<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999.
Commission file number 0-15939
SHOWSCAN ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3940004
(State of incorporation) (I.R.S. Employer Identification No.)
3939 Landmark Street, Culver City, California 90232
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 558-0150
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Title of each class
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Common Stock,
$.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. YES ____ NO X
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The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 1, 1999 was approximately $314,480 (based on last
Over-The-Counter Bulletin Board-reported sale price of $0.0625 per share of
Common Stock on that date). There were 5,642,058 shares of registrant's common
stock outstanding as of November 1, 1999.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
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Item Page
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Part I
1. Business............................................................................ 3
2. Properties.......................................................................... 16
3. Legal Proceedings................................................................... 16
4. Submission of Matters to a Vote of Security Holders................................. 17
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters............... 18
6. Selected Financial Data............................................................. 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 20
8. Financial Statements and Supplementary Data......................................... 30
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................. 30
Part III
10. Directors and Executive Officers of the Registrant.................................. 31
11. Executive Compensation.............................................................. 33
12. Security Ownership of Certain Beneficial Owners and Management...................... 36
13. Certain Relationships and Related Transactions...................................... 38
Part IV
14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K............................................................ 42
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2.
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Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K
contains statements that constitute forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act and Section 27A of the
Securities Exchange Act. The forward-looking statements contained herein are
subject to certain risks, uncertainties and other factors that may cause actual
results to differ materially from those contained in the forward-looking
statements. Factors that might cause such a material difference include, but
are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Factors That May Affect Future Results." Readers are cautioned not to place
undue reliance on these forward-looking statements which reflect management's
analysis only as of the date hereof. Such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Showscan
Entertainment Inc. undertakes no obligation to publicly revise these forward-
looking statements to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by the
Company in calendar 1999 and 2000 and any Current Reports on Form 8-K filed by
the Company.
PART I
Item 1. Business
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General
Showscan Entertainment Inc. (the "Company") is a provider of movie-based
motion simulation theatre attractions to the expanding out-of-home entertainment
market. The Company's motion simulation theatre attractions ("Showscan
Attractions") combine the exhibition of a short action film with multi-channel
sound systems and synchronized theatre seat movement to produce an immersive
entertainment experience in which the theatre patron has the perception of
actually participating in the on-screen action. The entertainment creates a
"thrill ride" or action entertainment experience (such as riding a run-away
train or racing through outer space). The Company's attractions incorporate
various proprietary technologies, including the award winning and patented 70mm
filming and projection process known as Showscan(R). The Company believes that
films made and exhibited in the Showscan process create a visual effect of
depth, clarity and realism that is superior to any other film format. The
Showscan process is also used for the exhibition of films in large screen
special format movie theatres. The Company's films have been exhibited in such
specialty theatres at world fairs, tourist destinations, trade conventions and
other locations where the operator desires the impact of the large-screen,
intense image that a Showscan film provides.
As of November 1, 1999, the Company had 57 Showscan Attractions screens
operating around the world. The Company had 8 additional Showscan Attractions
screens in its delivery and installation backlog, and has contractual
commitments for an additional 5 Showscan Attractions screens over the next two
years. The Company includes in its backlog all sales for which it has a signed
agreement or letter of intent, in each case supported by a letter of credit,
cash deposits or liquidated damage provisions. The Company has an ownership
interest in motion simulation theatres ("O&O Theatres") at Universal CityWalk,
Universal City, California and the Asian Trade Center in Osaka, Japan.
As part of its business, the Company produces and licenses specialty films
in the Showscan process which are then exhibited in conventional theatres
equipped to show Showscan films. The Company also markets all of the cameras,
projectors, motion bases and other equipment necessary to establish and operate
3.
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Showscan Attractions and Showscan specialty theatres. There are 7 permanent
specialty theatres operating as of November 1, 1999, which license the Company's
films.
The Company was incorporated in Delaware in August 1984 under the name
Showscan Film Corporation. In August 1990, the Company's name was changed to
Showscan Corporation, and in August 1994 the name was changed again to Showscan
Entertainment Inc. The Company's principal executive office is located at 3939
Landmark Street, Culver City, California 90232. The Company's telephone number
at its executive office is (310) 558-0150. Unless the context otherwise
requires, the term "Company" as used in this Report refers to Showscan
Entertainment Inc. and its wholly owned subsidiaries, Showscan Productions,
Inc., Showscan CityWalk, Inc., Showscan Attractions, Inc., Showscan Framingham,
Inc. and Showscan Entertainment B.V.
Business Strategy
The Company believes that there is worldwide consumer demand for a variety
of out-of-home entertainment options. The Company's goal has been to capitalize
on its position as a leader in the entertainment motion simulation attraction
business and on the growing demand for entertainment alternatives by making its
movie-based products available to consumers worldwide at high-visibility and
high-traffic locations, such as urban entertainment complexes, tourist
destinations, family entertainment centers, amusement/theme parks, movie theatre
complexes, gaming casinos, and shopping centers.
The Company, since March 1997, has focused its primary business strategy on
the development of high-margin recurring revenues from the licensing and
distribution of its motion simulation and specialty films. The Company's goal
has also been to enhance the recognition of the Showscan(R) brand name
worldwide. In response to the unsatisfactory results and the need to manage its
personnel resources, the Company's current management has revised certain of its
prior business strategies. For example, the Company has decided to reduce its
marketing of other large format projection systems and its investments in O&O
Theatres and will concentrate its limited resources on its core business of
selling Showscan Attractions to third parties and licensing its film library.
The Company's current strategies to achieve its objectives are as follows:
Increase Film Licensing Revenues. The Company's principal strategy
continues to be to increase the recurring revenues derived from licensing its
films by increasing the number of motion simulation attractions that license the
Company's films. As this installed base grows, each film will be licensed to a
greater number of exhibitors thereby increasing film revenue, while also
amortizing the fixed film production costs of Showscan owned films over a larger
revenue base. To increase this recurring revenue, the Company's focus continues
to be on:
(i) Marketing to a wide range of potential customers worldwide while
maintaining reasonable profit margins;
(ii) Enhancing and expanding its film library by producing internally or
with third parties new films while also obtaining distribution rights
to motion simulation films produced by others;
(iii) Offering Showscan films for distribution, and films for which
Showscan has obtained distribution rights from other producers, to
all operators of simulation attractions including those previously
installed by competitors of Showscan; and
(iv) Entering into additional strategic multi-location sales arrangements
to supplement existing strategic agreements which cover Japan,
Austria, Australia and Taiwan.
4.
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Investments in Showscan Attraction Theatres. The Company has historically
participated directly in the recurring revenues from ticket sales and film
distribution and licensing by having an ownership interest in certain Showscan
Attractions ranging from 25% to 50%. The Company's management, recognizing the
losses incurred at most of these theatres, has closed over the last two years
five of the seven O&O Theatre screens and has not made any new O&O Theatre
investments.
Expand Distribution; Exploit Proprietary Assets. In addition to increasing
its recurring film revenue through the addition of more sites, another objective
of the Company is to expand its distribution base and to find and exploit other
commercial and entertainment opportunities and revenue sources for its existing
assets.
The Company believes that its current and future library of motion
simulation and specialty films will become more valuable, not only to Showscan
Attractions currently showing Showscan films but also to third-party sites that
will be interested in licensing films from the Company. Accordingly, the
Company plans to continue to increase the number of films it offers by producing
patented and/or acquiring additional suitable films. In addition, the Company
also is pursuing various financing alternatives, including limited partnerships
and other similar arrangements to finance the production of additional Showscan
motion simulation films. The Company has begun to market its films, and films
for which Showscan has obtained distribution rights from other producers, to all
operators of motion simulation attractions either in conjunction with, or as a
replacement for, the films that they are currently showing.
The Company believes that the Showscan process can also be used to enhance
the effectiveness, appeal and commercial potential of other filmed products,
including feature-length motion pictures, specialty films, commercial and
corporate presentations, educational films, documentaries and other forms of
entertainment, such as interactive and virtual reality attractions.
The Company is a representative in the Peoples Republic of China for Spitz,
Inc., a manufacturer of planetariums, space theatres and flight simulators.
Furthermore, the Company may consider the acquisition of motion simulation film
libraries and/or other companies in its line of business or in other businesses.
The Motion Simulation and Specialty Film Library
The Company derives revenues in the following ways from its film library:
(i) a royalty fee for use of the patented Showscan filming and projection
process, (ii) distribution fees based on the revenues derived from all films
including those that are not solely owned by the Company; and (iii) receipt of
all or a percentage of the licensing revenues remaining after the payment of any
distribution fees or expenses. The amount the Company receives from co-owned
films varies, and is based on the participation agreements negotiated with the
other owners of the films.
The Company's film library consists of a motion simulation film library and
a specialty film library. The motion simulation film library is one of the
world's largest entertainment motion simulation film libraries and currently
contains 40 action/thrill-ride films. The Company also has two motion
simulation films in pre-production "Wing Commander-The Ride" and "Hollywood
Stunts," more titles in development, and three titles in production, "Dragon
Quest," "Robo Soldier" and "Desperado." The Company is the sole owner of 17 of
the motion simulation films, a joint owner of eight motion simulation films and
the distributor of 17 motion simulation films owned by unaffiliated companies.
The specialty film library contains 16 Showscan specialty films available for
exhibition in specialty theatres. Of the 16 Showscan specialty films, six are
owned by the Company. The Company has not produced any specialty films in the
past four years and currently has no plans to commit any of its resources to
producing additional specialty films.
5.
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The Company's newest simulation film "Street Fighter II" which was released
in June 1999, takes audiences on a computer-generated adventure to combat the
various characters based upon the popular Capcom arcade game "Street Fighter
II." "Street Fighter II" is the first industry film to fully utilize convergent
media that crosses a variety of entertainment forms including video games,
theatrical films and simulation adventures, and "Wing Commander - The Ride" will
continue the convergency. The Company's film library consists of such films as
the live-action motion simulation film "Street Luge" (a high-speed downhill ride
just inches from the asphalt), "Cosmic Pinball" (depicting a race through a
giant, futuristic pinball park), and the highly-acclaimed "Devil's Mine Ride" (a
ride through an abandoned mine on a runaway rail car). The Company has obtained
certain distribution rights through May 1, 2002 to two films ("Funhouse Express"
and "Asteroid Adventure") which were produced by Imax Corporation. These two
films may be distributed to Showscan's existing installed base and contractual
backlog of Showscan Attractions as of April 30, 1997.
The films that the Company produces are either fully financed by third
parties or co-produced and financed by the Company and third parties. When the
Company produces films, it typically hires a production company or team of
specialists on a project-by-project basis, similar to the major movie studios.
This allows the Company to retain creative and quality control without the
burden of significant ongoing production overhead expenses. As the film's
producer, the Company typically has control over the creative and technical
aspects of the production and is designated as the film's exclusive distributor.
The Company has obtained the exclusive, perpetual worldwide rights to
distribute in the Showscan format certain of the Showscan motion simulation
films and specialty films that are not owned by the Company, except that in
certain circumstances the Company does not own the right to distribute such
films in the country in which the owner of the distributed film is located. On
some films, the Company only has the right to distribute the film to its network
of simulation attractions.
The Company's specialty film library consists of such films as "Niagara
Wonders," a 23-minute Showscan film produced for exhibition in a permanently
erected 300-seat theatre in Niagara Falls, New York; "France," a 40-minute
Showscan film that was produced by Source Perrier for the 1989 bicentennial
celebration of the French revolution and exhibited in a first-run theatre in
Paris, France; and "Discovery," a 16-minute Showscan film produced by the
government of British Columbia and exhibited in a temporary specialty theatre at
the Expo '86 World's Fair in Vancouver, Canada. Two Showscan specialty films,
"Nature Rediscovered" and "Concerto for the Earth," were in exhibition at
temporary Showscan specialty theatres at the Expo '92 World's Fair in Seville,
Spain. Both films explore biodiversity, ecological awareness and the fragile
balance of nature. "Concerto for the Earth" is the first Showscan film in 3-D;
however, the film can be exhibited in the standard 2-D format.
Motion Simulation Attractions
A Showscan Attraction is a theatre (typically 18 to 84 seats) in which the
on-screen action of a short action film is synchronized with the motion of the
theatre seats to simulate various realistic or action experiences. The Showscan
Attraction "thrill rides" are short, approximately four-to-five-minute
entertainment experiences. Each Showscan Attraction is equipped with a high-
quality, multi-channel sound system and a seat motion system (motion base).
Motion bases are available in various theatre configurations to suit the needs
of the various locations. The Company's principal supplier has been Intamin,
A.G. ("Intamin"), and the Company recently entered into an agreement for an
electric motion base capability with Hydraudyne Systems and Engineering B.V. (a
part of the worldwide Mannesmann Group) ("Hydraudyne"); however numerous other
suppliers are available to the Company. The potential market for motion
simulation theatre attractions includes any location with high pedestrian
traffic, including tourist attractions, amusement parks, theme parks, resorts,
large regional shopping centers, motion-picture multiplexes, urban entertainment
centers, and hotel casinos.
6.
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Showscan Attractions are either the standard film-based theatres in which
the Company's 70mm motion simulation films are exhibited using the Company's
patented projector, or are HD Simulation Attractions in which the motion
simulation films are projected using standard, commercially available high-
definition video projection equipment. To date, most Showscan Attractions have
exhibited Showscan motion simulation films using 70mm film and the Company's
projectors. However, the Company has seen increasing demand for its HD
Simulation Attractions in which the Showscan films are transferred to a high-
definition video format on laser discs and projected using high definition video
projectors. Of the 40 films in the Company's simulation thrill-ride library, 33
have been transferred and are available in high-definition video format. See
Item 1. "Business -- Equipment," below. Because the Showscan film is
transferred directly from frame-to-field to high-definition video, the Company
believes that the image projected is the sharpest image available in that
format. The HD Simulation Attractions, when combined with any of the available
motion bases, utilize less space than the standard film-based Showscan
Attractions. Due to the lesser space requirements of HD Simulation Attractions,
such Showscan Attractions can be installed in locations previously not feasible.
The Company licenses its films and, in standard film-based motion
simulation theatre attractions, sells its Showscan projection equipment to third
party owners and operators of Showscan Attractions. The Company is the sole
source of both the film projectors used to exhibit Showscan motion simulation
films and the show control system. In addition, the Company generally sells the
motion bases, control panels, video equipment and other equipment used in the
Showscan Attractions and assists in installing the attraction. Licensees of the
Company's motion simulation films are not obligated to purchase the motion bases
or the other equipment and services offered by the Company. Other than the
patented Showscan film projectors and the Company's show control system, all
motion simulation equipment, including the various motion bases, the sound
system and the video projection equipment, can be purchased by the third party
owner/operator from numerous other sources. The initial term of the Company's
licensing agreements generally range from one to five years (normally with fixed
or minimum annual royalty payments and film rental obligations).
Historically, Showscan Attraction installations outside North America have
represented a significant portion of the Company's total revenues (constituting
85%, 85% and 62% of the Company's revenues for the fiscal years ending March 31,
1999, 1998 and 1997, respectively).
