<PAGE>
================================================================================
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, 1999 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 1, 1999, the Registrant had 5,642,058 shares of Common Stock,
$.001 par value, issued and outstanding.
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This report contains 23 consecutively numbered pages.
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SHOWSCAN ENTERTAINMENT INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
Condensed Consolidated Balance Sheets as of September 30, 1999
and March 31, 1999.................................................................... 3
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended September 30, 1999 and 1998............................... 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 1999 and 1998.............................................. 6
Notes to the Condensed Consolidated Financial Statements................................ 8
Item 2. Management's Discussion and Analysis of
- ------------------------------------------------
Financial Condition and Results of Operations.................................. 11
---------------------------------------------
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................ 21
- ----------------------------------------
Signatures.............................................................................. 22
</TABLE>
2
<PAGE>
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,
1999 1999
-------------- ----------
(unaudited) (Note)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 236 $ 661
Accounts receivable (net of allowances) 956 1,676
Unbilled receivables on uncompleted
film and equipment contracts 422 123
Due from affiliated entities, net of allowances (Note 7) 149 284
Equipment sales inventory 1,212 993
Prepaid expenses and other current assets 357 239
------ ------
Total current assets 3,332 3,976
Film library (net of amortization) 2,382 2,758
Patents and other intellectual properties (net of
amortization) 250 467
Other assets, including equipment and leasehold
improvements, net of accumulated depreciation and
amortization 660 758
------ ------
Total assets $6,624 $7,959
====== ======
</TABLE>
Note: The balance sheet at March 31, 1999 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
<PAGE>
SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Balance Sheets (continued)
(Dollars in Thousands Except Share Information)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
-------------- ----------
(unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
- ----------------------------------------
Current liabilities:
Accounts payable $ 653 $ 555
Customer advances on uncompleted film and
equipment contracts 2,374 1,467
Accrued expenses and other current liabilities 3,553 2,477
Note payable (Note 4) - 260
8% convertible notes (Note 5) 5,690 5,690
-------- --------
Total current liabilities 12,270 10,449
-------- --------
Stockholders' deficiency:
Series A Convertible Preferred Stock, $.001 par value;
150,000 shares authorized, no shares issued and
outstanding - -
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; 5,642,058 shares issued and outstanding 6 6
Additional paid-in capital 42,567 42,567
Accumulated deficit (48,219) (45,063)
-------- --------
Total stockholders' deficiency (5,646) (2,490)
-------- --------
Total liabilities and stockholders' deficiency $ 6,624 $ 7,959
======== ========
</TABLE>
Note: The balance sheet at March 31, 1999 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
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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,
1999 1998 1999 1998
--------------------------- ---------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Film licensing and production services $ 588 $ 924 $ 1,115 $ 1,550
Equipment sales and related services 1,316 1,744 1,336 2,880
---------- ------ ---------- -------
1,904 2,668 2,451 4,430
Costs of revenues 1,474 1,330 1,869 2,610
---------- ------ ---------- -------
Gross profit 430 1,338 582 1,820
Costs and expenses:
General and administrative expenses 1,600 1,314 3,122 2,585
Depreciation and amortization 143 118 286 288
---------- ------ ---------- -------
1,743 1,432 3,408 2,873
Operating loss ---------- ------ ---------- -------
(1,313) (94) (2,826) (1,053)
Other income (expense):
Equity in net operations of O&O Theatres (23) (55) (32) (113)
Other income, including interest 5 39 19 58
Interest and other expenses (148) (215) (317) (429)
---------- ------ ---------- -------
166 (231) (330) (484)
---------- ------ ---------- -------
Net loss $ (1,479) $ (325) $ (3,156) $(1,537)
========== ====== ========== =======
Basic and diluted net loss per common
share (Note 6) $ (.26) $ (.06) $ (.56) $ (.27)
========== ====== ========== =======
</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,
1999 1998
-----------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,156) $(1,537)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 286 288
Amortization of film library 417 509
Equity in net operations of O&O Theatres 32 113
Accrued interest on debt 228 229
Provision for doubtful accounts 660 60
Changes in operating assets and liabilities:
Accounts receivable 194 (149)
Equipment sales inventory (219) (281)
Unbilled receivables on uncompleted film and
equipment contracts (299) (890)
Prepaid expenses (118) 162
Investment in and advances to O&O Theatres - (26)
Accounts payable, accrued expenses and other
current liabilities 941 (242)
Customer advances on uncompleted equipment contracts 907 961
---------- -------
Net cash used in operating activities
$ (127) $ (803)
---------- -------
Cash flows from investing activities:
Purchases of equipment and leasehold
improvements - (7)
Additions to film library (41) (69)
Other assets 3 (14)
---------- -------
Net cash used in investing activities $ (38) $ (90)
---------- -------
</TABLE>
(Continued)
6
<PAGE>
SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
1999 1998
------------------------
(Unaudited)
<S> <C> <C>
Balance forwarded $ (165) $ (893)
---------- ---------
Cash flows from financing activities:
Payments on 11% note payable (260) -
---------- ---------
Net cash used in financing activities (260) -
---------- ---------
Net decrease in cash and cash equivalents (425) (893)
---------- ---------
Cash and cash equivalents, beginning of period 661 2,492
---------- ---------
Cash and cash equivalents, end of period $ 236 $ 1,599
========== =========
Supplemental disclosures of cash flow information:
Interest paid $ - $ 228
========== =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
7
<PAGE>
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 the six-month period ended
September 30, 1999 are not necessarily indicative of the results that may be
expected either for any other quarter in the fiscal year ending March 31, 2000
or for the entire fiscal year ending March 31, 2000. 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, 1999.
