be made within five (5) days after your request for payment accompanied
with such evidence of fees and expenses incurred as the Corporation reasonably
may require.
(b) Compensation During Dispute. Your
compensation during any disagreement, dispute, controversy or claim arising out
of or relating to this Agreement or the interpretation of this Agreement shall
be as follows:
(i) If a purported termination by you for Good
Reason within twenty-four (24) months after a Change in Control occurs
or is deemed to occur following a Change in Control and during the
term of this Agreement, and such termination is disputed in accordance
with Section 7 of Appendix A and Section 11(a) of this Agreement, the
Corporation shall continue to pay you the full compensation in effect
when the notice giving rise to the dispute was given (including, but
not limited to, salary) and continue you as a participant in all
compensation, benefit and insurance plans in which you were
participating when the notice giving rise to the dispute was given,
until the dispute is finally resolved in accordance with Section
11(a). Amounts paid under this Section 11(b)(i) are in addition to
all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement. You
agree to remain in the employ of the Corporation during the resolution
of the dispute and to continue to provide services unless your
<PAGE> 9
W. Tucker Lemon
August 7, 1996
Page 9
employment is terminated earlier by death, Disability or retirement,
or by action of the Corporation. If the dispute is resolved by a
determination that you did not have Good Reason, this Agreement, in
accordance with its terms, shall continue to apply to the
circumstances of your employment by the Corporation and any
termination thereof.
(ii) If there is a termination by the Corporation
followed by a dispute as to whether you are entitled to the payments
and other benefits provided under this Agreement, then, during the
period of that dispute the Corporation shall pay you 100% of the
amount specified in Section 4(b)(i) hereof and 50% of the amount
specified in Section 4(b)(ii) hereof, and the Corporation shall
provide you with the other benefits provided in Section 4(b) of this
Agreement, if, but only if, you agree in writing that if the dispute
is resolved against you, you shall promptly refund to the Corporation
all payments you receive under Section 4(b)(ii) of this Agreement plus
interest at the rate provided in Section 1274(d) of the Code,
compounded quarterly. If the dispute is resolved in your favor,
promptly after resolution of the dispute the Corporation shall pay you
the sum that was withheld during the period of the dispute plus
interest at the rate provided in Section 1274(d) of the Code,
compounded quarterly.
12. Entire Agreement. This Agreement sets forth the
entire agreement of the parties hereto in respect of your benefits upon a
Change in Control and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations or warranties, whether oral or
written, by any officer, employee or representative of any party hereto related
to the subject of your benefits upon a Change in Control; and any prior
agreement of the parties hereto in respect of your benefits upon a Change in
Control, is hereby terminated and cancelled. Notwithstanding the foregoing,
this Agreement shall not supersede any employment agreement between you and the
Corporation, except that if the provisions and definitions of such an
employment agreement in respect of your benefits upon a change in control (as
defined in such employment agreement), if any, differ from the provisions and
definitions of this Agreement in respect of your benefits upon a Change in
Control, you, in your sole and absolute discretion, may choose whether the
provisions and definitions of such employment agreement or this Agreement shall
govern all matters relating to your benefits upon a change in control.
13. No Employment Right Created. Nothing in this
Agreement shall confer on you any right to continue in the employ of the
Corporation or shall interfere with or restrict in any way the rights of the
Corporation, which are hereby expressly reserved, to discharge you at any time
for any reason whatsoever, with or without good cause, except as may be
otherwise provided in any written employment agreement between you and the
Corporation. This Agreement shall not constitute an agreement for employment.
<PAGE> 10
W. Tucker Lemon
August 7, 1996
Page 10
If this letter sets forth our agreement on the subject matter
hereof, kindly sign and return to the Corporation the enclosed copy of this
letter, which shall then constitute our agreement on this subject.
Sincerely,
SHOWSCAN ENTERTAINMENT INC.
By /s/ WILLIAM C. SOADY
-------------------------
Name: William C. Soady
Title:President and CEO
Agreed to this 8th day
of August 1996.