As of March 31, 1999, Showscan Attractions have been sold or licensed in
the United Kingdom, Australia, Saudi Arabia, Spain, Hong Kong, People's Republic
of China, United States, Canada, Japan, South Korea, Taiwan, Indonesia,
Singapore, France, Belgium, Italy, Austria, South Africa, United Arab Emirates,
Egypt, Kuwait, New Zealand and Germany. The Showscan Attractions sold in Japan
have been purchased or distributed by Imagine Japan, Inc. ("Imagine"), which has
exclusive distribution rights to Showscan Attractions in Japan through December
31, 1999. See Item 1. "Business -- Sales and Marketing," below.
Owned and Operated Theatres. In 1993, the Company began developing and
operating Showscan Attractions in which the Company has an ownership interest
(the "O&O Theatres"). The Company has revised its strategy with respect to O&O
Theatres so that it will generally limit its investment in future O&O Theatres
to between 10-15%. In addition, the Company has closed 5 of the 7 total O&O
Theatre screens to date because of their financial performance. For certain
financial information regarding these strategic alliances, see Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The United Artists Venture. Under the terms of a Joint Venture
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Agreement dated as of August 19, 1994 (the "Joint Venture Agreement"), the
Company and United Artists Theatre Circuit, Inc. ("UATC") UATC agreed to be
equal partners in a venture called Showscan/United Artists Theatres Joint
Venture (the "UA Venture"). The UA Venture has never developed any Showscan
Attractions and it now appears that the UA Venture and the Joint Venture
Agreement will be terminated as part of the arbitration between UATC and the
Company discussed below.
7.
<PAGE>
Pursuant to a Theater Rights Agreement dated as of August 19, 1994, as
amended (the "Theater Rights Agreement"), UATC agreed to offer to the UA Venture
for ownership and operation by the UA Venture, up to 24 theatre sites at any
time prior to August 19, 1999 for the installation of Showscan Attractions in
existing or to-be-built UATC theatre complexes and to install a Showscan
Attraction itself at each site that the UA Venture declined. As of August 19,
1999 UATC had installed 8 Showscan Attractions. 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 theatres included
in each. The Company is assisting UATC in the resale of these sites and to date
has sold three such sites. The Company receives a commission, plus
reimbursement for all costs of removal, refurbishment, crating, shipping and
installation and specific warranties, as applicable. The UA Venture had agreed
to accept prior to August 19, 1999 at least one of the theatre sites offered to
it by UATC. The Theater Rights Agreement contains certain provisions that
require UATC to make payments to the Company if UATC is unable to meet its
obligations and that require the Company to make payments to UATC if the UA
Venture is unable to meet certain of its obligations. UATC is obligated to pay
$330,000 to the Company for each Showscan Attraction which is not purchased and
installed by August 19, 1999 (16 theatre sites) and the Company is obligated to
pay UATC $165,000 since the UA Venture did not select a joint venture site by
August 19, 1999. Therefore, UATC presently owes to the Company an amount in
excess of $5,000,000 in connection with the expiration of the Theater Rights
Agreement, as amended. UATC has disputed that this amount is owed and has
counterclaimed that it is owed damages on account of installation and equipment
problems that it alleges in connection with the Showscan Attractions that it did
install. The Company has invoked the binding arbitration provisions contained
in the Theater Rights Agreement and is presently selecting the arbitrator with
UATC. See Item 3. "Legal Proceedings," below.
Moss/DiBenedetto Ventures. The Company and affiliates of certain of
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its directors entered into (i) the Showscan CityWalk Venture (the "CityWalk
Venture"), a venture formed solely to own and operate an O&O Theatre in
Universal City, California and (ii) the Showscan Attractions Venture, a venture
formed for the purpose of, directly or through other jointly-owned entities,
developing, owning and operating additional O&O Theatres throughout the world
(the "Attractions Venture," and together with the CityWalk Venture, the
"Moss/DiBenedetto Ventures").
The CityWalk Venture. The first O&O Theatre opened in November 1993
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at Universal CityWalk, adjacent to Universal Studios in Universal City,
California. This O&O Theatre is owned by the CityWalk Venture, a venture 50%
owned by Showscan CityWalk, Inc. (a wholly owned subsidiary of the Company), 25%
owned by Moss Family LA Corp., a California corporation, and 25% owned by
DiBenedetto CityWalk Limited Partnership, a Delaware limited partnership
(collectively, the "Investors"). Moss Family LA Corp. and DiBenedetto CityWalk
Limited Partnership are controlled by Mr. Charles B. Moss, Jr. and Mr. Thomas R.
DiBenedetto, respectively. Mr. Moss and Mr. DiBenedetto are directors and
stockholders of the Company. See Item 10. "Directors and Executive Officers of
the Registrant," below. The term of the CityWalk Venture expires on December
31, 2050.
Universal CityWalk is a diversified-use entertainment/shopping facility
that is controlled by Universal Studios Recreation Group ("Universal"), and is
presently being expanded to add approximately 90,000 square feet to the existing
320,000 square feet already in use at Universal CityWalk. The facilities are
leased from Universal pursuant to a profit sharing lease (the "Lease") entered
into with MCA Inc., the predecessor of Universal, under which Universal paid
approximately one-half of the total tenant costs of the theatre (as defined),
which costs included the projection equipment and the motion bases. The Lease
expires in November 2002, subject to options to extend the Lease for three five-
year periods. In general, the CityWalk Venture is obligated to pay a base rent
plus 50% of the cash flow (as defined) from the operations of the theatre.
Accordingly, the CityWalk Venture will retain 50% of the cash flow from the
theatre's operations. The base rent will be adjusted annually based on the
percentage increase in the consumer price index up to a maximum
8.
<PAGE>
of 5% per year. Of the 50% of cash flow retained by CityWalk Venture, 50% will
be retained by the Company and 50% will be paid to the Investors. Thus, the
Company's share of the total cash flow from the theatre's operations will be 25%
plus the annual film rentals, royalties and management fees that the CityWalk
Venture is separately required to pay the Company, each of which is subject to
annual increases based on the consumer price index up to a maximum of 5% per
year.
The Attractions Venture. The parties to the Attractions Venture are (i)
-----------------------
Showscan Attractions, Inc., a wholly owned California subsidiary of the Company
and the managing partner of the Attractions Venture, (ii) Moss Family O&O Corp.,
a California corporation controlled by Mr. Moss (the "Moss Partner"), and (iii)
DiBenedetto O&O Limited Partnership, a Delaware limited partnership controlled
by Mr. DiBenedetto (the "DiBenedetto Partner").
The Attractions Venture agreement states that the parties intend to
develop, own and operate O&O Theatres through the Attractions Venture or through
other corporations, joint ventures, partnerships or other entities to be owned
by the parties to the Attractions Venture. The agreement further provides that
if any O&O Theatre is owned by any such other corporation, venture, partnership
or other entity, the partners to the Attractions Venture shall own and operate
such other entity on the same terms and conditions as the agreement of the
Attractions Venture.
Pursuant to a Proprietary Property Acquisition and Management Agreement,
dated as of September 27, 1993, between the Company and the Attractions Venture,
the Company granted to the Attractions Venture rights to utilize proprietary
property and rights of the Company in connection with the development and
operation of additional O&O Theatres. Under the terms of this agreement, the
Company will manage any and all Showscan Attractions developed and operated by
the Attractions Venture. The Attractions Venture is required to purchase
simulation equipment and license Showscan motion simulation films from the
Company on terms and conditions that are substantially the same as those offered
to unaffiliated third parties, except that the Attractions Venture receives a
discount on certain equipment prices and film rental and royalty fees. Moss
Entertainment Corp., a corporation controlled by Moss, and DiBenedetto Corp., an
affiliate of DiBenedetto, were retained by the Attractions Venture to provide
certain services in connection with the acquisition of properties for the
additional O&O Theatres and the disposition of those theatres. For such
services, Moss Entertainment Corp. and DiBenedetto Corp. are to receive fees
upon the sale or other disposition of certain of the O&O Theatres developed by
the Attractions Venture. The term of the Attractions Venture expires on
December 31, 2050.
The Attractions Venture agreement further provides that neither the
Company, the Moss Partner, nor the DiBenedetto Partner may develop, own or
operate any additional Showscan Attractions without first offering all of the
other parties to the Attractions Venture the opportunity to invest in such
additional Showscan Attractions in proportion to each party's Percentage
Interest (as defined below). No party is, however, obligated to invest in any
such additional Showscan Attractions. If the parties to the Attractions Venture
do not collectively contribute all funds necessary to establish and operate any
such additional Showscan Attraction, the parties may admit additional
unaffiliated investors as part owners of the additional Showscan Attraction.
Showscan Attractions, Inc. currently owns a 50% interest in the Attractions
Venture, and each of the Moss Partner and the DiBenedetto Partner owns a 25%
interest in the Attractions Venture (the "Percentage Interests"). In the event
that the Company and the Moss Partner and/or the DiBenedetto Partner elect to
jointly invest in any additional Showscan Attraction, the parties will share all
profits, loss and distributions of cash, if any, derived from the operation and
ultimate disposition of each additional Showscan Attraction in proportion to the
capital contributions made by the partners (and any unaffiliated investor) into
the account established for the additional Showscan Attraction.
There are presently no O&O Theatres owned by the Attractions Venture.
9.
<PAGE>
The Osaka Venture. In June, 1995, Showscan Entertainment B.V., a
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wholly owned subsidiary of the Company, organized under the laws of the
Netherlands, and Imagine Japan, Inc., a company organized under the laws of
Japan, entered into a venture (the "Osaka Venture") to own and operate a
Showscan Attractions theatre at the Asia Trade Center in Osaka, Japan.
Showscan Entertainment B.V. and Imagine Japan, Inc. agreed to be equal
partners in the Osaka Venture. Day-to-day operations of the theatre are managed
by Sega Enterprises, Ltd. As theatre manager, Sega receives a percentage of the
gross box office receipts of the theatre as a combined rent/management fee, as
well as reimbursement of its operating expenses. The Company separately
receives film rental and royalty fees from the Osaka Venture. The term of the
Osaka Venture expires in June 2000 and can be extended for an additional five
years at the option of Showscan Entertainment B.V. at the end of the initial
term. No determination has yet been made on whether or not to extend the term.
Because of the structure of the Osaka Venture under Japanese law, ownership and
title of all property is held by Imagine Japan.
Universal Agreement. Pursuant to the Lease entered into with
-------------------
Universal in connection with the CityWalk Venture, Universal has the right,
exercisable at Universal's election, to participate in the Company's share of
any future O&O Theatres located in California. If Universal makes any such
election, Universal will be entitled to receive one-half of the Company's rights
in such O&O Theatre and will assume one-half of the Company's obligations
related to such O&O Theatre. To date, Universal has not exercised its option to
participate in any additional O&O Theatres.
Specialty Theatres
The Company also receives revenues from the production, licensing and
exhibition of specialty films. These films are typically 15 to 40 minutes in
duration, are produced in the Showscan process and are exhibited at expositions,
theme parks, major fairs and festivals and other larger tourist areas. Specialty
theatres are either theatres permanently dedicated to the exhibition of Showscan
specialty films or temporary theatres erected for such purposes. Often,
specialty theatres exhibit Showscan specialty films that are produced
specifically for the theatre or the exhibition. Examples of specialty theatres
and specialty films include the two films produced for and exhibited at the Expo
'92 World's Fair held in Seville, Spain.
In the past, the Company has financed its specialty film production through
a third party who usually was the owner and operator of the specialty theatre
venue. The Company received production fees for its services, revenues from the
sale of Showscan projector equipment (and possibly the theatre installation,
sound system and seats, etc.) and worldwide distribution rights to the specific
films. As of November 1, 1999, nine permanent and twelve temporary specialty
theatres had been sold by the Company. Of the nine permanent theatres, seven
are currently operating and the remaining two theatres are permanently closed.
The Showscan Process
Standard theatrical motion picture films are currently projected at 24
frames per second (fps) on 35mm film with each frame being shown twice. In
contrast to conventional filming and projection systems, a Showscan motion
picture is photographed on 65mm film at a rate of 60 fps and is projected using
70mm film at a rate of 60 fps and at a higher illumination level (the 65mm film
is projected using 70mm film in order to accommodate the sound track, which
occupies approximately 5mm of the film strip). The Company believes that the
bigger image and increased visual cues perceived by the viewer of a Showscan
film result in greater picture clarity and an enhanced sense of depth and
realism.
Photography of 65mm film at a frame rate of 60 fps offers a number of
improvements to the quality of a motion picture image and permits the screen
size to be substantially enlarged without significant degradation
10.
<PAGE>
of the image. The images are significantly brighter with more saturated and
vibrant colors. Because of the frame rate of Showscan film, the motion of the
cameras and the subject can be substantially increased without noticeable
distortion, greatly heightening the impact of action scenes. The larger 70mm
format and faster exposure time also greatly reduce blurring, thus recording
images more accurately and in finer detail. To enhance the visual impact, and to
take maximum advantage of the realism and detail of the Showscan process,
Showscan film is usually projected onto a specially designed, curved screen.
Showscan motion pictures can be transferred to conventional formats for use
in movie theatres to other large film formats and to all standard video formats.
Showscan motion pictures can also be directly transferred (one frame to each
field) to high-definition video for exhibition with standard high-definition
video projectors. Although a Showscan film transferred to alternative formats,
including to the high-definition laser projection system used by the Company,
does not contain the clarity, depth and realism of the original Showscan film
projected in 70mm film at 60 fps, the Company believes that the visual quality
of Showscan film transferred to such alternative film formats (such as the 8/70
- - 30 fps and 24 fps, 5/70 - 30 fps film formats) exceeds the quality that could
be obtained in such formats using conventional films.
Sales and Marketing
The Company's sales and marketing activities are coordinated by the
Company's Vice President of Worldwide Sales and Marketing, and effected through
the Company's employees, its independent sales representatives worldwide and its
strategic sales alliances. The Company participates in trade shows and
regularly advertises in trade periodicals. The companies that provide Showscan
with motion bases also market motion simulation theatre attractions worldwide
that license the Company's motion simulation attraction films and equipment.
Effective January 1997, the Company extended its agreement with Imagine
Japan, Inc. ("Imagine") through December 31, 1999, which included an extension
of Imagine's exclusive right to sell and acquire Showscan Attractions and
specialty theatres in Japan. The price and other terms on which the Showscan
Attractions are sold to Imagine are substantially the same as the price and
terms offered by the Company to other Showscan Attraction customers. Imagine is
permitted to resell in Japan any and all of the Attractions it purchases from
the Company. The price and terms at which Imagine resells the Attractions are
established by Imagine. However, notwithstanding such resales, Imagine remains
liable to the Company for all annual film licensing obligations related to all
of the Showscan Attractions sold to Imagine. The Company has also granted
Imagine a non-transferable license to exhibit Showscan films in the Company's
motion simulation library for a rental fee that is based on the number of
Showscan Attractions operating in Japan and on the films exhibited at the
various attractions. This exclusive agreement with Imagine expires on December
31, 1999 although Imagine will continue to remain liable thereafter for all
annual film rental and royalty obligations. 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 best to do business in Japan
during the calendar year 2000. Both parties have made respective proposals with
regard thereto. It is anticipated that Showscan's future film license revenues
from Imagine Japan will be significantly less than the $1,101,000 received in
Fiscal 1999 if the agreement is renewed at all.