Note 2--Going Concern Matters:
- -----------------------------
The Company's cash declined during Fiscal 1999 and continues to decline
subsequent to September 30, 1999. The Company expects to experience further
declining balances during the remainder of Fiscal 2000. Management believes
that its existing cash balances, combined with anticipated cash flow from
operations, may not be sufficient to meet its cash requirements through the end
of Fiscal 2000. If the Company is unable to achieve its projected cash flow
from operations, the Company will experience significant reductions in cash
which could result in the Company not being able to meet its operating needs.
The Company is actively exploring possible financing, however, recent operating
losses, the Company's declining cash balances, the Company's historical stock
performance, and a general decrease in investor interest in the Company's
industry, make it difficult for the Company to attract financing on terms that
are deemed to be favorable to the Company. In the event that cash flow from
operations is less than that anticipated and the Company is unable to secure
additional financing, in order to preserve cash, the Company would be required
to reduce expenditures for new films and effect further reductions in its
corporate infrastructure, either of which could have a material adverse affect
on the Company's future operations and/or require it to seek a negotiated or
bankruptcy enforced reorganization with its creditors.
Note 3--Owned and Operated Theatres ("O&O Theatres"):
- ----------------------------------------------------
The Company retains an ownership interest 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 Universal City,
California (opened in November 1993) and Osaka, Japan (opened in August 1995)
(collectively, the O&O Theatres). Generally, in each of these arrangements, the
Company receives reimbursements for direct expenses, a percentage of each
theatre's cash flow (equal to its ownership percentage), and receives separately
annual film licensing revenues and management fees (if
8
<PAGE>
applicable). The Company accounts for its investment in the O&O Theatres under
the equity method of accounting.
Note 4--11% Promissory Note:
- ----------------------------
On November 1, 1997, the Company completed a private placement of a
$1,000,000 promissory note through an unaffiliated third party. The note which
was originally due on November 15, 1998, was amended on November 10, 1998. The
note bore interest at a rate of 11% per annum. Principal and interest were paid
in full in April, 1999, pursuant to the November 10, 1998 amendment.
Note 5--8% Convertible Notes:
- -----------------------------
On September 1, 1995, the Company completed a private placement of
$7,000,000 in secured convertible notes ("8% Convertible Notes") through an
unaffiliated third party. The 8% Convertible Notes matured on September 1, 1999
and bear interest at 8% per annum which is payable semi-annually and are
convertible at the option of the holder into shares of the Company's common
stock ("Common Stock") at a conversion price of $5.75 per share. Through
September 30, 1999, $1,310,000 of such notes had been converted into 227,819
shares of Common Stock leaving an outstanding balance of $5,690,000. The notes
are secured by substantially all of the assets of the Company, although the
security excludes the Company's film library and the capital stock of its
subsidiaries, which includes its O&O Theatres. Effective September 1, 1999, the
Company entered into an Extension and Security Agreement with the holders of its
outstanding 8% Convertible Notes due September 1, 1999, providing for the
following: (1) an extension of the maturity date from September 1, 1999 to March
1, 2000, with interest to continue to accrue at 8% per annum, (2) a prepayment
provision whereby the Company can at any time prior to March 1, 2000 pay off the
notes at 67.5% of their carrying value (such amount currently equaling
$3,840,750) plus all accrued and unpaid interest from September 1, 1998. In
connection with any such future prepayment, the Company has agreed to issue
warrants to purchase aggregate of 750,000 shares of Company's Common Stock at
the excise price per share of $0.20. The Company agreed that if the notes are
not completely paid by March 1, 2000, then, on such date, the noteholders will
receive as additional collateral a security interest in the Company's film
library. Additionally, the Company agreed that to the extent it obtains any
third-party financing, not less than 75% of such proceeds shall be applied by
the Company to prepay the notes at the 67.5% discounted rate described above,
plus all accrued and unpaid interest on such prepaid amount. The Company
further agreed that if it receives any amounts pursuant to the liquidated
damages provision contained in that certain Theater Rights Agreement between the
Company and United Artists Theatre Circuit, Inc. (UATC), subject to certain
adjustments, then the Company will use the minimum of 60% of such proceeds to
prepay the notes in the same manner.