/s/ W. TUCKER LEMON
- -----------------------------
W. Tucker Lemon
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W. Tucker Lemon
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Page 11
APPENDIX A
DEFINITIONS
For purposes of this Agreement, the following terms have the
meanings indicated:
1. "Acquiring Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 20% or more of the Common Shares of the Corporation then
outstanding, but shall not include (i) the Corporation; (ii) any Subsidiary of
the Corporation; or (iii) any employee benefit plan of the Corporation or any
Subsidiary of the Corporation, or any entity holding Common Shares for or
pursuant to the terms of any such plan. Notwithstanding the foregoing, no
Person shall become an "Acquiring Person" as the result of an acquisition of
Common Shares by the Corporation which, by reducing the number of shares
outstanding, increases the proportionate number of shares beneficially owned by
such Person to 20% or more of the Common Shares of the Corporation then
outstanding; provided, however, that if a Person shall become the Beneficial
Owner of 20% or more of the Common Shares of the Corporation then outstanding
by reason of share purchases by the Corporation and shall, after such share
purchases by the Corporation, become the Beneficial Owner of any additional
Common Shares of the Corporation, then such Person shall be deemed to be an
"Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of
the Corporation determines in good faith that a Person who would otherwise be
an "Acquiring Person," has become such inadvertently, and such Person divests
as promptly as practicable a sufficient number of Common Shares so that such
Person would no longer be an "Acquiring Person," then such Person shall not be
deemed to be an "Acquiring Person" for any purposes of this Agreement.
2. "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as in effect on the date of this Agreement.
3. A Person shall be deemed the "Beneficial Owner" of
and shall be deemed to "beneficially own" any securities:
(a) which such Person or any of such Person's
Affiliates or Associates beneficially owns, within the meaning of Rule
13d-3(a) under the Exchange Act, directly or indirectly;
(b) which such Person or any of such Person's
Affiliates or Associates has (i) the right to acquire (whether such
right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or
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W. Tucker Lemon
August 7, 1996
Page 12
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities), or upon the exercise of conversion
rights, exchange rights, rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the Beneficial
Owner of, or to beneficially own, securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange; or (ii) the right to vote
pursuant to any agreement, arrangement or understanding; provided,
however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, any security if the agreement, arrangement or
understanding to vote such security (A) arises solely from a revocable
proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act
and (B) is not also then reportable on Schedule 13D under the Exchange
Act (or any comparable or successor report); or
(c) which are beneficially owned, directly or
indirectly, by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities) for the purpose of acquiring, holding,
voting or disposing of any securities of the Corporation.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase "then outstanding," when used with reference to (and for
purposes of determining the percentage of) a Person's Beneficial Ownership of
securities of the Corporation, shall mean the number of such securities then
issued and outstanding together with the number of such securities not then
actually issued and outstanding which such Person (including such Person's
Affiliates and Associates but not including any other Person) would be deemed
to own beneficially hereunder.
4. Termination by the Corporation of your employment for
"Cause" shall mean termination (a) upon your willful and continued failure to
substantially perform your duties with the Corporation (other than any such
failure resulting from your incapacity due to physical or mental illness) or
any such actual or anticipated failure after your issuance of a Notice of
Termination, after a written demand for substantial performance is delivered to
you by the Board, which demand specifically identifies the manner in which the
Board believes that you have not substantially performed your duties, (b) upon
your willful participation in conduct which is demonstrably and materially
injurious to the Corporation, monetarily or otherwise, or (c) upon your
conviction of a felony involving moral turpitude after all appeals are final.
For purposes of this definition, no act, or failure to act, on your part shall
be deemed "willful" unless done, or omitted to be done, by you in bad faith.
<PAGE> 13
W. Tucker Lemon
August 7, 1996
Page 13
Notwithstanding the foregoing, you shall not be deemed terminated for Cause
unless and until there shall have been delivered to you a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters (3/4) of
the entire membership of the Board at a meeting of the Board (after reasonable
notice to you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the Board's good faith opinion you
were guilty of conduct set forth above in this definition and specifying the
particulars thereof in reasonable detail.