11.
<PAGE>
Historically, the majority of the Company's revenues have been derived from
export sales. These sales by geographic region for each of the three fiscal
years ended March 31, 1999, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1999 1998 1997
========== ========== ===========
<S> <C> <C> <C>
Africa $ 35,000 $ 0 $ 215,000
Australasia 451,000 647,000 1,976,000
Europe 3,582,000 1,753,000 1,206,000
Far East 2,409,000 4,051,000 6,048,000
Middle East 311,000 2,399,000 1,340,000
Other 66,000 0 159,000
---------- ---------- -----------
Total Export Revenues $6,854,000 $8,850,000 $10,944,000
========== ========== ===========
</TABLE>
The Company sells internationally through independent sales representatives
and its own sales and marketing staff. The Company's international sales are
subject to customary restrictions on foreign operations, including restrictions
on imports and exports, longer collection periods for accounts receivable and
risks associated with both economic conditions and fluctuations in foreign
exchange rates. The Company's contracts for the sale of equipment generally
provide for payment in United States dollars and for letters of credit as the
means of payment. The Company's policy is to require annual film rental and
royalty payments to be made in United States dollars. The Company does not
engage in any hedging activities.
Equipment
The photography and exhibition of Showscan motion pictures require
specially equipped or modified cameras and projectors. In addition, certain
other products and equipment are needed to produce Showscan motion pictures and
to convert Showscan film to other film formats.
The Company markets (a) a two-passenger and a four-passenger open seating
pod, and (b) a 15-18 passenger open seating platform. Each of these seating
arrangements is mounted on a six-axis motion base that is manufactured by
Intamin, A.G., a Liechtenstein corporation ("Intamin"), or by Hydraudyne Systems
and Engineering B.V. (a part of the worldwide Mannesmann Group) ("Hydraudyne").
In September 1999, the Company entered into a strategic motion base equipment
alliance with Hydraudyne. Hydraudyne supplies and manufactures high-quality
products, systems and advanced technical solutions, for all sectors of industry,
in the field of hydraulic, pneumatic, electrical and mechanical drive systems
and related controls. Hydraudyne also specializes in technical service
provision, service, repairs, installation technology, and commissioning
services.
Films made in the Showscan process can be projected with certain
conventional 70mm projectors that are modified to project a motion picture at 60
fps. The modification does not entail significant expense or effort and does not
have an adverse effect on the reliability of the projector. In order to
facilitate the projection of Showscan motion simulation films, however, the
Company has developed an automatic electronic projector that uses low-inertia
motors to achieve the intermittent projection of frames of film rather than the
conventional use
12.
<PAGE>
of gears and geneva-drive sprockets. Film storage is contained within the
projector which eliminates the need for complicated film loop cabinets. The
projector permits computer-controlled automatic cuing, synchronization and
rewinding necessary for the continuous showing of a variety of short films
without requiring that the film be changed or a projectionist used. The Company
owns a patent on certain circuitry included in this projector.
The HD Simulation Attractions use standard, commercially available
high definition video projectors and laser disc players. The video projectors
and laser disc players are manufactured by a number of companies, including NEC,
Sony Corp., Hughes JVC, and Barco Inc.
Research and Development
The Company, directly or in conjunction with other companies, has from
time to time been engaged in a limited program of research and development. For
the last four years, the Company's research and development program did not,
however, require a significant expenditure of funds.
The Company's research and development efforts are currently directed
at creating new simulation attractions. Also, the Company has developed theatre
computer control system software programs to further enhance the ease by which
simulation attractions can be operated and maintained by a minimum number of on-
site personnel.
Competition
The Company faces intense competition in all of its business
activities. Some of the Company's competitors and potential competitors are
well-established, have substantially greater financial and other resources than
the Company, and have an established reputation for success in the development
and marketing of filmed products. There can be no assurance that the Company
will be able to compete successfully with such other companies.
In addition to competing directly against other firms in the
marketplace of the Company's products, the Company also generally competes for
customers with other out-of-home location-based entertainment alternatives. The
entertainment business in general is undergoing significant changes in
technology and in consumer demands for more stimulating entertainment both
within the home and outside of the home. As the demand for increasingly
sophisticated forms of technology increases, the Company competes for customers
to some extent with theme parks, traditional motion pictures and other forms of
filmed or computer-related entertainment. As a result of technological advances
and the increased availability of alternative forms of leisure entertainment,
including expanded pay and cable television service and advanced home audio and
video systems, consumer demands and tastes may continue to change. Computer
simulation, interactive and virtual reality products are improving rapidly and
will soon become competitive with the Company's products. The Company is unable
to predict what effect technological and other changes will have on the future
success of the Company's products and services.
Motion Simulation Theatre Attractions. Although the Company is aware
of a substantial number of other distributors of entertainment motion simulation
equipment worldwide, including Iwerks Entertainment, Inc., Simex, Thomson
Entertainment, Camber Entertainment, Doron Simulation and Dynamax, which compete
directly with the Company in the motion simulation attraction market, the
Company believes that it is one of the leading companies in the sale of motion
simulation attractions. Most of the Company's competitors have significantly
greater financial resources than the Company and are substantially larger than
the Company. Because of the significant costs involved in the development and
promotion of motion simulation attractions, companies with superior financial
resources may have an advantage. However, the Company also believes that the
Company's record of motion simulation attraction operations to date, the size of
its film library and the
13.
<PAGE>
quality and enhanced sense of depth and realism of its Showscan motion
simulation films permits the Company to effectively compete in the motion
simulation attractions market.
The most widely-recognized motion simulation theatre attractions
include Star Tours in Disneyland, and Back to the Future in a Universal Studios
theme park. The Company is not aware of any plans by The Walt Disney Company or
Universal Studios, which operate these parks, to make these motion simulation
theatre attractions available outside of their respective theme parks. In fact,
in May 1992, MCA, Inc. entered into a participating lease with the Company in
connection with the Company's first O&O Theatre located at Universal's CityWalk
complex at Universal City near Hollywood, California. However, any decision by
The Walt Disney Company, Universal or other major studios to market their own
motion simulation theatre attractions outside their respective theme parks could
have a material adverse effect on the Company's business.
Specialty Theatres. The Company competes with a number of companies
that distribute other well-established large and giant-screen and special
projection systems, including the Imax Corporation and Iwerks. Imax and Iwerks
are well-established in the specialty film markets and have significantly more
theatres currently exhibiting films produced in these formats. In fact, the 15
perforations, 70 millimeter film format marketed by these companies appears to
have become the dominant and preferred large format film. In addition, each has
substantially greater financial and other resources and an established
reputation for developing and marketing products competitive with the Company's
specialty theatres.
Patents and Other Intellectual Property
The Company owns two United States patents on the Showscan process.
These patents cover the combined process of filming and projecting 35mm or
larger negative film having high resolution images, at a constant frame rate of
at least 50 fps, with the film being projected at a high illumination level.
Both patents expire in October 2001. The patents are important to the Company
because it believes that a frame rate of 50 fps or more is necessary to achieve
the desired degree of depth and realism, and that enforcement of these patents
could prevent others from achieving the same result. Although the Company
believes that its existing patents are valid, there can be no assurance that the
Company's patents, if challenged, will be upheld, nor can there be any assurance
that competitors will not develop a different technology that offers comparable
or better visual effects. Moreover, the Company may elect, for financial or
commercial reasons, not to enforce its rights under its patents.
The Company has obtained additional patents for the Showscan process
in Australia, Canada and Japan. The Company's patent on the Showscan process
has been approved under the European Patent Convention, which resulted in the
issuance of patents in those European countries in which the Company elected to
seek patent protection. To date, most of the Company's motion simulation
attraction sales have been outside the United States and no assurance can be
given that the Company's patents will adequately protect the Company's exclusive
rights to the Showscan process outside the United States or that any additional
foreign patents will be granted.
The Company also has obtained other U.S. patents that it does not
believe are important to its current business operations. These include patents
on its electronic projector, the rapid start-up feature of the CP-65 camera, a
system for projecting a 360-degree motion picture image, and a process for
converting high frame-rate film to standard frame-rate film. In addition, the
Company, in conjunction with Intamin, has obtained three U.S. patents on certain
aspects of the Showscan motion simulation attractions and has a joint interest
with another party in another motion simulation patent. The patents expire
between the years 2004 and 2006. However, there can be no assurance that these
patents, if challenged, will be upheld, nor can there be any assurance that
competitors will not develop a different or more effective competing technology.
14.
<PAGE>
Although the Company believes that its patented and non-patented
products and processes have been independently developed and do not infringe the
patents of others, third parties could claim that the Company's products and
processes infringe the rights of others. If it were determined that the
Company's products or processes did infringe the property rights of third
parties, the Company may be required to modify its design or obtain a license.
No assurance can be given that the Company will be able to do so in a timely
manner or upon acceptable terms and conditions; and the failure to do either
could have a material adverse effect upon the Company's business. There are no
claims that the Company's products and processes infringe the rights of others.
The mark "Showscan(R)" has been registered with the United States
Patent and Trademark Office for use with the Showscan process and Showscan
products. The Company has also registered the design of its logo as well as
"Showscan's The Edge" and "Emaginator" for use as the name of motion simulation
theatres. The Company has registered other marks in connection with the
marketing of its films such as "Movies That Move You," "Unleashing the Power of
Film," and "Virtual Thrill Ride."
Royalty Arrangements
The Company acquired all of the rights to the Showscan process from
Paramount Pictures Corporation ("Paramount") and its subsidiary, FGC, Douglas
Trumbull and WLS Partners ("WLS") in consideration for, among other things,
agreements to pay royalties on future revenues from the exploitation of the
Showscan process. The terms of such royalties are described below.
WLS. Pursuant to a royalty agreement (the "Royalty Agreement") with
---
WLS, the Company is required to pay WLS a royalty based, in general, on the
gross receipts (as defined) of the Company from the worldwide exploitation of
Showscan motion pictures and any other use of the Showscan process. The royalty
is 3% of such gross receipts until August 31, 1999, or until WLS has been paid
an aggregate of $3,500,000. The Company has paid a total of $2,780,000 in
royalties under the Royalty Agreement through March 31, 1999.
Future General Corporation/Paramount. Pursuant to the agreement
------------------------------------
with Paramount and FGC (the "FGC Agreement"), the Company is obligated to pay
FGC a royalty, in perpetuity, equal to 2% of the Company's gross receipts (as
defined) from the worldwide exploitation of the Showscan technology in excess of
180% of the sum of (i) $21,100,000, (ii) actual cash contributions for debt or
equity of the Company during the period from June 27, 1985 to June 27, 1987,
(iii) the Company's actual cost, if any, of converting and equipping theatres
for exhibition of Showscan motion pictures, and (iii) any Showscan feature-
length motion picture production costs incurred by the Company. For the purpose
of determining FGC's royalty, "gross receipts" are defined as all monies
received by the Company from the exploitation of the Showscan technology,
provided that if the Company is the exhibitor of a Showscan feature-length
motion picture, gross receipts will be deemed to be one-half of box office
receipts less taxes paid. When gross receipts reach the $65 million level, FGC
will begin to earn royalties. The current level of gross receipts (as defined)
is $40 million at March 31, 1999, so no royalties have been earned under the FGC
Agreement as of yet.
If the Company produces feature-length motion pictures in Showscan and
grants distribution rights to such a film to a third-party distributor,
Paramount will have the right of first negotiation with respect to distribution
of the first three of the Showscan motion pictures produced by the Company.
However, the Company has not and does not currently intend to produce any
feature-length motion pictures itself.
Douglas Trumbull. Pursuant to its agreement with Douglas Trumbull,
----------------
the Company is required to pay royalties to Mr. Trumbull until the year 2015,
subject to the maintenance of certain levels of working capital as established
by the Board of Directors of the Company. In general, the payments equal 1% of
revenues (as defined) received by the Company from the worldwide exploitation of
the Showscan technology, except that
15.
<PAGE>
if the Company operates a full-length motion picture theatre, Mr. Trumbull is
entitled to 1% of the box office receipts of that theatre. The Company does not
currently intend to operate any full-length motion picture theatres.
Employees
As of November 1, 1999, the Company had 30 employees, four of whom
were employed in management, five in sales and marketing, eight in engineering,
assembly and installation, and five in production, film licensing and
distribution. The remaining full-time employees are administrative and support
staff. This compares to 29 employees at June 30, 1998 and 41 employees at June
20, 1997. Although the Company has not experienced difficulties in obtaining
qualified personnel and anticipates that it will be able to continue to recruit
qualified personnel for its operations, there can be no assurance that such
personnel will be available when required. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors That
May Effect Future Results."
The Company considers its relationship with its employees to be
satisfactory.
Item 2. Properties
- -------------------
The Company leases a 37,000-square-foot building in Culver City,
California, pursuant to a lease expiring on June 30, 2003. Under the lease, the
current monthly rental is $34,881, subject to annual cost-of-living adjustments.
The maximum annual rental increase is 7%. The Company is responsible for all
costs and expenses of maintaining the building, including the payment of all
property taxes and insurance premiums. The Company's corporate headquarters,
demonstration theatre and film studio are located at this site.
The Company considers its facilities adequate to meet its current
needs.
Item 3. Legal Proceedings
- --------------------------
On May 6, 1997, the Company sued Boomtown Inc., Boomtown Hotel &
Casino, Inc., and Mississippi -I Gaming, LP in the Los Angeles County Superior
Court. The suit alleges, among other things, breach of contract in connection
with the defendants failure to make scheduled contract payments. The suit seeks
unspecified monetary damages. An agreement in principal has been reached with
Boomtown to settle this lawsuit together with the lawsuit brought by Iwerks
discussed below. The settlement would involve a payment to Showscan of $140,000
and a simultaneous payment by Showscan to Iwerks of $50,000. In connection with
the settlement, Boomtown shall receive the right to exhibit a Showscan film in
its theatre in Verdi, Nevada for a period of two-and-a-half years.
On March 17, 1998, the Company sued Reality Cinema Pty Ltd. and its
individual directors in the Supreme Court of New South Wales, Australia. The
suit alleges, among other things, breach of contract in connection with
Reality's failure to make scheduled contract payments. The suit seeks payment of
US$607,366 together with other unspecified monetary damages as well as
injunctive relief prohibiting the use by Reality of certain of the Company's
intellectual properties.
On September 25, 1998, Iwerks Entertainment, Inc. sued the Company in
Los Angeles County Superior Court. The suit alleges, among other things, breach
of contract in connection with a 1992 agreement between the Company and Omni
Film International, Inc. which was later purchased by plaintiff. The suit seeks
payment of $143,850. The Company has counterclaimed in this lawsuit for
intentional interference with contract and unfair business practices. The
counterclaim seeks unspecified monetary damages, punitive damages and injunctive
relief. An agreement in principal has been reached with Iwerks to settle this
lawsuit together with
16.