The Company has instituted binding arbitration proceedings against UATC
seeking payment of an amount in excess of $5,000,000, and UATC has
counterclaimed in the arbitration for unspecified damages in connection with
certain contract breeches it alleges against the Company (see Note 7).
9
<PAGE>
Note 6--Loss per common share:
- ------------------------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128), effective with its March 31, 1998 fiscal
year end. SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) and supersedes APB Opinion No. 15, "Earnings Per Share"
(APB No. 15). SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS. Basic EPS excludes the dilutive effects, if any, of
common stock equivalents, and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to
APB No. 15, with certain modifications. SFAS No. 128 also required dual
presentation of basic EPS and diluted EPS on the face of the income statement
for all periods presented. All earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to the SFAS No. 128
requirements.
Per share information has been determined by using 5,642,058 weighted
average shares outstanding for the six-months and the three-months ended
September 30, 1999 and 1998.
Note 7--Receivables from affiliated entities:
- ---------------------------------------------
In August, 1994, the Company and UATC agreed to be partners in a venture
called Showscan/United Artists Theatres Joint Venture (UA Venture). Pursuant to
a Theatre Rights Agreement, as amended (TRA), UATC agreed to offer to the UA
Venture, up to 24 theatre sites prior to August 19, 1999 for the installation of
motion simulation attraction theatres in or adjacent to existing or to-be-built
UATC theatre multiplexes. As of the August 1999 date, UATC had failed to
purchase and/or install 16 of the required sites.
On September 1, 1999 the Company initiated binding arbitration against UATC
with the American Arbitration Association (AAA). The TRA among the Company,
UATC and UA Venture requires that all disputes thereunder be submitted to the
AAA for binding arbitration in Phoenix, Arizona. The suit alleges, among other
things, breach of contract in connection with UATC's failure to make certain
payments of liquidated damages due under the TRA on August 19, 1999. The suit
seeks payment of an amount in excess of $5,000,000. UATC has counterclaimed in
this arbitration for unspecified monetary damages in connection with certain
breaches of contract that it alleges against the Company.
At September 30, 1999, affiliates of certain directors owed the Company a
combined balance of $175,000 related to advances made by the Company on their
behalf to several O&O Theatres to satisfy capital calls to cover operating
expenses at such theatres and certain other administrative costs. In July,
1998, the affiliates indicated to the Company that they disputed their
obligations to pay these sums; accordingly, the Company fully reserved for such
amount in its March 31, 1998 consolidated balance sheet. During 1999, the
Company and the affiliates entered into an agreement whereby the Company can
retain the affiliates respective proceeds from the sale of the theater system
equipment from the San Antonio attraction, which closed in September 1997, and
to the extent there is a shortfall, to reimburse the Company accordingly.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Overview:
- ---------
Showscan Entertainment Inc. (the "Company") is a provider of movie-based
motion simulation theatre attractions ("Showscan Attractions") to the expanding
out-of-home entertainment market. The Company's business includes: (i) licensing
and distributing the films in its library to all operators of simulation
attractions (including those installed by the Company and those previously
installed by competitors of the Company); (ii) licensing the proprietary
technologies necessary to produce and exhibit Showscan films; (iii) selling and
installing Showscan Attractions including the equipment necessary for each
(including motion bases, projectors, screens, sound systems, synchronization and
show control, and theatre design packages); (iv) producing films using the
Showscan process; and (v) to a limited extent, establishing Showscan Attractions
in which the Company has an economic interest ("O&O Theatres"). The Company is
also committed to the continued recognition of the Showscan(R) brand name
worldwide.