5. A "Change in Control" shall be deemed to occur if:
(a) any Person shall have become an Acquiring
Person;
(b) any Person is or becomes the Beneficial Owner,
directly or indirectly, of Common Shares of the Corporation
representing 20% or more of the combined voting power of the
Corporation's then outstanding Common Shares;
(c) during any period of two consecutive years (not
including any period prior to the execution of this Agreement),
individuals who at the beginning of such period constitute the Board,
and any new director (other than a director designated by a person who
has entered into an agreement with the Corporation to effect a
transaction described in Sections (a), (b), (d) or (e) of this
definition) whose election by the Board or nomination for election by
the Corporation's stockholders was approved by a vote of at least
two-thirds ( 2/3) of the directors then still in office who either
were directors at the beginning of such period or whose election or
nomination for election was previously so approved (hereinafter
referred to as "Continuing Directors"), cease for any reason to
constitute at least a majority thereof;
(d) the stockholders of the Corporation approve a
merger or consolidation of the Corporation with any other corporation
(or other entity), other than a merger or consolidation which would
result in the Common Shares of the Corporation outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into Common Shares of the surviving entity) more
than 66- 2/3% of the combined voting power of the Common Shares of the
Corporation or such surviving entity outstanding immediately after
such merger or consolidation; provided, however, that a merger or
consolidation effected to implement a recapitalization of the
Corporation (or similar transaction) in which no Person acquires more
than 20% of the combined voting power of the Corporation's then
outstanding Common Shares shall not constitute a Change in Control; or
<PAGE> 14
W. Tucker Lemon
August 7, 1996
Page 14
(e) the stockholders of the Corporation approve a
plan of complete liquidation of the Corporation or an agreement for
the sale or disposition by the Corporation of all or substantially all
of the Corporation's assets.
6. "Common Shares" when used with reference to the
Corporation shall mean the shares of common stock, par value $.001 per share,
of the Corporation; and in addition shall include all Common Shares issuable
upon exercise or conversion of outstanding Common Share Equivalents, which
Common Shares are deemed to be "outstanding" and the holder of which shall be
deemed to be a "record holder" of such Common Shares for purposes of this
Agreement. "Common Share Equivalents" shall mean all outstanding shares of
Series C Preferred Stock of the Corporation and of 8% Convertible Notes Due
September 1, 1999, and such other classes or series of capital stock and/or
debt of the Corporation as the Board of Directors of the Corporation shall
expressly designate as Common Share Equivalents within the meaning of this
Agreement. "Common Shares" when used to refer to shares issued by any Person
other than the Corporation shall mean the capital stock (or equity interest)
with the greatest voting power of such other Person or, if such other Person is
a Subsidiary of another Person, the Person or Persons which ultimately control
such first-mentioned Person.