<PAGE>
the lawsuit brought by the Company against Boomtown discussed above. The
settlement would involve a payment by Boomtown to Showscan of $140,000 and a
simultaneous payment by Showscan to Iwerks of $50,000. In connection with the
settlement, Boomtown shall receive the right to exhibit a Showscan film in its
theatre in Verdi, Nevada for a period of two-and-a-half years.
On November 4, 1998, Showtech Co. for Movie Show ("Showtech") sued the
Company in Los Angeles County Superior Court. The suit alleges, among other
things, breach of contract, intentional misrepresentation and fraudulent
concealment in connection with the sale of a Simulation Attraction by the
Company to the plaintiff. The suit seeks payment of $1,000,000 together with
other unspecified monetary damages as well as punitive damages. On April 5,
1999, the Company filed a cross-complaint against Showtech, which arose out of
the same transaction as the complaint and is a related cause of action. The
case is still in the discovery phase with depositions scheduled for Spring 2000.
On September 1, 1999, the Company initiated binding arbitration
against United Artists Theatre Circuit, Inc. ("UATC") with the American
Arbitration Association ("AAA"). The Theater Rights Agreement, dated August 19,
1994 (the "TRA"), among the Company, UATC and the Showscan/United Artists
Theatres Joint Venture requires that all disputes thereunder be submitted to AAA
for binding arbitration in Phoenix, Arizona. The Company's claim 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 Company's claim seeks payment of an amount in excess of $5,000,000. See,
Item 1. "Business--Motion Simulation Attractions--Owned and Operated Theatres--
The United Artists Venture," above. UATC has counterclaimed in this arbitration
for unspecified monetary damages in connection with certain breaches of contract
that it alleges against the Company. The arbitration hearing will likely occur
in early 2000.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
During the fourth quarter of the fiscal year ended March 31, 1999, no
matters were submitted to a vote of the Company's stockholders through the
solicitation of proxies or otherwise.
17.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
Since September 17, 1998, the Common Stock has been traded on the Over-the-
Counter Bulletin Board ("OTCBB") under the symbol "SHOW." Prior to September
17, 1998, the Common Stock was traded on the Nasdaq National Market System.
The following table sets forth the high and low sales prices for the Common
Stock for the periods indicated as reported on the OTCBB and the Nasdaq NMS.
The prices do not include retail mark-ups, mark-downs or fees.
<TABLE>
<CAPTION>
Sales Prices
------------
High Low
---- ---
<S> <C> <C>
Year Ended March 31, 1998
-------------------------
1st Quarter $ 3 $ 2 1/8
2nd Quarter 3 1/2 2 1/8
3rd Quarter 3 3/8 1
4th Quarter 1 7/8 5/8
Year Ended March 31, 1999
-------------------------
1st Quarter $ 31/32 $ 1/4
2nd Quarter 5/8 1/16
3rd Quarter 21/64 5/16
4th Quarter 3/16 25/320
</TABLE>
The Company has never paid dividends on its Common Stock and does not
currently anticipate that it will do so in the foreseeable future. The future
payment of dividends, if any, on the Common Stock, is within the discretion of
the Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition, and other relevant factors. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The payment of any dividends on the Common Stock also obligates
the Company to pay dividends on the outstanding shares of Series C Preferred
Stock. Each share of Series C Preferred Stock is entitled, on an "as converted"
basis, to 110% of any cash dividends declared on each share of Common Stock,
subject to adjustments for stock splits, combinations or dividends.
As of September 30, 1999, the Company had 117 holders of record of the
Company's Common Stock. However, based solely upon its proxy solicitation
procedures for last year's annual meeting of stockholders, the Company believes
that it has more than 1,000 beneficial owners of its Common Stock.
18.
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
<TABLE>
<CAPTION>
March 31,
=========================================================================
1999 1998 1997 1996 1995
------------- ----------- ------------ --------------- --------------
(Dollars in thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Film licensing and production services..... $ 4,665 $ 5,726 $ 6,236 $ 9,039 5,978
Equipment sales and related services....... 3,362 4,688 11,475 8,426 9,459
---------- ---------- ---------- ---------- ----------
Total revenues................................. 8,027 10,414 17,711 17,465 15,437
Costs of Revenues............................ 4,538 8,756 10,854 8,399 8,584
---------- ---------- ---------- ---------- ----------
Gross profit................................. 3,489 1,658 6,857 9,066 6,853
Other costs and expenses:
General and administrative expenses........ 5,878 7,860 6,904 7,576 5,560
Depreciation and amortization.............. 573 875 961 971 1,025
---------- ---------- ---------- ---------- ----------
6,451 8,735 7,865 8,547 6,585
---------- ---------- ---------- ---------- ----------
Operating income (loss).................... (2,962) (7,077) (1,008) 519 268
Other income (expense):
Equity in operations of owned and
operated theatres...................... (260) (540) (694) (217) (502)
Effect of impairment loss on equity in
operations of owned and operated
theatres................................ (268) (313) (1,771) -- --
Other income............................. 71 127 250 358 444
Interest and other expense................ (778) (725) (692) (555) (128)
Provision for income taxes.................. (4) (4) (4) (4) (3)
---------- ---------- ---------- ---------- ----------
Net income (loss)........................... $ ( 4,201) $ (8,532) $ (3,919) $ 101 $ 79
========== ========== ========== ========== ==========
Basic Net income (loss) per
common share............................... $ (0.74) $ (1.51) $ (.70) $ .02 $ .02
========== ========== ========== ========== ==========
Diluted Net income (loss) per
common share............................... $ (0.74) $ (1.51) $ (.70) $ .01 $ .01
========== ========== ========== ========== ==========
Basic weighted average number of
common shares................................. 5,642,058 5,642,058 5,594,245 5,344,945 5,073,294
========== ========== ========== ========== ==========
Diluted basic weighted average number of
common shares................................. 5,642,058 5,642,058 5,594,245 7,471,949 6,800,512
========== ========== ========== ========== ==========
Balance Sheet Data (at end of period):
Cash, cash equivalents and short-term
investments................................ $ 661 $ 2,492 $ 2,562 $ 8,141 $ 6,791
Accounts receivable, net..................... 1,960 2,955 3,600 3,101 2,943
Equipment sales inventory.................... 993 1,186 1,289 1,547 2,142
Other current assets......................... 362 901 1,072 1,244 980
Film library (net)........................... 2,758 3,765 5,520 3,481 1,394
Property and equipment (net)................. 321 447 868 1,313 1,728
Owned and operated theatres.................. - 440 2,123 4,424 2,598
Patents and other (net)...................... 904 1,525 2,894 2,764 2,654
---------- ---------- ---------- ---------- ----------
Total assets................................. $ 7,959 $ 13,711 $ 19,928 $ 26,015 $ 21,230
========== ========== ========== ========== ==========
Current liabilities.......................... $ 10,449 $ 6,310 $ 3,995 $ 6,097 $ 4,860
Convertible notes and other.................. -- 5,690 5,690 6,620(2) 3,121(1)
Stockholders' (deficiency) equity............ (2,490) 1,711 10,243 13,298 13,249
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity... $ 7,959 $ 13,711 $ 19,928 $ 26,015 $ 21,230
========== ========== ========== ========== ==========
</TABLE>
_______________________
(1) Paid in full in April, 1995.
(2) The Company completed a private placement of convertible notes in
September, 1995.
19.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
Results of Operations
The Company is a provider of movie-based motion simulation theatre
attractions to the out-of-home entertainment market. The Company is presently
in the business of: (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 motion simulation attractions and specialty
theatres including the equipment necessary for each (including 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 motion simulation attractions in which the Company has an
economic interest (O&O Theatres). The Company is also committed to the
continued recognition of the Showscan7 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 derived, for each of the three years in the period
ended March 31, 1999, 60-85% of its revenues from export sales. See Note 10 to
the Consolidated Financial Statements and Item 1. "Business -- Sales and
Marketing." The Company does not believe that inflation has had a material
impact on the Company's net revenues or on its results of operations for the
three most recent fiscal years.
Comparison of Year Ended March 31, 1999 and Year Ended March 31, 1998.
Revenues for the fiscal year ended March 31, 1999 (hereafter "Fiscal
1999") decreased $2.4 million or 23% from revenues for the fiscal year ended
March 31, 1998 (hereafter "Fiscal 1998").
Film licensing and production service revenues decreased $1,061,000 or
19% in Fiscal 1999. The decrease was due primarily to (i) the renegotiation of
certain film licensing contracts in Asia due to adverse economic conditions in
that region, and (ii) the reduction in film revenues collected from the O&O
Theatres, due to the closure of five such theatres.
Revenues from equipment sales and related services decreased
$1,326,000 or 28% in Fiscal 1999. The decrease is due to the decrease in the
number of Showscan Attractions shipped during Fiscal 1999 as compared to the
corresponding prior year period. Four Showscan Attractions were shipped in
Fiscal 1999 as compared to three units plus the completion of two relocation
projects in the prior year.
The decrease in equipment revenues can be attributed to the
significant slow down in new sales orders since the announcement on August 5,
1997 of the Merger with Iwerks Entertainment, Inc. Although the Merger
eventually failed on March 31, 1998, the Company believes that the uncertainty
of the Merger and its possible effects on the Company adversely affected sales.
Equipment revenues were also negatively impacted by the economic situation in
Asia and the Company believes that its adverse impact on the Company's revenues
will continue in future periods since Asia is the largest market for the
Company's products and films.
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 or the
equipment is shipped. The actual signing of a Showscan Attraction sale precedes
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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 Attractions; and (iii) the shipment, delivery and installation
of the equipment and related services.
At November 1, 1999, the Company had 57 Showscan Attraction screens
open with 8 additional Showscan Attraction screens in its delivery and
installation backlog and had contractual commitments for an additional 5
Showscan Attraction screens in its backlog over the next two years.
Cost of revenues was 57% in Fiscal 1999 as compared to 84% in Fiscal
1998. Equipment cost of sales to total equipment sales decreased to 72% in
Fiscal 1999 from 95% in Fiscal 1998. Film licensing costs to total film
licensing sales decreased to 45% in Fiscal 1999 from 75% in Fiscal 1998. The
decrease in equipment cost of sales to total equipment sales is due to the fact
that, of the five sales in Fiscal 1998, two were for relocations of existing
equipment. Relocation sales provide substantially less gross margin than new
sales. No relocation sales were recorded in Fiscal 1999. In Fiscal 1999, the
Company reduced the carrying value of certain equipment held for sale by
$400,000 in order to state it at its net realizable value. The decrease in film
licensing cost of sales to total film licensing costs is due to (i) a $240,000
provision taken in Fiscal 1999 to adjust the carrying value of two films to
their estimated realizable value, versus a $1,725,000 provision in Fiscal 1998,
and (ii) a $72,000 provision in Fiscal 1999 pursuant in a film distribution
guarantee given by the Company versus a $300,000 provision in Fiscal 1998. The
film distribution guarantee provision represents an estimate of the amount the
Company will have to pay the producer of the film over and above any net
revenues that will be generated from the distribution of the film through March
2000. The amortization of the film library was $1,234,000 in Fiscal 1999
compared to $2,782,000 in Fiscal 1998.
General and administrative expenses decreased $1,982,000 or 25% in
Fiscal 1999. The decrease can be primarily attributed to (i) a significant
decrease in overhead expenses in Fiscal 1999 as compared to Fiscal 1998, and
(ii) higher provisions for doubtful accounts in Fiscal 1998. Part of the
decrease is due to the merger related expenses included in Fiscal 1998 from the
failed merger with Iwerks Entertainment.
Depreciation and amortization expense decreased by $302,000 or 35% in
Fiscal 1999 from Fiscal 1998.
The Company accounts for its ownership position in O&O Theatres using
the equity method of accounting. The equity loss of $260,000 on the operations
of O&O Theatres for Fiscal 1999 was the result of operating losses at the (i)
Universal CityWalk theatre, and (ii) operating losses at the two (2)
London/Trocadero theatres through their closing on July 2, 1998 and related
costs of such closing. Also, the Company recognized a non-cash charge of
$268,000 in Fiscal 1999 to reflect an impairment loss on the Company's
investment in the O&O Theatre in Osaka. The Company earns film licensing
revenues (from both O&O Theatres) and management fees (from one of the O&O
Theatres) which are recorded separately in the accompanying consolidated
statements of operations, thereby increasing the operating expenses at the
specific O&O Theatres. The Company has ceased operations at the Framingham
(closed in October 1997), San Antonio (closed in September 1997), and the two
London (closed in July 1998) theatres. The Company has either sold or is
negotiating to sell the equipment from the Framingham and San "Antonio theatres
to nonaffiliated third parties. The joint venture partners of each respective
theatre have agreed to these sales.
The Company incurred a net loss of $4.2 million in Fiscal 1999 as
compared to a net loss of $8.5 million recorded in Fiscal 1998 primarily due to
(i) the decrease in film amortization, (ii) the decrease in general and
administrative expenses (Fiscal 1998 included expenses related to the failed
Merger with Iwerks Entertainment, Inc.), and (iii) offset by the decrease in
both film licensing and production services revenue and equipment sales and
related service revenues.
21.
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Comparison of Year Ended March 31, 1998 and Year Ended March 31, 1997.
Revenues for the fiscal year ended March 31, 1998 (hereafter "Fiscal
1998") decreased $7.3 million or 41% from revenues for the fiscal year ended
March 31, 1997 (hereafter "Fiscal 1997").
Film licensing and production service revenues decreased $510,000 or
8% in Fiscal 1998. The decrease was due primarily to (i) renegotiation of
certain film licensing contracts in Asia due to adverse economic conditions in
that region, and (ii) the reduction in film revenues collected from the O&O
Theatres, due to the closure of three (two screens in London closed July 3,
1998) of the Company's screens.
Revenues from equipment sales and related services decreased $6.8
million or 59% in Fiscal 1998. The decrease is due to a decrease in the number
of Showscan Attractions shipped during Fiscal 1998 as compared to Fiscal 1997.
The actual number of Showscan Attractions shipped in Fiscal 1998 decreased to 3
units plus the completion of two relocation projects as compared to 16 such
units plus the completion of three relocation projects in Fiscal 1997. At June
30, 1998, the Company had 60 Showscan Attraction screens open with 10 additional
Showscan Attraction screens in its delivery and installation backlog and had
contractual commitments for an additional 29 Showscan Attraction screens in its
backlog, including the 16 screens which UATC has contractually agreed to
purchase and install prior to August 1999. This backlog amount compares to 61
Showscan Attraction screens open with 8 additional Showscan Attraction screens
in its delivery and installation backlog and 29 contractual commitments for
Showscan Attraction screens in its backlog at June 20, 1997. The Company did
not sell any permanent or temporary specialty theatres in Fiscal 1998.
The decrease in equipment revenues can be attributed to the
significant slow down in new sales orders since the announcement on August 5,
1997 of the merger with Iwerks Entertainment, Inc. (the "Merger"). Although the
Merger eventually failed on March 31, 1998, the Company believes that the
uncertainty of the Merger and its possible effects on the Company adversely
affected sales. Equipment revenues were also negatively impacted by the delay
in timing of certain projects in the sian market. The Company believes this
delay is primarily due to the economic situation in Asia and that its adverse
impact on the Company's revenues will continue in future periods since Asia is
the largest market for the Company's products and films.