The 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 (60-85% for
each of the three years ended March 31, 1999 and the six-month period ended
September 30, 1999). 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 and the six-month period ended September
30, 1999.
Comparison of the six months ended September 30, 1999 and 1998:
- ---------------------------------------------------------------
Revenues for the six month period ended September 30, 1999 (the "Six Month
Period") decreased by $1,979,000 or 45% from revenues for the six-month period
ended September 30, 1998 primarily due to a reduction in equipment sales and
related services during the current period.
Film licensing and production service revenues in the Six Month Period
decreased by $435,000 or 28% to $1,115,000 from $1,550,000 in the six-month
period ended September 30, 1998. The decrease was primarily due to the
renegotiation of certain film licensing contracts in Asia due to adverse
economic conditions in that region.
Revenues from equipment sales and related services for the Six Month Period
decreased $1,544,000 or 54% to $1,336,000 from $2,880,000 in the six-month
period ended September 30, 1998. The decrease is due to a decrease in the number
of Showscan Attractions shipped during the Six Month Period as compared to the
corresponding prior six-month period. One Showscan Attraction was shipped in the
Six Month Period as compared to three units shipped in the six-month period
ended September 30, 1998.
11
<PAGE>
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
five to six 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 76% of revenues in the Six Month Period as compared
to 59% in the six-month period ended September 30, 1998. Equipment cost of
sales to total equipment sales increased to 90% in the Six Month Period from 63%
in the six-month period ended September 30, 1998, due to the relatively low
margin realized from relocation equipment sales during the current period. Film
licensing cost of sales to total film licensing sales was 60% in the Six Month
Period as compared to 51% in the six-month period ended September 30, 1998. As
costs of sales decreased 15% in the Six Month Period as compared to the six-
month period ended September 30, 1998, the ratio increased due to a decrease in
total film licensing sales of 28%.
Amortization of the film library for the Six Month Period and the six-month
period ended September 30, 1998 was $417,000 and $509,000, respectively. The
decrease in film amortization is primarily due to three films included in
amortization expense during the six-month period being fully amortized prior to
the Six Month Period. The Company reviews film library estimated revenues on a
quarterly basis (based on the then current market conditions) and, where
applicable, unamortized film costs are written down to estimated net realizable
value.
General and Administrative expenses increased $537,000 or 21% in the Six
Month Period from the six-month period ended September 30, 1998. The increase is
attributed to an increase in the allowance for doubtful accounts to reflect the
uncertainty of collection from one of the Company's Asian customers ($600,000).
The loss on investment in O&O Theatres decreased to $32,000 in the Six
Month Period from $113,000 in the six-month period ended September 30, 1998,
primarily as a result of the Company's closing of the Trocadero Showscan
Attraction in London in July, 1998. The Company earns film licensing revenues
and management fees (if applicable) which are recorded separately in the
accompanying consolidated statements of operations, thereby inherently
increasing the operating expenses at the specific O&O Theatres.
The Company's net loss increased $1,617,000 or 105% in the Six Month Period
to $3,154,000 from $1,537,000 in the six-month period ended September 30, 1998
primarily due to (i) the decrease in equipment sales revenues, and (ii) the
increase in the Company's reserve for doubtful accounts included in General and
Administrative expenses.
12
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Comparison of the three months ended September 30, 1999 and 1998:
- -----------------------------------------------------------------
Revenues for the three-month period ended September 30, 1999 (the "2000
Second Quarter") decreased by $764,000 or 29% from revenues for the three-month
period ended September 30, 1998 (the "1999 Second Quarter") due to a decrease
in both (i) film licensing and production services and (ii) revenues recognized
from equipment sales and related services in the 2000 Second Quarter.
Film licensing and production service revenues in the 2000 Second Quarter
decreased by $336,000 or 36% to $588,000 from $924,000 in the 1999 Second
Quarter. The decrease was primarily due to the non-renewal of certain film
licensing contracts.
Revenues from equipment sales and related services for the 2000 Second
Quarter decreased 25% to $1,316,000 from $1,744,000 in the 1999 Second Quarter.
The decrease is due to a reduction in Showscan Attractions shipped, from two in
the 1999 Second Quarter, to one in the 2000 Second Quarter.
Costs of revenues were 77% of revenues in the 2000 Second Quarter as
compared to 50% in the 1999 Second Quarter. Equipment cost of sales to total
equipment sales increased to 88% in the 2000 Second Quarter from 54% in the 1999
Second Quarter primarily as a result of the lower margin realized upon the sale
of relocation equipment. Film licensing cost of sales to total film licensing
sales was 55% in the 2000 Second Quarter as compared to 42% in the 1999 Second
Quarter, as a result of the decrease in film revenues (see above).