7. "Date of Termination" shall mean (a) if your
employment is terminated due to your death, the date of your death; (b) if your
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30)-day period), and
(c) if your employment is terminated for Cause or Good Reason or for any other
reason (other than death or Disability), the date specified in the Notice of
Termination (which, in the case of a termination for Cause shall not be less
than thirty (30) days from the date such Notice of Termination is given, and in
the case of a termination for Good Reason or a voluntary termination shall not
be less than fifteen (15) nor more than sixty (60) days from the date such
Notice of Termination is given). Except for cases of voluntary termination,
notwithstanding anything to the contrary contained in this definition, if
within fifteen (15) days after any Notice of Termination is given, the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, then the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, or as set forth in Section 11 of the Agreement;
provided, however, that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
8. "Good Reason" shall mean, without your express
written consent, the occurrence after a Change in Control of any of the
following circumstances unless, in the case of Sections (a), (e), (f), (g) or
(h) of this definition, such circumstances are fully
<PAGE> 15
W. Tucker Lemon
August 7, 1996
Page 15
corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(a) the assignment to you of any duties
inconsistent with the position in the Corporation that you held
immediately prior to the Change in Control, or a significant adverse
alteration in the nature or status of your responsibilities or the
conditions of your employment from those in effect immediately prior
to such Change in Control, or a significant adverse alteration in the
level or authority of your position in the overall corporate structure
from that in effect immediately prior to such Change in Control;
(b) the Corporation's reduction of your annual
base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all management personnel of the
Corporation and all management personnel of any Person in control of
the Corporation;
(c) the relocation of the Corporation's offices
at which you are principally employed immediately prior to the date of
the Change in Control to a location that is more than fifteen (15)
miles further from your primary residence on the date of the Change in
Control than the location of the Corporation's offices at which you
are principally employed immediately prior to the date of the Change
in Control, or the Corporation's requiring you to be based anywhere
other than the Corporation's offices at such location except for
required travel on the Corporation's business to an extent
substantially consistent with your present business travel
obligations;
(d) the Corporation's failure to pay to you any
portion of your current compensation or to pay to you any portion of
an installment of deferred compensation under any deferred
compensation program of the Corporation within seven (7) days of the
date such compensation is due;
(e) the Corporation's failure to continue in
effect any material compensation or benefit plan in which you
participate immediately prior to the Change in Control, unless an
equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or the
Corporation's failure to continue your participation therein (or in
such substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount of benefits provided and the
level of your participation relative to other participants, as existed
at the time of the Change in Control;
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W. Tucker Lemon
August 7, 1996
Page 16
(f) the Corporation's failure to continue to
provide you with benefits substantially similar to those enjoyed by
you under any of the Corporation's life insurance, medical, health and
accident, or disability plans in which you were participating at the
time of the Change in Control, the taking of any action by the
Corporation which would directly or indirectly materially reduce any
of such benefits, or the failure by the Corporation to provide you
with the number of paid vacation days to which you are entitled on the
basis of years of service with the Corporation in accordance with the
Corporation's normal vacation policy in effect at the time of the
Change in Control;
(g) the Corporation's failure to obtain a
satisfactory agreement from any successor to assume and agree to
perform this Agreement, as contemplated in Section 6 of the Agreement;
or
(h) any purported termination of your employment
that is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 9 of this Appendix (and, if applicable,
the requirements of termination for Cause), which purported
termination shall not be effective for purposes of this Agreement.
9. "Notice of Termination" shall mean a notice that
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of your employment under the provision so
indicated.
10. "Person" shall mean any individual, firm, corporation
or other entity, and shall include any successor (by merger or otherwise) of
such entity.
11. A "Potential Change in Control" shall be deemed to
occur if:
(a) the Corporation enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control;
(b) any Person (including the Corporation) publicly
announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control;
(c) any Person who, on the effective date of this
Agreement, is not a Beneficial Owner directly or indirectly of Common
Shares of the Corporation representing 10% or more of the combined
voting power of the Corporation's then outstanding Common Shares,
becomes, at any time after the effective date of this Agreement, the
Beneficial Owner directly or indirectly, of Common Shares of the
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W. Tucker Lemon
August 7, 1996
Page 17
Corporation representing 10% or more of the combined voting power of
the Corporation's then outstanding Common Shares;
(d) any Person who, on the effective date of this
Agreement, is a Beneficial Owner directly or indirectly of Common
Shares of the Corporation representing 10% or more of the combined
voting power of the Corporation's then outstanding Common Shares,
increases such Person's beneficial ownership of such Common Shares, at
any time after the effective date of this Agreement, by 5% or more over
the percentage so owned by such Person on the date hereof; or
(e) the Board adopts a resolution to the effect that,
for purposes of this Agreement, a Potential Change in Control has
occurred.
12. "Subsidiary" of any Person shall mean any corporation
or other entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, at the time of determination, directly
or indirectly, by such Person.
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<S> <C>
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<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
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0
0
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<INCOME-PRETAX> (424)
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