Cost of revenues was 84% in Fiscal 1998 as compared to 61% in Fiscal
1997. Equipment cost of sales to total equipment sales increased to 95% in
Fiscal 1998 from 77% in Fiscal 1997. Film licensing costs to total film
licensing sales increased to 75% in Fiscal 1998 from 32% in Fiscal 1997. The
increase in equipment cost of sales to total equipment sales is due to the fact
that, of the five sales in Fiscal 1998, two were for relocations of existing
equipment. Relocation sales provide substantially less gross margin than new
sales. In addition, in Fiscal 1998 the Company reduced the carrying value by
$325,000 of certain non-performing assets held for sale in order to state them
at their net realizable value. The increase in film licensing cost of sales to
total film licensing costs is due to (i) a $1,725,000 provision to adjust the
carrying value of two films to their estimated realizable value, (ii) a $330,000
provision pursuant to a film distribution guarantee given by the Company (this
amount represents an estimate of the amount the Company will have to pay the
producer of the film over and above any net revenues that will be generated from
the distribution of the film over the next two years), and (iii) the additional
amortization of new films added in Fiscal 1998. The amortization of the film
library (which includes all adjustments) was $2,782,000 in Fiscal 1998 compared
to $613,000 in Fiscal 1997.
General and administrative expenses increased $956,000 or 14% in
Fiscal 1998. The increase can be primarily attributed to (i) $650,000 in
expenses incurred with respect to the failed Merger with Iwerks Entertainment,
Inc., (ii) an increase to the allowance for doubtful accounts to reflect
degrading economic conditions with respect to certain of the Company's Asian and
other customers ($970,000), and certain other accounts receivable from
affiliates which are being disputed ($279,000) at March 31, 1998, (iii) offset
by a significant reduction in the Company's overhead.
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Depreciation and amortization expense decreased by $86,000 or 9% in
Fiscal 1998 from Fiscal 1997.
The Company accounts for its ownership position in O&O Theatres using
the equity method of accounting. The equity loss of $540,000 on the operations
of O&O Theatres for Fiscal 1998 was the result of operating losses at the
Trocadero in London, at the Riverwalk in San Antonio, Texas, at the Framingham
theatres and at CityWalk. Although the O&O Theatre in Osaka had an operating
profit, the profit was not sufficient to offset the losses of the other O&O
Theatres. The Company earns film licensing revenues (from all O&O Theatres) and
management fees (from some of the O&O Theatres) which are recorded separately in
the accompanying consolidated statements of operations, thereby increasing the
operating expenses at the specific O&O Theatres. The Company has ceased
operations at the Framingham (closed in October 1997), San Antonio (closed in
September 1997), and London (closed in July 1998) theatres.
Additionally, a non-cash charge of $313,000 was recorded to reflect an
impairment loss recognized on the Company's investment in the London theatres,
which is recorded separately in the financial statements.
The Company incurred a net loss of $8,532,000 in Fiscal 1998 as
compared to a net loss of $3,919,000 recorded in Fiscal 1997, primarily due to
(i) the significant decrease in equipment sales revenues, (ii) the increase in
cost of revenues to total revenues, (iii) the poor performance of the O&O
Theatres, (iv) the $2 million adjustments to the carrying values of certain
films to their estimated realizable values, and (v) the increase in general and
administrative expenses caused by the failed Merger with Iwerks Entertainment,
Inc. and (vi) the increase to the accounts receivable reserves. Certain of the
expenses the Company incurred (e.g. the failed Merger costs) are non-recurring
items. In addition, the Company has taken steps to decrease on-going losses
(i.e. the closure of the five O&O Theatre screens and the significant reduction
of its work force and overhead). Accordingly, the Company does not believe that
these results are necessarily indicative of future operating results.
Liquidity and Capital Resources
At March 31, 1999, the Company's working capital decreased to negative
$6,473,000 from $1,224,000 at March 31, 1998. Cash and cash equivalents
decreased to $661,000 from $2,492,000 at March 31, 1998. The decrease in
working capital is primarily due to the reclassification of the $5,690,000
outstanding balance of the 8% Convertible Notes to a current liability and to
the operating loss for Fiscal 1999.
Cash and cash equivalents at March 31, 1999 decreased by $1,831,000
from March 31, 1998, which was the result of $803,000 used in operating
activities, $288,000 used in investing activities and $740,000 used in financing
activities. In 1997, the Company completed a private placement of $1,000,000
through an unaffiliated third party. The note which was due on November 15,
1998, was amended on November 10, 1998 and paid in full in April 1999, pursuant
to the November 10, 1998 amendment. Cash balances have continued to decline
throughout Fiscal 2000.
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 Showscan'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 already caused the delay of certain projects and the Company
believes that it will have an adverse impact on revenues in future periods. As
a result of the continuing adverse 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 best to do business in Japan during the calendar year 2000. Both
parties
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have made respective proposals with regard thereto. It is anticipated that
Showscan's future film license revenues from Imagine Japan will be significantly
less than the $1.1 million received in Fiscal 1999 if the agreement is renewed
at all.
The Company's business strategy includes an increase in the installed
base of Showscan Attractions, new film productions, the securing of distribution
rights to motion simulation films produced by other companies, the licensing and
distribution of its motion simulation library (including films produced using
the Showscan process and acquired from other producers) to all operators of
simulation attractions (including those installed by the Company and those
previously installed by competitors of the Company), new product development and
new product lines, enhancement of existing product lines, possible investments
in O&O Theatres and the continued reduction of overhead.
The Company has, since inception, incurred substantial recurring
losses (aggregating $45,000,000) and had net losses aggregating $16,652,000
during the fiscal years ended March 31, 1999, 1998 and 1997. The Company's
management is constantly evaluating potential cost reductions, including the
out-sourcing of certain operating functions (thereby further reducing employee
head count), the relocation of the Company's headquarters to smaller office
space and other actions. There can be no assurance that these cost-cutting
measures will be sufficient or that they will not further negatively impact the
Company's operations.
The Company has limited capital resources and held debt obligations
from two different financial institutions, one which was paid in full on April
5, 1999 ($1,000,000) and the second ($5,690,000) which matured on September 1,
1999 ($5,690,000). 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 (the "Notes"), 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 fair amount (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 an aggregate of 750,000 shares of the Company's
Common Stock at an exercise 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 prepared amount.
The Company further agreed that if it receives any amounts pursuant to the
liquidated damages provisions contained in that certain Theater Rights
Agreement, between the Company and UATC, subject to certain adjustments, then
the Company will use a minimum of 60% of such proceeds to prepay the Notes in
the same manner. The Company has initiated 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 breaches it alleges against the Company. See Item 3. "Legal
Proceedings," and Item 13. "Certain Relationships and Related Transactions--The
United Artists Venture" and Note 8 of Notes to the Consolidated Financial
Statements.
A substantial portion of the aggregate losses for Fiscal 1999, 1998
and 1997 are attributable to non-cash expenditures in each of those years. The
Company believes that these write downs of certain non-performing assets,
particularly O&O theatres and certain simulation films, are complete and will
not reoccur in future periods.
The Company's cash declined during Fiscal 1999 and continues to
decline subsequent to March 31, 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
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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. Accordingly, the Company is
actively exploring possible financing sources; 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.
Impact of the Year 2000
Some of the Company's older computer software systems were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. This software could cause a
system failure or miscalculations causing disruptions of operation, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
As of November 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.
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
Portions of this Report may contain statements that constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act and
Section 27A of the Securities Exchange Act. 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. Among the
important factors that could cause actual results to differ from those indicated
in the forward-looking statements are the level of revenues, 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
The discussion below, together with portions of the discussion
elsewhere in this Report, highlight some of the more important risks identified
by management of the Company but should not be assumed to be the only things
that could affect future performance.
25.
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History of Operating Losses; Working Capital Deficit; Ability to Continue as a
- ------------------------------------------------------------------------------
Going Concern
- -------------
For the past three fiscal years and for all but two of the last ten
years the Company has had net operating losses such that the Company now has a
negative net worth. For the fiscal years ending March 31, the Company had net
profits of $101,000 in Fiscal 1996, a net loss of $3.9 million in Fiscal 1997, a
net loss of $8.5 million in Fiscal 1998 and a net loss of $4.2 million in Fiscal
1999. At March 31, 1999, the Company had an accumulated deficit of $45.0
million. In addition, the Company has seen its level of gross revenues drop
from approximately $18 million in 1997 to $8 million in the most recent fiscal
year. This history of losses and reduced revenues has had a negative impact on
the Company's stock price and makes it very difficult for the Company to attract
and obtain financing.
In addition, the continued operating losses have reduced the Company's
cash and cash equivalents to $236,000 at September 30, 1999. These levels of
cash reserves together with the projected amount and timing of projected revenue
inflows do not provide sufficient working capital to maintain the current level
of operations beyond March 31, 2000. Though the Company has made and continues
to make significant reductions in its overhead, if the level of working capital
does not improve the Company will have to seek either (i) a voluntary
reorganization with its creditors in order to reduce and/or extend its
obligations and commitments, or (ii) protection under the United States
Bankruptcy laws.
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. Additional financing may not be
available to the Company at all or only on unfavorable terms. 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 and curtail its business and
operations. A number of factors will make it difficult for the Company to
obtain any financing in the future, including the significant losses the Company
has incurred, the de-listing of the Company's Common Stock from Nasdaq, the on-
going financial turmoil in Asia (historically the Company's largest market and
principal source of operating revenues), the Company's historically poor 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 will 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 ($5,690,000) which
have had their maturity extended from September 1, 1999 to March 1, 2000. 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 from year to year periodically as a result of the timing of theatre
system deliveries,
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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. 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. 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. This dependence has been
lessening as the percentage of the Company's revenues derived from recurring
film licensing revenues has increased though there can be no assurance that this
trend will necessarily continue. In addition, the Company has begun to see some
of the older sites begin to close such that there has been a reduction in gross
film revenues in recent years.
New Product Development
- -----------------------
The Company operates in a technology driven segment of the
entertainment business. As such, the Company must continually improve its
products to increase their entertainment value while also facing pressure to
continually reduce the price of its products to respond to competitive
pressures. Since 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 which are
accepted by its consumers 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 Fiscal 1999, 1998, 1997, and
1996, 85%, 85%, 62%, and 61% 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 devaluation in recent years of a number of Asian countries' currencies
relative to the 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
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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.
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.
Most of the Company's competitors, have dedicated substantial
resources to this market. In the large screen, special format motion picture
business, the Company's main competitor is Imax, though Iwerks is also a
competitor. The 15 perforation 70 millimeter film format has emerged 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.
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, or that the Company's products can remain
competitive against the pricing of existing products by competitors or the
pricing of new developments and products.
Volatility of Stock Price; Effect of Delisting
- ----------------------------------------------
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 $0.0625 per share to a high of $0.3438 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
28.
<PAGE>
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.
In addition, the Company's shares were delisted on September 17, 1998
from trading on the Nasdaq National Market(R) and are now traded electronically
on the Over-the-Counter Bulletin Board. This delisting has made it more
difficult to effect trades and the Company's frequency of trades and trading
volume have decreased significantly since the delisting. The delisting has
reduced the Company's visibility and has adversely effected the Company's
ability to attract and obtain financing because of the decreased liquidity of
the Company's shares. See Item 5. "Market for Registrant's Common Equity and
Related Stockholder Matters."
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.
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
best to do business in Japan during the calendar year 2000. Both parties have
made proposals with regard thereto. It is anticipated that Showscan's film
license revenues from Imagine Japan in calendar 2000 will be significantly less
than the $1.1 million received in Fiscal 1999, based on the discussions and
respective proposals to date, if the agreement is renewed at all. The Company's
short and long-term performance will be adversely impacted if disruptions were
to occur with Imagine Japan such as closures, license terminations or payment
problems.
29.
<PAGE>
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.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Financial Statements are listed under Item 14 in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
30.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Set forth below is certain information with respect to the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Director
Name Age Title Since
---- --- ----- -----
<S> <C> <C> <C>
William D. Eberle 76 Chairman of the Board of Directors 1988
William C. Soady 56 Director 1994
Charles B. Moss, Jr. 55 Director 1993
Thomas R. DiBenedetto 50 Director 1993
Dennis Pope 55 President, Chief Executive Officer
and Director 1997
Michael B. Ellis 48 Senior Vice President --
Russell H. Chesley 42 Senior Vice President --
Gregory W. Betz 51 Senior Vice President --
Ernest M. Bakenie 37 Vice President - Worldwide Sales & Marketing --
Jeanne Lucas 50 Vice President - Showscan Studios --
Patricia L. Gordon 48 Vice President - Human Resources & --
Administration
</TABLE>
William D. Eberle was elected Chairman of the Board of Directors of
the Company in May 1993. Mr. Eberle has been a private investor in various
companies for more than five years and is Of Counsel to Kaye, Scholer, Fierman,
Hays & Handler. He currently is also the chairman of Manchester Associates, Ltd.
He is a director of Ampco Pittsburgh Corp., Mitchell Energy & Development Corp.,
Konover Property Trust, and America Service Group. Mr. Eberle served as the U.S.
Trade Representative for President Nixon and President Ford. In addition, he
served as the President's Special Representative for Trade Negotiations from
1971 through 1975, and as the executive director of the Cabinet Council on
International Economics from 1974 to 1975. Other positions previously held by
Mr. Eberle include Chairman of the Board, President and Chief Executive Officer
of American Standard, Inc. and officer and director of Boise Cascade Corp.
William C. Soady has been the President of Distribution for PolyGram
Filmed Entertainment Distribution, Inc. since March 1997. Previously, Mr. Soady
served as President and Chief Executive Officer of the Company since March 1994,
and was elected as a director of the Company in April 1994. Prior to joining the
Company, Mr. Soady served as Executive Vice President of Distribution at TriStar
Pictures, Inc. from September 1988 to July 1992, at which time he was promoted
to President of Domestic Distribution of TriStar Pictures, Inc., the position he
held immediately prior to joining the Company. Mr. Soady has been involved in
motion picture distribution in various capacities for over 20 years, including
serving as President of Universal Pictures Distribution.
Charles B. Moss, Jr. has been the President and Chief Executive
Officer of The B.S. Moss Enterprises, Inc. since 1979. Mr. Moss is also a
director of Robins Cinemas, Ltd., a United Kingdom corporation.
Thomas R. DiBenedetto has served as the President of Junction
Investors, Ltd. since 1991 and as the President of Boston International Group
since 1983. He is also currently a director of National Wireless Inc. and of
Alexander's, Inc.
31.
<PAGE>
Dennis Pope was appointed the President and Chief Executive Officer of the
Company in March 1997. Mr. Pope had been the Executive Vice President and Chief
Financial Officer of the Company since May 1994. Prior to joining the Company,
Mr. Pope served as a senior executive with several entertainment industry-based
companies.
Michael B. Ellis joined the Company as its Vice President-Engineering and
Product Development in July 1994 and was appointed Senior Vice President in
September 1998. From February 1993 until he joined the Company, Mr. Ellis was a
consultant providing technical support to entertainment and commercial
construction industries. Mr. Ellis was the Corporate Director-Engineering and
Project Development of Knott's Berry Farm from May 1989 through February 1993.