Amortization of the film library for the 2000 Second Quarter and the 1999
Second Quarter was $209,000 and $255,000, respectively. The Company reviews
film library estimated revenues on a quarterly basis (based on the then current
market conditions) and, where applicable, unamortized film costs are written
down to estimated net realizable value.
General and Administrative expenses increased $286,000 or 22% in the 2000
Second Quarter from the 1999 Second Quarter. The increase is attributed to the
increase in the Company's reserve for doubtful accounts included in General and
Administrative expenses.
The loss on investment in O&O Theatres decreased to $23,000 in the 2000
Second Quarter from $55,000 in the 1999 Second Quarter. The Company earns film
licensing revenues and management fees (if applicable) which are recorded
separately in the accompanying consolidated statements of operations, thereby
inherently increasing the operating expenses at the specific O&O Theatres.
The Company's net loss increased $1,154,000 in the 2000 Second Quarter to
$1,479,000 from $325,000 in the 1999 Second Quarter primarily due to (i) the
decrease in equipment sales revenue, and (ii) the increase in the Company's
provision for doubtful accounts included in General and Administrative expenses.
13
<PAGE>
Liquidity and Capital Resources:
- -------------------------------
At September 30, 1999, the Company's operating working capital decreased to
a deficit of $8,936,000 from $6,473,000 at March 31, 1999. The decrease in
operating working capital was primarily due to the operating loss of the Company
in the Six Month Period.
Cash and cash equivalents at September 30, 1999 decreased by $425,000 to
$236,000 from the cash level at March 31, 1999. This reduction was the result
of $127,000 used in operating activities, $38,000 used in investing activities,
and $260,000 used in financing activities.
Net cash used in operating and investing activities was minimal during the
period. Net cash used in financing activities was primarily due to the final
payment of $260,000 on the 11% note payable.
As the Company derives 60-85% of its business from export sales, its
liquidity may be adversely affected by changes in worldwide economic or
political conditions. Such factors as changes in foreign currency exchange
rates (which can significantly affect the affordability of the Company's
products and services), trade protection measures, and policies with respect to
currency and fiscal controls may negatively affect liquidity. The current Asian
economic situation has caused the re-negotiation of certain film licensing
agreements and the delay of certain projects.
The Company's cash declined during fiscal 1999 and continues to decline
subsequent to September 30, 1999. The Company expects to experience further
declining balances during the remainder of fiscal 2000. Management believes
that the existing cash balances, combined with anticipated cash flow from
operations, may not be sufficient to meet its cash requirements through the end
of fiscal 2000. If the Company is unable to achieve its projected cash flow
from operations, the Company will experience significantly reduced cash which
could result in the Company not being able to meet its operating needs. The
Company is actively exploring possible financing, however, recent operating
losses, the Company's declining cash balances, the Company's historical stock
performance, and a general decrease in investor interest in the Company's
industry, make it difficult for the Company to attract financing on terms that
are deemed to be favorable to the Company. In the event that cash flow from
operations is less than that anticipated and the Company is unable to secure
additional financing, in order to preserve cash, the Company would be required
to reduce expenditures for new films and effect further reductions in its
corporate infrastructure, either of which could have a material adverse effect
on the Company's future operations and/or require it to seek a negotiated or
bankruptcy enforced reorganization with its creditors.
Impact of the Year 2000:
- ------------------------
As of September 30, 1999, the Company has completed the replacement of or
has upgraded its existing software systems. After reviewing various factors,
one of which being the year 2000 issue, the Company has determined that the
systems are tested, operational, and adequate for the Company's needs.
14
<PAGE>
The Company believes with its conversion to new software, the year 2000
issue will not pose operational problems for its computer systems. The cost of
the conversion was not significant.
Forward Looking Statements
With the exception of the historical information, the matters discussed
above include forward-looking statements that involve risks and uncertainties.
Among important factors that could cause actual results to differ from those
indicated in the forward looking statements are revenue, costs of sales and the
ability of the Company to maintain pricing at a level to maintain gross profit
margins, the level of selling, general and administrative costs, the performance
by the Company under its existing purchase contracts and the ability to obtain
new contracts, the success of the Company's owned and operating strategy, the
ability of the Company to identify and successfully negotiate arrangements with
joint venture and other strategic partners, the success of the Company's film
software, the effects of competition, general economic conditions and acts of
God and other events outside the control of the Company.