Russell H. Chesley was appointed Senior Vice President in September 1998.
Mr. Chesley joined the Company as Vice President -Worldwide Sales in August 1995
and was named Vice President - Worldwide Sales & Marketing in February, 1997.
From March 1994 until he joined the Company, Mr. Chesley was Director of
Marketing and Sales at Westrex, an entertainment technology and equipment
manufacturer. From November 1992 until February 1994, Mr. Chesley was Sales and
Marketing Director and an Executive Producer at Starfax/The Editing Company, a
post production facility. Prior thereto, Mr. Chesley was an independent motion
picture producer and marketing consultant.
Gregory W. Betz was appointed Senior Vice President in February 1999. Mr.
Betz joined the Company as Controller in June 1986, was promoted to Vice
President-Controller in December 1990, and became the Company's Vice President
and Director of Finance in October 1993. Mr. Betz had resigned from all of his
positions that he held with the Company and its subsidiaries in July 1998. Mr.
Betz rejoined the Company in January 1999 and is currently employed by the
Company on a part-time consulting basis.
Ernest M. Bakenie joined the Company in 1997 as an international sales
representative and was responsible for the sale of Showscan products in Greater
Asia. He was promoted to Vice President - Worldwide Sales & Marketing in
November 1998. Mr. Bakenie holds a Masters degree from the University of
California, Irvine in International Business and his experience includes
fourteen years of sales and marketing management positions with Fortune 500
companies, including Loctite Corporation and RJR Nabisco.
Jeanne Lucas joined the Company in March 1996 as Production Development
Executive in the Company's film production department, became Director of
Production and was promoted to Vice President - Showscan Studios, the film
production and development arm of Showscan. Prior to joining Showscan Ms. Lucas
was an independent writer/producer whose feature film credits include Paint It
Black, The River's Edge, Ladies Nite Out, Peter and Reel Horror; she was co-
executive producer and co-creator of the TV series Out of Service developed with
Castle Rock; P.E.O.N. - TV and Louie Karnopski, R.N.
Patricia L. Gordon joined the Company as Manager of Human Resources in
March 1990, and was promoted to Director of Corporate Services and Human
Resources in May 1997. Ms. Gordon was promoted to Vice President-Human Resources
and Corporate Services in November 1998. Ms. Gordon handles the Company's human
resource functions and is responsible for all activities maintaining the
operation of the Company's corporate infrastructure.
The Company has five wholly owned subsidiaries (Showscan Productions, Inc.,
Showscan CityWalk, Inc., Showscan Attractions, Inc., Showscan Framingham, Inc.
and Showscan Entertainment B.V.). Mr. Pope is the sole director and President of
Showscan Productions, Inc., Showscan CityWalk, Inc., Showscan Attractions, Inc.
and Showscan Framingham, Inc. Mr. Pope currently is director and President of
Showscan Entertainment B.V.
32.
<PAGE>
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, as well as persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of beneficial ownership and reports of
changes in beneficial ownership of the Common Stock. Directors, executive
officers and greater-than-ten-percent stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on a review of copies of reports filed with the SEC and
submitted to the Company since April 1, 1998 and on written representations by
certain directors and executive officers of the Company, the Company believes
that four persons subject to the reporting requirements of Section 16(a) filed
required reports late during the past fiscal year: Form 3's for Michael B.
Ellis, Russell H. Chesley and Patricia L. Gordon; and Form 4 for Dennis Pope.
Item 11. Executive Compensation
- --------------------------------
The following tables set forth certain information concerning the annual
and long-term compensation for services rendered to the Company in all
capacities for the fiscal years ended March 31, 1999, 1998 and 1997 of (i) all
persons who served as the Chief Executive Officer of the Company during the
fiscal year ended March 31, 1999, (ii) each of the four other most highly
compensated executive officers of the Company. (The Chief Executive Officer and
the other named officers are collectively referred to as the "Named
Executives.")
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------- Long-Term Com-
pensation Award
Name and Principal Position Year Salary ($) Bonus ($) Options (#)
--------------------------- ------- ----------- --------- ----------------------
<S> <C> <C> <C> <C>
Dennis Pope, President 1999 $ 348,461 $ -0- -0-
and Chief Executive Officer.......... 1998 $ 250,000 $ -0- -0-
1997 $ 220,000(1) $ -0- 115,000(2)
Michael B. Ellis, Senior Vice President- 1999 $ 146,115 $ -0- 32,500
Engineering and Product 1998 $ 127,336 $ -0- -0-
Development........................... 1997 $ 115,442 $ -0- -0-
Russell H. Chesley, Senior Vice 1999 $ 134,278(4) $ -0- 32,500
President- Worldwide Sales.............. 1998 $ 172,886(4) $ -0- -0-
1997 $ 124,458(4) $ -0- -0-
Gregory W. Betz, Senior Vice 1999 $ 130,907 $ -0- 25,000
President, Finance.................... 1998 $ 110,846 $ -0- -0-
1997 $ 95,000 $ -0- -0-(3)
W. Tucker Lemon, Senior Vice 1999 $ 252,885(5) $ -0- -0-
President, General Counsel 1998 $ 150,577 $ -0- -0-
and Secretary......................... 1997 $ 125,501 $ -0- 35,000
</TABLE>
____________
33.
<PAGE>
(1) Mr. Pope became President and Chief Executive Officer in March 1997. Prior
to Mr. Pope assuming the office of President and Chief Executive Officer,
he served as the Company's Executive Vice President and Chief Financial
Officer.
(2) Mr. Pope, as of February 24, 1999, released 115,000 shares at $8.125 of the
Company's Common Stock that he had been granted on May 16, 1994.
(3) Mr. Betz resigned from all of his positions that he held with the Company
and its subsidiaries in July 1998. The stock options he held were canceled.
Mr. Betz rejoined the Company in January 1999 and received 25,000 shares as
of February 24, 1999. Mr. Betz currently is employed by the Company on a
part-time consulting basis.
(4) Mr. Chesley's compensation consisted of a base salary of $130,000 plus
commissions on certain sales of the Company's equipment and films.
(5) Mr. Lemon resigned from all of his positions that he held with the Company
and its subsidiaries as of October 6, 1998. His compensation includes
termination payments made pursuant to his employment agreements with the
Company.
The following table contains information concerning stock options granted
in the last fiscal year with respect to the Named Executives.
Option/SAR Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value At
-----------------
Assumed Annual Rates Of
Stock Price Appreciation For
Option Term
--------------------------------
Number Of Percent of
Securities Total
Underlying Opitons/SARs Exercise
Options/SARs Granted to of Base
Granted) Employees in Price Expiration
Name (#) Fiscal Year (S/Sh) Date 5% ($) 0% ($)
------------------- ------------ ------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dennis Pope -0- -0- -0- -0- -0- -0-
Michael B. Ellis 32,500 20.06% $0.1562 2/23/09 $3,193 $ 8,091
Russell H. Chesley 32,500 20.06% $0.1562 2/23/09 $3,193 $ 8,091
Gregory W. Betz 25,000 15.43% $0.1562 2/23/09 $2,456 $ 6,224
W. Tucker Lemon -0- -0- -0- -0- -0- -0-
</TABLE>
34.
<PAGE>
The following table contains information concerning stock options
exercised in the last fiscal year and stock options remaining unexercised on
March 31, 1999 with respect to the Named Executives.
Aggregated Option Exercises in Fiscal Year Ended March 31, 1999
and Fiscal Year-End Option Value
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options/SARs at Fiscal Year- Money Options/SARs Held at
End (#) Fiscal Year-End ($) (1)
--------------------------- ----------------------------
Shares Acquired Value
on Exercise Realized
Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis Pope -0- -0- 92,500 57,500 -0- -0-
Michael B. Ellis -0- -0- 17,500 32,500 -0- -0-
Russell H. Chesley -0- -0- 13,125 36,875 -0- -0-
Gregory W. Betz -0- -0- -0- 25,000 -0- -0-
W. Tucker Lemon -0- -0- -0- -0- -0- -0-
</TABLE>
_____________
(1) Value is determined by subtracting the exercise price from the fair market
value (the closing price for Common Stock as reported on the Over The
Counter Bulletin Board as of March 31, 1999, the last trading day in the
fiscal year ($.125 per share) and multiplying the resulting number by the
number of underlying shares of Common Stock.
Director Compensation
Members of the Board of Directors who are not officers of the Company
receive a fee of $500 for each Board meeting that they attend and are also
reimbursed for the travel expenses incurred to attend such meetings.
Board of Director Interlocks and Insider Participation
The Compensation Committee of the Board of Directors made all compensation
determinations during the past fiscal year for the Company's executives. Dennis
Pope was during the fiscal year ended March 31, 1999, both an officer and a
director of the Company though he was not a member of the Compensation
Committee.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
Mr. Pope has entered into an employment agreement, dated May 3, 1994, and
amended on June 15, 1995, March 1, 1997 and October 1, 1998, pursuant to which
he agreed to be Executive Vice President and Chief Financial Officer of the
Company. Effective March 1, 1997, Mr. Pope was made President and Chief
Executive Officer. On October 1, 1998, his employment agreement was amended so
that he will receive an annual salary of $300,000. The agreement is terminable
by either Mr. Pope or the Company upon 30 days notice to the other party.
However, if the Company terminates the agreement without cause (where "cause" is
defined to mean conviction of a felony, commission of fraud or embezzlement,
neglect of duties, death, permanent disability or breach of duty of loyalty to
the Company), then the Company is obligated to pay Mr. Pope his salary and
benefits for up to one year, subject to Mr. Pope's best efforts to mitigate such
obligation. In addition, the Company has granted Mr. Pope options to purchase
35,000 shares of the Company's Common Stock at $8.125 per share, 35,000 shares
at $6.125 per share and 80,000 shares at $3.625 per share. Such
35.
<PAGE>
options vest at the rate of 25% per year, commencing on the first anniversary of
the agreement by which they were granted. As of February 24, 1999, Mr. Pope
released 115,000 of his options of the Company's Common Stock at $8.125 that he
had been granted on May 16, 1994. On June 28, 1999, Mr. Pope was granted options
to purchase an aggregate of 650,000 of the Company's Common Stock. 250,000 of
these options were priced at $.20 per share and vest evenly over a five (5) year
period. 100,000 of these options were priced at $.50 per share and are fully
vested but are subject to certain restrictions and forfeiture until the closing
of the acquisition of certain motion simulation assets owned by a third party.
300,000 of these options were priced at $.75 per share and are fully vested but
are subject to certain restrictions and forfeiture until the acquisition/merger
of the Company by/with/of other entities in the motion simulation or other out-
of-home entertainment business.
The Company's Board of Directors entered into agreements with Messrs. Pope,
Ellis and Chesley that would protect each such officer in the case of a change
in control of the Company. These agreements are intended to provide certain
benefits to the officers upon a "Change of Control" which is defined to mean (a)
the acquisition by any person of 20% or more of Common Stock and Common Stock
equivalents of the Company or 20% of the Company's voting power, (b) a
liquidation, merger or consolidation of the Company, or (c) a change in the
membership of the Company's Board of Directors over any period of two (2) years
or less such that the directors sitting at the beginning of such period or who
were nominated by at least two-thirds of the sitting directors cease to be a
majority of the Company's Board of Directors. These officers of the Company are
entitled to receive certain cash payments and health benefits if they leave the
Company, either one year before or within two years after a Change in Control,
for "Good Reason," "Disability," death or retirement or if they were terminated
without "Cause" (in each case as the foregoing terms are defined in the
agreements). Mr. Pope also has an additional period after a Change in Control in
which he can voluntarily leave the Company and receive the benefits. The cash
benefits provided for Mr. Pope will equal 200% of his annual salary on the date
of termination. The other two officers each will receive 75% of the greater of
his average salary and bonuses over the three (3) fiscal years preceding the
Change in Control or the period of three (3) fiscal years preceding his
termination. In addition, the unvested options of Mr. Pope shall become vested
upon a Change in Control. All such benefits shall be in lieu of any benefits
provided under any such officer's employment agreement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of each class of the Company's voting securities as of November 20,
1999 by (i) each of the Company's directors and Named Executives who
beneficially own Common Stock or Series C Preferred Stock, (ii) by all directors
and officers as a group, and (iii) based on reports filed by each person with
the Securities and Exchange Commission, by the known beneficial holders of more
than 5% of any class of outstanding shares of the Company's voting securities.
Beneficial ownership has been determined in accordance with Rule 13d-3 under the
Exchange Act. Under this Rule, certain shares may be deemed to be beneficially
owned by more than one person (such as where persons share voting power or
investment powers). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire the shares (for example, upon
exercise of an option) within 60 days of the date as of which the information is
provided; in computing the percentage ownership of any person, the amount of
shares outstanding is deemed to include the amount of shares beneficially owned
by such person (and only such person) by reason of these acquisition rights on
or before January 1, 2000. As a result, the percentage of outstanding shares of
any person as shown in the following table does not necessarily reflect the
person's actual voting power at any particular date.
36.
<PAGE>
<TABLE>
<CAPTION>
Series C
Common Stock(2) Preferred Stock
--------------------------------- -------------------------------
Number Percentage Number Percentage
Name and Address of of of of
of Beneficial Owner(1) Shares Outstanding Shares Outstanding
- ------------------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Charles B. Moss, Jr. 525,785(3) 8.9% 12,000 24.5%
c/o B.S. Moss Enterprises
225 North Hill Street,
Aspen, CO 81611
Thomas R. DiBenedetto 545,785(4) 9.3% 12,000(5) 24.5%
c/o Junction Investors, Ltd.
84 State Street
Boston, MA 02109
DiBenedetto Showscan Limited 238,095(6) 4.0% 12,000 24.5%
Partnership
c/o Junction Investors, Ltd.
84 State Street
Boston, MA 02109
United Artists Theatre 523,032(7) 8.5% 25,000 51.0%
Circuit, Inc.
9110 East Nichols Avenue
Suite 200
Englewood, CO 80112
Alan J. Andreini 463,666(8) 8.2% -- --
Interworld Corporation
395 Hudson Street
New York, NY 10014
William C. Soady(9) 147,000 2.5% -- --
Dennis Pope(10) 112,250 2.0% -- --
Michael B. Ellis(11) 17,500 * -- --
Russell H. Chesley(12) 17,500 * -- --
W. Tucker Lemon(13) 2,000 * -- --
All Officers and Directors
as a Group (11 persons) (14) 1,370,820 21.374% 24,000 100.0%
</TABLE>
_______________
* Less than 1%.
(1) Except as otherwise noted, the address of each beneficial owner listed in
this table is c/o Showscan Entertainment Inc., 3939 Landmark Street, Culver
City, California 90232.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all securities
beneficially owned by them.
(3) Consists of (a) 238,095 shares of Common Stock issuable upon conversion of
Mr. Moss' Preferred Stock, (b) 155,000 shares of Common Stock held by the
Charles B. Moss, Jr. Family Trust, (c) 6,200 shares of Common Stock held by
M. F. P., LLC, a limited liability company whose members are Mr. Moss'
children, (d) 21,900 shares of Common Stock held by Robin H. Moss, and (e)
104,590 shares of Common Stock owned by Mr. Moss. Robin H. Moss is the sole
trustee of the Charles B. Moss, Jr. Family Trust. Mr. Moss disclaims
beneficial ownership of the shares held by the Charles B. Moss, Jr. Family
Trust, M. F. P., LLC and Robin H. Moss.