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.
History of Operating Losses
- ---------------------------
For the fiscal years ending March 31, 1999, 1998, and 1997 the Company had
net losses of $4.2 million, $8.5 million, and $3.9 million, respectively. At
September 30, 1999, the Company had an accumulated deficit of $48.2 million.
This history of losses has had a negative impact on the Company's stock price
and will adversely effect the Company's ability to carry out its business
strategy, increase stockholder value, and to obtain financing in the future.
Capital Needs; Dilution; Risk of Foreclosure
- --------------------------------------------
Management of the Company has adopted a business strategy that includes
substantial investments in the expansion and marketing of its film library among
other things. This strategy carries with it a number of risks, including a
level of operating expenses and capital needs that cannot be adequately covered
by the Company's revenues and must be financed by funds obtained by raising
additional capital. To date, the Company's primary source of capital has been
from debt and equity financings. Unless the Company is able to obtain additional
proceeds from such financing sources the Company will have to restructure its
business and operations. A number of factors will make it difficult for the
Company to obtain equity financing in the future, including the significant
15
<PAGE>
losses the Company incurred in the last fiscal year, the de-listing of the
Common Stock from the Nasdaq National Market(R), the on-going financial turmoil
in Asia (historically the Company's largest market and principal source of
operating revenues), the Company's historical stock performance, and a general
decrease in investor interest in the Company's industry. The Company's lack of
assets that are available for collateral and its cash flow fluctuations may make
it difficult for the Company to attract additional debt financing. Any investor
or lender may require a significant equity position in the Company that could
result in dilution of the Company's present stockholders. In addition to
curtailing its business strategy, the Company has debt obligations from a
financial institution, which have had their maturity extended from September 1,
1999 to March 1, 2000 ($5,690,000). Based on current cash flow projections, the
management of the Company anticipates that cash generated from operations will
not be sufficient to pay all of the $5.7 million due on March 1, 2000. The
Company is seeking replacement financing but does not presently have any
arranged. There can be no assurance that the Company will be able to find new
financing or that it will be able to negotiate another extension with the
current lender. If the Company is unable to refinance or extend the existing
indebtedness, then the holders of that debt may seek to foreclose on their
collateral which constitutes virtually all of the assets of the Company. Such an
action could force the Company to seek bankruptcy protection.
Period to Period Fluctuations
- -----------------------------
The Company has experienced quarterly fluctuations in operating results and
anticipates that these fluctuations will continue in future periods. Operating
results and cash flow can fluctuate substantially from quarter to quarter and
periodically as a result of the timing of theatre system deliveries, contract
signings, the mix of theatre systems shipped, the completion of custom film
contracts, the amount of revenues from film licensing agreements, the timing of
sales of Showscan Attractions, the timing of delivery and installation of such
sales (pursuant to percentage of completion accounting) and any delays therein
caused by permitting or construction delays at the customer's site, the size,
type and configuration of the attractions sold, the timing of film rental
payments from existing attractions and the performance of those attractions that
pay film rental based on a percentage of box office and the timing of sales and
marketing efforts and related expenditures. In particular, fluctuations in
theatre system sales and deliveries from quarter to quarter can materially
affect quarterly and periodic operating results, and theatre system contract
signings can materially affect quarterly or periodic cash flow. Accordingly,
the Company's revenues and earnings in any particular period may not be
indicative of the results for any future period. The seasonal fluctuations also
cause gyrations in the Company's stock price.
The Company's performance depends primarily upon the number of motion
simulation attractions that it can sell and install. The Company's results have
followed a seasonal pattern, with revenues tending to be stronger in the second
and fourth fiscal quarters, reflecting the buying patterns of the Company's
customers for new motion simulation attractions.
New Product Development
- -----------------------
The Company operates in a technology driven segment of the entertainment
business. As such, the Company must continually improve its products to increase
their entertainment value while
16
<PAGE>
also facing pressure to continually reduce the price of its products to respond
to competitive pressures. Since several of the Company's competitors have
significantly more capital than the Company, the Company has had to rely more on
its suppliers and other third-parties to improve the Company's existing products
and to develop new ones. The inability of the Company to develop new products
and to respond to technological developments of its competitors could have a
materially adverse effect on the Company's business, operations and financial
condition.