37.
<PAGE>
(4) Includes (a) 238,095 shares of Common Stock issuable upon conversion of the
Preferred Stock held by DiBenedetto Showscan Limited Partnership, a
Delaware limited partnership, (b) 35,000 shares of the Common Stock owned
by the DiBenedetto 1993 Family Trust, (c) 35,000 shares of Common Stock
owned by the DiBenedetto Family Trust U/A/D 11/01/91 FBO Cory James
DiBenedetto, (d) 35,000 shares of Common Stock owned by the DiBenedetto
Family Trust U/A/D 11/01/91 FBO Christian Robert DiBenedetto, (e) 35,000
shares of Common Stock owned by the DiBenedetto Family Trust U/A/D 11/01/91
FBO Thomas Austin DiBenedetto, (f) 35,000 shares of Common Stock owned by
the DiBenedetto Family Trust U/A/D 11/01/91 FBO Marc Anthony DiBenedetto,
and (g) 132,690 shares of Common Stock owned by Mr. DiBenedetto. Mr.
DiBenedetto has sole voting and dispositive power over the securities
beneficially owned by DiBenedetto Showscan Limited Partnership. Linda M.
DiBenedetto, Mr. DiBenedetto's wife, is co-trustee of the DiBenedetto 1993
Family Trust. Mr. DiBenedetto disclaims beneficial ownership of the shares
of Common Stock held by the DiBenedetto 1993 Family Trust, the DiBenedetto
Family Trust U/A/D 11/01/91 FBO Cory James DiBenedetto, the DiBenedetto
Family Trust U/A/D 11/01/91 FBO Christian Robert DiBenedetto, the
DiBenedetto Family Trust U/A/D 11/01/91 FBO Thomas Austin DiBenedetto, and
the DiBenedetto Family Trust U/A/D 11/01/91 FBO Marc Anthony DiBenedetto.
(5) Consists of 12,000 shares of Preferred Stock owned by DiBenedetto Showscan
Limited Partnership. Mr. DiBenedetto has sole voting and dispositive power
over these securities.
(6) Consists of 238,095 shares of Common Stock issuable upon conversion of
Preferred Stock.
(7) Consists of 27,000 shares subject to currently exercisable stock purchase
warrants and 496,032 shares of Common Stock issuable upon conversion of
Preferred Stock.
(8) Alan J. Andreini disclaims beneficial ownership of an aggregate of 80,666
shares owned by his son and a foundation.
(9) Includes 145,000 shares of currently exercisable stock options and options
exercisable within 60 days.
(10) Includes 101,250 shares of currently exercisable stock options and options
exercisable within 60 days.
(11) Includes 17,500 shares of currently exercisable stock options and options
exercisable within 60 days.
(12) Includes 17,500 shares of currently exercisable stock options.
(13) W. Tucker Lemon resigned from all positions with the Company in September
1998. All options held by Mr. Lemon were canceled 30 days after his
resignation.
(14) Includes 311,250 shares subject to stock options and stock purchase
warrants currently exercisable or exercisable within 60 days and 476,190
shares of Common Stock issuable upon conversion of Preferred Stock.
Showscan, United Artists Theatre Circuit, Inc. ("UATC"), Charles B. Moss,
Jr. ("Moss"), Thomas R. DiBenedetto and DiBenedetto Showscan Limited
Partnership, a Delaware limited partnership (collectively, the "DiBenedetto
Entities") are party to that certain Voting Agreement, dated as of August 19,
1994, pursuant to which UATC, Moss and the DiBenedetto Entities have agreed to
vote the securities held by them in favor of each other's designees for the
Company's Board of Directors.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Moss/DiBenedetto Ventures. On September 27, 1993, the Company entered into that
- -------------------------
certain Purchase Agreement (the "Purchase Agreement") with Mr. Charles B. Moss,
Jr., a director of the Company ("Moss"), Mr. Thomas R. DiBenedetto, a director
of the Company ("DiBenedetto"), and DiBenedetto Showscan Limited Partnership, a
Delaware limited partnership affiliated with, and controlled by, DiBenedetto
("DiBenedetto LP"),
38.
<PAGE>
pursuant to which, among other things, Moss, DiBenedetto and DiBenedetto LP
collectively acquired the warrants to purchase an aggregate of 850,000 shares of
Common Stock, 150,000 shares of Series A Preferred Stock, and 24,000 shares of
Series B Preferred Stock. So long as Moss and DiBenedetto collectively own
shares of Common Stock or securities convertible into shares of Common Stock
representing in the aggregate 5% or more of the then outstanding Common Stock,
the terms of the Purchase Agreement require that the Company continue to
nominate Moss and DiBenedetto or their designees to the Company's Board of
Directors. Additionally, affiliates of Moss and DiBenedetto have entered into
two transactions for the purpose of owning, operating, developing and financing
the Company's motion simulation attractions. The first transaction, a venture
called the "Showscan City Walk Venture," was formed for the purpose of operating
one of the Company's motion simulation attractions at Universal City Walk in
Universal City, California which opened in November 1993. The parties to that
venture are Showscan City Walk, Inc., a wholly-owned California subsidiary of
the Company and the managing partner of Showscan City Walk Venture, Moss Family
LA Corp., a California corporation controlled by Moss, and DiBenedetto City Walk
Limited Partnership, a Delaware limited partnership controlled by DiBenedetto.
Initially, the Moss and DiBenedetto affiliates together owned a 1% investment
and had a right to acquire a collective 50% investment in the venture for a
price based on the cash flow of the motion simulation attraction. The Moss and
DiBenedetto affiliates exercised the right to acquire the 50% investment in
January 1994. Upon the exercise of the option, the Moss and DiBenedetto
affiliates each paid the Company $10,000. The balance of the purchase price
($247,772) was paid in March, 1996. As of June 30, 1999, the Moss and
DiBenedetto affiliates owed the Company $92,503 and $92,906, respectively, for
advances made to the Showscan CityWalk Venture and the Showscan Attractions
Venture on their behalf to satisfy capital calls to cover operating expenses.
The Moss and DiBenedetto affiliates have agreed that in payment of such
obligations that the Company can retain their respective proceeds from the sale
of the theatre system equipment from the San Antonio attraction, which was
closed in September 1997, and to the extent that there is a shortfall, to
reimburse the Company accordingly
The second venture, organized under the name "Showscan Attractions
Venture," was formed for the purpose of acting as the exclusive vehicle to
develop, own, manage and operate additional Showscan motion simulation
attractions throughout the world. The scope of the Showscan Attractions Venture
was subsequently narrowed in September 1994 to accommodate the venture with
United Artists Theatre Circuit, Inc. ("UATC") discussed below. The parties to
this venture are Showscan Attractions, Inc., a wholly-owned California
subsidiary of the Company and the managing partner of Showscan Attractions
Venture, Moss Family O&O Corp., a California corporation controlled by Moss (the
"Moss Partner), and DiBenedetto O&O Limited Partnership, a Delaware limited
partnership controlled by DiBenedetto (the "DiBenedetto Partner"). Showscan
Attractions, Inc., currently owns a 50% interest in the Attractions Venture, the
Moss Partner currently owns a 25% interest in the venture, and the DiBenedetto
Partner owns the remaining 25% interest.
The Showscan Attractions Venture agreement contemplates that the parties
thereto will jointly develop, own and operate the Company's motion simulator
attractions through the venture or through other corporations, partnerships or
entities formed by them. In accordance with the foregoing, the parties to the
Showscan Attractions Venture have formed Cinemania (UK) Limited for the purpose
of developing, owning and operating the Company's motion simulator attraction in
London which opened in late September 1994 (the "London Theatre"). The
stockholders of Cinemania (UK) Limited closed the London Theatre on July 3, 1998
and have completed its liquidation.
In August 1995, Showscan Attractions Venture and Maloney Development
Partnership Ltd. ("Maloney"), an unaffiliated Texas limited partnership, formed
a Texas limited liability company called Showscan Maloney, LLC to own and
operate the Company's motion simulation attraction in the San Antonio Riverwalk
District, in San Antonio, Texas. The partners of Showscan Maloney, LLC closed
the theatre on September 7, 1997 and have liquidated its assets. The partners
have further agreed to distribute the theatre equipment to the Company,
39.
<PAGE>
will sell the equipment to a non-affiliated third party. The Company expects to
fully realize the carrying value of its investment in this venture upon the
completion of the liquidation and subsequent sale.
Pursuant to a Proprietary Property Acquisition and Management Agreement
dated as of September 27, 1993, between the Company and Showscan Attractions
Venture, the Company granted to the Showscan Attractions Venture rights to
utilize proprietary property and rights of the Company in connection with the
development and operation of the Company's motion simulation attractions. Under
that agreement, the Company has been retained to manage the motion simulation
attractions developed and operated by the venture. The venture has also retained
Moss Entertainment Corp., a corporation controlled by Moss, and DiBenedetto
Corp., an affiliate of DiBenedetto, to provide certain services in connection
with the acquisition of properties for the Company's motion simulation
attractions and the potential disposition of those attractions. Moss
Entertainment Corp. and DiBenedetto Corp. are to receive fees for providing
acquisition and disposition services upon the sale or other disposition of
certain of the initial theatres developed by the venture.
The United Artists Venture. On August 19, 1994, the Company entered into that
- --------------------------
certain Purchase Agreement (the "UA Purchase Agreement") with UATC, pursuant to
which, among other things, UATC purchased 25,000 shares of Preferred Stock and
warrants representing the right to purchase an aggregate of 552,000 shares of
Common Stock. So long as UATC owns shares of Common Stock or securities
convertible into shares of Common Stock representing in the aggregate of at
least 500,000 shares of Common Stock, the terms of the UA Purchase Agreement
require that the Company continue to nominate a designee of UATC to the
Company's Board of Directors. Kurt C. Hall, an executive officer of UATC was the
designee of UATC until his resignation on July 17, 1999. UATC has not designated
a replacement for Mr. Hall. In connection with the transactions effected by the
UA Purchase Agreement, the Company and UATC agreed to be equal partners in a
venture called Showscan/United Artists Theatres Joint Venture (the "UA
Venture"). The UA Venture never undertook any motion simulation or other
projects and it will likely be terminated as part of the ongoing arbitration
between the Company and UATC discussed below.
Pursuant to the Theater Rights Agreement, UATC agreed to offer to the UA
Venture for ownership and operation by the UA Venture, up to 24 theatre sites at
any time prior to August 19, 1999 for the installation of Showscan Attractions
in existing or to-be-built UATC theatre complexes. If the UA Venture declined to
acquire a particular location, then UATC was required to install a Showscan
motion simulation attraction theatre at the first 24 sites that the UA Venture
declined to acquire. Through August 19, 1999, UATC installed only 8 Showscan
Attractions. The Theater Rights Agreement provided that two motion simulation
attraction theatres be installed and in operation in Malaysia no later that
December 31, 1995. UATC was unable to meet this commitment and therefore UATC
has an Obligation at March 31, 1998, to pay to the Company $712,000 together
with interest thereon at the rate of 7.5% per annum (the "Obligation") from
January 1, 1996 until paid in full. In July 1998, the Company and UATC reached
an agreement to settle the Obligation by means of a $318,000 payment in July
1998, the purchase by the Company of certain new simulation equipment and other
assets owned by UATC, the offset of certain amounts and the payment of the
remaining amounts over approximately one year. The Theater Rights Agreement
contains further provisions that require UATC to make payments to the Company if
UATC is unable to meet its obligations and that require the Company to make
payments to UATC if the UA Venture is unable to meet certain of its obligations.
UATC is obligated to pay the Company $330,000 for each Showscan Attraction which
was not purchased and installed by August 19, 1999 (16 theatre sites) and the
Company is obligated to pay UATC $165,000 since the UA Venture did not select a
joint venture site by August 19, 1999.
On September 1, 1999, the Company initiated binding arbitration against
United Artists Theatre Circuit, Inc. ("UATC") with the American Arbitration
Association ("AAA"). The Theater Rights Agreement, dated August 19, 1994 (the
"TRA"), among the Company, UATC and the Showscan/United Artists Theatres Joint
Venture requires that all disputes thereunder be submitted to AAA for binding
arbitration in Phoenix, Arizona.
40.
<PAGE>
The claim 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 claim 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.
In connection with the formation of the UA Venture and the modification to
the Showscan Attractions Venture that it necessitated, the Company entered into
a royalty agreement with Moss and DiBenedetto Partner which provides that each
time that the UA Venture opens the Company's motion simulation attraction
theatre in one of the areas granted to UATC, each of Moss and DiBenedetto
Partner will receive a one-time cash fee and thereafter will receive an annual
royalty based on the net cash flow (as defined) received by the Company from the
operations of such UA Venture theatre.
41.
<PAGE>
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on
- -----------------------------------------------------------------------------
Form 8-K
- --------
a.(1)(2) Financial Statements and Schedules.
See the Index to Consolidated Financial Statements and Financial Statement
Schedule on Page F-1 hereafter, which is incorporated herein by reference.
a.(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation.(j)
3.2 Certificate of Amendment to Restated Certificate of Incorporation,
dated August 3, 1990.(j)
3.3 Second Certificate of Amendment of Restated Certificate of
Incorporation of Showscan Corporation, dated August 18, 1994.(j)
3.4 Certificate of Designations with respect to Series C Convertible
Preferred Stock of Showscan Corporation, as filed with the
Secretary of State of Delaware on August 22, 1994.(h)
3.5 Certificate of Designations with respect to Series D Participating
Preferred Stock of Showscan Entertainment Inc., as filed with the
Secretary of State of Delaware on November 9, 1994.(j)
3.6 Bylaws of the Company, as amended.(n)
4.1 Specimen certificate of the Common Stock, $.001 par value, of the
Company.(a)
4.3 Warrant Agreement, dated as of September 27, 1993, among Showscan
Corporation and Charles B. Moss, Jr. and DiBenedetto Showscan
Limited Partnership.(b)
4.5 Registration Rights Agreement, dated as of September 27, 1993,
among Showscan Corporation, Charles B. Moss, Jr., Thomas R.
DiBenedetto and DiBenedetto Showscan Limited Partnership.(b)
4.6 Specimen Certificate of Series C Convertible Preferred Stock,
$.001 par value, of the Company.(j)
4.7 Warrant Agreement, dated as of August 19, 1994, by and between
Showscan Corporation and United Artists Theatre Circuit, Inc.(h)
4.8 Registration Rights Agreement, dated as of August 19, 1994, by and
between Showscan Corporation and United Artists Theatre Circuit,
Inc.(h)
</TABLE>
42.