International Operations
- ------------------------
A significant portion of the Company's sales and film licensing are made to
customers located outside of the United States, primarily in the Far East,
Europe, Middle East and Australasia. During the fiscal years ended 1999, 1998
and 1997, 85%, 85%, and 62% of the Company's revenues, respectively, were
derived from sales outside the United States. International operations and
sales of the Company may be subject to political and economic risks, including
political instability, currency controls, exchange rate fluctuations (which, in
the event of a decrease in value of foreign currency to the dollar, can
significantly affect the affordability of the Company's products overseas),
changes in import/export regulations, tariff and freight rates, longer accounts
receivable collection patterns, changes in regional or worldwide economic or
political conditions and natural disasters. The Company typically denominates
the prices of its films and equipment in United States Dollars. As a result of
the recent devaluation of a number of Asian countries' currencies relative to
the U.S. Dollar, the price of the Company's products to prospective buyers in
such countries has increased significantly. This effective price increase could
adversely affect the Company's future sales in the region and its ability to
continue to negotiate and receive its current levels of film rental from
existing sites in the region. In addition, various forms of protectionist trade
legislation have been proposed in the United States and certain other countries.
Any resulting changes in current tariff structures or other trade and monetary
policies could adversely affect the Company's international operations.
Political and economic factors have been identified by the Company with respect
to certain of the markets in which it competes. There can be no assurance that
these factors will not result in customers of the Company defaulting on payments
due to it, or in the reduction of potential purchases of the Company's products.
The Company has not engaged in any currency hedging programs.
Intellectual Property
- ---------------------
The Company has several United States patents on various processes and
elements related to film projection and motion simulation. The most important of
these patents expire in October 2001. Though the Company's patents have never
been challenged and the Company believes that they are valid, third parties
could still challenge the patents and a court could determine that one or more
of them are invalid. Declarations of invalidity, particularly of the Company's
key patents, could adversely affect the marketability of the Company's products
and services. In addition, the Company always faces the risk that new
technologies could be discovered that are superior to the Company's patents.
17
<PAGE>
Competition
- -----------
Competition in each of the markets in which the Company competes is
intense. The principal direct competition for customers comes from manufacturers
of competing movie-based attractions, and in the case of amusement and theme
parks, manufacturers of traditional amusement park attractions. In addition to
direct competitors, there is also competition from systems integrators and some
amusement and theme parks developing and constructing their own attractions.
Many of the Company's competitors have better name recognition, and
substantially greater financial and other resources than the Company.
Additionally, the out-of-home entertainment industry in general is
undergoing significant changes, primarily due to technological developments as
well as changing consumer tastes. Numerous companies are developing and are
expected to develop new entertainment products or concepts for the out-of-home
entertainment industry in response to these developments that are or may be
directly competitive with existing products. There is severe competition for
financial, creative and technological resources in the industry and there can be
no assurance that existing products will continue to compete effectively or that
products under development will ever be competitive. Further, the commercial
success of products is ultimately dependent upon audience reaction. Audience
reaction will to a large extent be influenced by the audience's perception of
how the Company's products compare with other available entertainment options
out of the home. There can be no assurance that new developments in out-of-home
entertainment will not result in changes in consumer tastes that will make the
Company's products less competitive.
Volatility of Stock Price
- -------------------------
The Company's stock price has been, and could continue to be, highly
volatile. During the 12 months prior to November 1, 1999, the Company's closing
market price has ranged from a low of $0.04 per share to a high of $0.42 per
share. Future announcements concerning the Company or its competitors, quarterly
variations in operating results, introduction of new products or changes in
product pricing policies by the Company or its competitors, the acquisition or
loss of significant customers, or changes in earnings estimates by analysts,
among other factors, may affect or be perceived to affect the Company's
operations and could cause the market price of the Company's shares to fluctuate
substantially. In addition, stock markets have experienced extreme price and
volume volatility in recent years. This volatility has had a substantial effect
on the market prices of securities of many smaller public companies for reasons
frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Company's shares.
Ability to Retain Key Personnel
- -------------------------------
Over the past four years, the Company has reduced its number of employees
by approximately 50% to 30. The possible merger of the Company, the financial
losses, the potential for additional staff reductions and a tight job market
have resulted in some departures by key personnel. While none of the departures
have had a significant effect upon the Company's operations, there can be no
assurance that there will not be additional departures. In addition, the
18
<PAGE>
Company may experience additional departures at its Board Management level which
could materially affect the Company's operations.
Environmental Matters and Other Governmental Regulations
- --------------------------------------------------------
Under various Federal, state and local environmental laws and regulations,
a current or previous owner or occupant of real property may become liable for
the costs of removal or remediation of hazardous substances at such real
property. Such laws and regulations often impose liability without regard to
fault. The Company could be held liable for the costs of remedial actions with
respect to hazardous substances at its corporate headquarters under the terms of
the governing lease and/or governing law. Although the Company has not been
notified of, nor is otherwise aware of, any current environmental liability,
claim or non-compliance, there can be no assurance that the Company will not be
required to incur remediation or other costs in the future in connection with
these properties. The Company believes it is in compliance with all applicable
Federal, state and local environmental laws and regulations.
Business Disruption
- -------------------
The Company's corporate headquarters, including its research and
development operations, are located in Los Angeles, California, a region known
for seismic activity. Operating results could be materially affected by a
significant earthquake or other natural disaster.
The Company believes with its conversion to new software, the year 2000
issue will not pose operational problems for its computer system. The cost of
the conversion was not significant.
Dependence on Major Customers
- -----------------------------
The Company's motion simulation business has one significant concentration.
The concentration involves ongoing film licenses and is located in Japan where
Imagine Japan presently operates or is otherwise responsible for fifteen
simulation attractions. In the fiscal year ended March 31, 1999, Showscan
earned revenues from Imagine Japan in the amount of $1,101,000. As a result of
the continuing economic conditions in Japan, the amount spent on entertainment
activities has softened significantly and has affected virtually all out-of-home
attractions, including theme and amusement parks, destination resorts and the 15
simulation Showscan attractions covered by the agreement with Imagine Japan.
Accordingly, the Company and Imagine Japan are discussing how to best do
business with in Japan during the calendar year 2000. Both parties have made
respective proposals with regard thereto. It is anticipated that Showscan's
film license revenues from Imagine Japan will be significantly less than the
$1,101,000 received in fiscal 1999. 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.
UATC has advised the Company that as part of its refocused and
regional/national business strategy that it is in the process of closing and/or
has closed its entertainment centers (called "Starports"), including the eight
motion simulation attraction theaters included in each. The Company is
assisting UATC in the resale of these sites and to date has sold three such
sites. The
19
<PAGE>
company receives a commission, plus reimbursement for all costs of removal,
refurbishment, crating, shipping and installation and specific warranties, as
applicable.
Ability to Produce Additional Films
- -----------------------------------
One of the primary factors considered by potential purchasers of motion
simulation attractions is the quality and extent of the films available to be
shown at the attraction. In addition, existing sites considering licensing the
Company's films will consider the type and number of films available to them.
The Company believes that a large portion of its competitive advantage resides
in its popular and extensive library of ride films. To maintain this competitive
edge, the Company must produce or acquire the distribution rights to several new
films each year. Film production is expensive and requires the investment of
Company funds (to the extent that investors cannot be located) with no assurance
that the films produced will be popular. To the extent that the Company does not
have its own funds available to invest and financing cannot be found on
acceptable terms, then the Company's ability to produce new films could be
restricted. Other competitors have each indicated that they are devoting
substantial portions of their financial resources to the production of new
motion simulation films. The Company's recent operating losses and declining
cash balances have caused it to decrease the level of its investments in film
software, which may have an adverse effect on revenues in future periods. Both
the short- and long-term financial performance of the Company will be adversely
affected if the perceived quality and popularity of the Company's film library
declines either alone or in comparison to the films of the Company's
competitors.
Current Trends in the Global Economy
- ------------------------------------
The Company's revenues and profitability are dependent on the strength of
the national and international economies. In a recessionary or deflationary
environment, sales of the Company's products and products of other entertainment
companies may be adversely affected. Theme parks and other out-of-home
entertainment venues may also experience a downturn in sales which could reduce
the funds available for capital improvements and film licensing, resulting in
price and other concessions and discounts by the Company in order to maintain
sales activity. Recent turmoil in the economies of the countries in Asia have
had a material adverse affect on the Company's revenues and results of
operations. If recent economic problems experienced in Asia, Russia, and
Eastern Europe were to spread to Europe, South America or the United States, it
could have a material adverse affect upon the Company's revenues and results of
operations. The Company is not able to predict to what extent, or for what
period, these economic trends may adversely affect the sales of its products.
20
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
The exhibit listed below is filed as part of this Report.
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None.
21
<PAGE>
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 7th day of December, 1999.
Showscan Entertainment Inc.
---------------------------
(Registrant)
By /s/ DENNIS POPE
---------------
Dennis Pope
President - Chief Executive Officer
(Authorized Officer and Principal
Executive Officer)
22
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page Number
- -------------- ----------- -----------
27.1 Financial Data Schedule 24
23
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