<PAGE>
Exhibit
Number Description
- ------- -----------
4.9 Rights Agreement, dated as of November 11, 1994, by and between
Showscan Entertainment Inc. and Continental Stock Transfer & Trust
Company.(i)
4.10 Registration Rights Agreement, dated as of September 22, 1994, by and
among Showscan Entertainment Inc., Charles B. Moss, Jr. and
DiBenedetto Showscan Limited Partnership.(j)
4.11 Note Purchase, Paying and Conversion Agency Agreement, dated as of
August 14, 1995, by and between Showscan Entertainment Inc. and Banca
del Gottardo.(k)
4.12 Global Note, dated September 1, 1995, made by Showscan Entertainment
Inc. in favor of Banca del Gottardo.(k)
4.13 Agency Agreement, dated as of August 14, 1995, by and between Showscan
Entertainment Inc. and Banca del Gottardo.(k)
4.14 Pledge/Security Agreement, dated as of September 1, 1995, by and
between Showscan Entertainment Inc. and Banca del Gottardo.(k)
4.15 Amendment to Pledge/Security Agreement, dated as of September 1, 1995,
by and between Showscan Entertainment Inc. and Banca del Gottardo.(k)
4.16 Warrant Agreement, dated as of September 1, 1995, by and between
Showscan Entertainment Inc. and Jack M. Ferraro.(l)
4.17 Registration Rights Agreement, dated as of September 1, 1995, by
and between Showscan Entertainment Inc. and Jack M. Ferraro.(l)
4.18 Warrant Agreement, dated as of September 1, 1995, by and between
Showscan Entertainment Inc. and Jack Erlanger.(l)
4.19 Registration Rights Agreement, dated as of September 1, 1995, by
and between Showscan Entertainment Inc. and Jack Erlanger.(l)
4.21 Rights Agreement Amendment, dated as of August 4, 1997, by and
between Showscan Entertainment Inc. and Continental Stock Transfer
& Trust Company. (p)
9.1 Voting Agreement, dated as of August 19, 1994, by and among Showscan
Corporation, United Artists Theatre Circuit, Inc., Charles B. Moss,
Jr., and Thomas R. DiBenedetto.(h)
10.1 Lease dated June 15, 1989 between the Company and Landmark Investments
Ltd. ("Lease").(d)
10.2 Amendment No. 1 to Lease, dated February 20, 1991.(a)
10.3 Amendment No. 2 to Lease, dated January 21, 1992.(e)
43.
<PAGE>
Exhibit
Number Description
- ------- -----------
10.4 Amendment No. 3 to Lease, dated February 18, 1993.(f)
10.6 Showscan Entertainment Inc. 1992 Stock Option Plan, as amended.(j)
10.7 Modification, Consent and Assignment Agreement dated April 26, 1985
between the Company, Douglas Trumbull and Brock/Trumbull Entertainment
Corporation.(c)
10.8 Agreement, dated June 27, 1985, between the Company and Future General
Corporation.(c)
10.9 Agreement, dated February 23, 1987, between the Company and Cinema
Products Corporation (the "Camera Agreement").(c)
10.10 Amendment to Camera Agreement, dated July 20, 1988.(a)
10.11 Amendment to Camera Agreement, dated February 1, 1989.(a)
10.12 Showscan 1985 Agreement, dated April 16, 1985, and Agreement, dated
August 31, 1983, between Showscan Investors and Brock-Trumbull
Entertainment Corporation.(c)
10.13 Amendment to Royalty Agreement, dated July 6, 1990, between the
Company and WLS Partners.(a)
10.14 Amendment to payment terms of the Royalty Agreement, dated November
13, 1990, between the Company and WLS Partners.(a)
10.15 Universal CityWalk Lease, dated November 24, 1992, by and among the
Company and MCA Development Company.(f)
10.16 Purchase Agreement dated as of September 27, 1993, among Showscan
Corporation, Charles B. Moss, Jr., Thomas R. DiBenedetto and
DiBenedetto Showscan Limited Partnership.(b)
10.17 Joint Venture Agreement, dated as of September 27, 1993, among
Showscan Attractions, Inc., Moss Family O&O Corp., and DiBenedetto O&O
Limited Partnership, with respect to the organization of Showscan
Attractions Venture.(b)
10.18 Joint Venture Agreement, dated as of September 27, 1993, among
Showscan CityWalk, Inc., Moss Family LA Corp., and DiBenedetto
CityWalk Limited Partnership, with respect to the organization of
Showscan CityWalk Venture.(b)
10.19 Proprietary Property Acquisition and Management Agreement, dated as of
September 27, 1993, between Showscan Corporation and Showscan
Attractions Venture.(b)
44.
<PAGE>
Exhibit
Number Description
- ------- -----------
10.20 Development and Disposition Services Agreement, dated as of September
27, 1993, among Showscan Attractions Venture, DiBenedetto Showscan,
Inc. and Moss Entertainment Corp.(b)
10.21 Employment Agreement, dated May 3, 1994, between the Company and
Dennis Pope, as amended.(j)
10.22 Purchase Agreement, dated as of August 19, 1994, by and between
Showscan Corporation and United Artists Theatre Circuit, Inc.(h)
10.23 Joint Venture Agreement, dated as of August 19, 1994, by and between
Showscan Corporation and United Artists Theatre Circuit, Inc.(h)
10.24 Theater Rights Agreement, dated as of August 19, 1994, among Showscan
Corporation, United Artists Theatre Circuit, Inc. and Showscan/United
Artists Theatres Joint Venture.(h)
10.25 First Amendment to Theater Rights Agreement, dated as of March 30,
1995, by and among Showscan Entertainment Inc., United Artists
Theatre Circuit, Inc. and Showscan/United Artists Theatres Joint
Venture.(j)
10.26 Master Management and Development Agreement, dated as of August 19,
1994, among Showscan Corporation, United Artists Theatre Circuit, Inc.
and Showscan/United Artists Theatres Joint Venture.(h)
10.27 Amendment No. 1 to the Showscan Attractions Joint Venture Agreement,
dated as of September 22, 1994, by and among DiBenedetto O&O Limited
Partnership, Showscan Attractions, Inc., and Moss Family O&O Corp.(j)
10.28 Standstill Agreement, dated as of August 22, 1994, by and among
Showscan Corporation, United Artists Theatre Circuit, Inc., Charles
B. Moss, Jr., Thomas DiBenedetto and DiBenedetto Showscan Limited
Partnership.(h)
10.29 Stock Exchange Agreement, dated as of September 22, 1994, by and
among Showscan Entertainment Inc., Charles B. Moss, Jr., Thomas
R. DiBenedetto, and DiBenedetto Showscan Limited Partnership.(j)
10.30 Royalty Agreement, dated as of September 22, 1994, by and among
Showscan Entertainment Inc., Moss Family O&O Corp. and DiBenedetto
O&O Limited Partnership.(j)
10.31 Second Amendment to Theater Rights Agreement, dated as of December 31,
1995, by and among Showscan Entertainment Inc., United Artists
Theatre Circuit, Inc. and Showscan/United Artists Theatres Joint
Venture.(l)
45.
<PAGE>
Exhibit
Number Description
- ------- -----------
10.32 Agreement, dated August 7, 1996, between the Company and Dennis
Pope.(m)
10.34 Credit Agreement, dated as of November 1, 1997, by and between
Showscan Entertainment Inc. and Eldee Foundation.(o)
10.36 Amendment to Employment Agreement, dated October 1, 1998, by and
between the Company and Dennis Pope.(g)
10.38 First Amendment to Credit Agreement, dated as of November 10, 1998,
by and between Showscan Entertainment Inc. and Eldee Foundation.(q)
10.39 Extension and Security Agreement entered into as of September 1, 1999
by and between Showscan Entertainment Inc. and Banca del Gottardo as
amendment to that certain Note Purchase Agreement effective as of
August 14, 1995.
21.1 List of Subsidiaries of the Company.(l)
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
_______________________
(a) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1, Registration No. 33-40531, as amended, and incorporated
herein by reference.
(b) Previously filed as an exhibit to the Schedule 13D filed with the
Securities and Exchange Commission by Charles B. Moss, Jr., Thomas R.
DiBenedetto and DiBenedetto Showscan Limited Partnership, dated
September 27, 1993, and incorporated herein by reference.
(c) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1, Registration No. 33-13582, as amended, and incorporated
herein by reference.
(d) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for fiscal year ended March 31, 1990, and incorporated herein by
reference.
(e) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1992, and incorporated herein
by reference.
(f) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for fiscal year ended March 31, 1993, and incorporated herein by
reference.
46.
<PAGE>
(g) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1998, and
incorporated herein by reference.
(h) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 19, 1994, as amended by the Form 8-K/A dated November
7, 1994, and incorporated herein by reference.
(i) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated November 11, 1994, and incorporated herein by reference.
(j) Previously filed as an exhibit to the Company's Annual Report on Form
10-K, as amended by the Form 10-K/A dated September 25, 1995, for the
fiscal year ended March 31, 1995, and incorporated herein by reference.
(k) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated September 1, 1995, and incorporated herein by reference.
(i) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1996, and incorporated herein
by reference.
(m) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1996, and incorporated
herein by reference.
(n) Previously filed as an exhibit to the Company's Annual Report on Form
10-K, as amended by the Form 10-K/A's dated July 29, 1997 and August
14, 1997, for the fiscal year ended March 31, 1997, and incorporated
herein by reference.
(o) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1997, and
incorporated herein by reference.
(p) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 4, 1997, and incorporated herein by reference.
(q) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1998, and
incorporated herein by reference.
b. The following reports on Form 8-K were filed during the fourth quarter of
the fiscal year ended March 31, 1999.
NONE.
47.
<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.
Date: December 6, 1999
SHOWSCAN ENTERTAINMENT INC.
By /s/ DENNIS POPE
---------------------------------
Dennis Pope
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1933,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- ----
<S> <C> <C>
/s/ WILLIAM D. EBERLE
- ------------------------------------- Chairman of the Board December 6, 1999
William D. Eberle
/s/ DENNIS POPE Director; President; Chief Executive December 6, 1999
- ------------------------------------- Officer (Principal Executive Officer)
Dennis Pope
/s/ CHARLES B. MOSS, JR.
- ------------------------------------- Director December 6, 1999
Charles B. Moss, Jr.
/s/ THOMAS R. DIBENEDETTO
- ------------------------------------- Director December 6, 1999
Thomas R. DiBenedetto
/s/ WILLIAM C. SOADY
- ------------------------------------- Director December 6, 1999
William C. Soady
</TABLE>
48.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SHOWSCAN ENTERTAINMENT INC.
<TABLE>
<S> <C>
Report of Independent Auditors..................................... F-2
Consolidated Balance Sheets at March 31, 1999 and 1998............. F-3
Consolidated Statements of Operations for the years ended March 31,
1999 and 1997................................................... F-5
Consolidated Statements of Stockholders' Deficiency Equity
for the years ended March 31, 1999, 1998, and 1997.............. F-6
Consolidated Statements of Cash Flows for the years ended March 31,
1999, 1998 and 1997............................................. F-7
Notes to Consolidated Financial Statements......................... F-9
Consolidated Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts............... F-29
</TABLE>
All other schedules have been omitted either as inapplicable or not
required under the instructions contained in Regulation S-X or because the
information is included in the Consolidated Financial Statements or the Notes
thereto listed above.
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Showscan Entertainment Inc.
We have audited the accompanying consolidated balance sheets of Showscan
Entertainment Inc. as of March 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' (deficiency) equity, and cash flows for
each of the three years in the period ended March 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Showscan
Entertainment Inc. at March 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that Showscan
Entertainment Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses, has a working
capital deficiency, and has extended the terms and conditions of its 8%
Convertible Notes which were due on September 1, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
Los Angeles, California
October 22, 1999
F-2
<PAGE>
Showscan Entertainment Inc.
Consolidated Balance Sheets
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
March 31
1999 1998
-----------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 661 $ 2,492
Accounts receivable, net of allowances of $1,185 (1999)
and $1,126 (1998) 1,676 2,161
Unbilled receivables on uncompleted equipment
contracts (Note 1) 123 708
Due from affiliated entities, net of allowances (Note 8) 284 794
Equipment sales inventory 993 1,186
Prepaid expenses and other current assets (Note 1) 239 193
-----------------------
Total current assets 3,976 7,534
Film library, net (Note 1) 2,758 3,765
Equipment and leasehold improvements, less
depreciation and amortization (Note 2) 321 447
Investment in and advances to O&O theatres (Notes 1 and 7) - 440
Patents and other intellectual properties, net of
amortization (Note 1) 467 900
Other assets 437 625
-----------------------
Total assets $7,959 $13,711
=======================
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
March 31
1999 1998
-----------------------
<S> <C> <C>
Liabilities and Stockholders' (Deficiency) Equity
Current liabilities:
Accounts payable $ 555 $ 752
Customer advances on uncompleted film and equipment contracts
(Note 1) 1,467 2,317
Accrued expenses and other current liabilities (Note 1) 2,477 2,241
Note payable (Note 4) 260 1,000
8% convertible notes (Note 3) 5,690 -
Total current liabilities 10,449 6,310
8% convertible notes (Note 3) - 5,690
Total liabilities 10,449 12,000
Commitments and contingencies (Note 11)
Stockholders' (deficiency) equity (Note 6):
Series A Convertible Preferred Stock, $.001 par value;
150,000 shares authorized, no shares issued and outstanding in
1999 and 1998 - -
Series C Convertible Preferred Stock, $.001 par value;
100,000 shares authorized; 49,000 shares issued and outstanding
in 1999 and 1998, $100 per share liquidation preference (Note 5) - -
Common stock, $.001 par value; 20,000,000 shares
authorized; shares issued and outstanding of
5,642,058 in 1999 and 1998 6 6
Additional paid-in capital 42,567 42,567
Accumulated deficit (45,063) (40,862)
-------------------------
Total stockholders' (deficiency) equity (2,490) 1,711
-------------------------
Total liabilities and stockholders' (deficiency) equity $ 7,959 $ 13,711
=========================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Showscan Entertainment Inc.
Consolidated Statements of Operations
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Revenues (Note 10):
Film licensing and production services $ 4,665 $ 5,726 $ 6,236
Equipment sales and related services 3,362 4,688 11,475
----------------------------------------
8,027 10,414 17,711
Costs of revenues 4,538 8,756 10,854
----------------------------------------
Gross profit 3,489 1,658 6,857
Other costs and expenses:
General and administrative expenses 5,878 7,860 6,904
Depreciation and amortization 573 875 961
----------------------------------------
6,451 8,735 7,865
----------------------------------------
Operating loss (2,962) (7,077) (1,008)
Other income (expense):
Equity in net operations of O&O theatres (Note 7) (260) (540) (694)
Effect of impairment loss on equity in net operations
of O&O theatres (Note 7) (268) (313) (1,771)
Other income, including interest of $32 (1999), $123
(1998) and $241 (1997) 71 127 250
Other expense, including interest of $777 (1999), $703
(1998) and $672 (1997) (778) (725) (692)
----------------------------------------
(1,235) (1,451) (2,907)
----------------------------------------
Loss before taxes (4,197) (8,528) (3,915)
Provision for income taxes 4 4 4
----------------------------------------
Net loss $ (4,201) $ (8,532) $ (3,919)
========================================
Net loss per common share (Note 1) $ (0.74) $ (1.51) $ (0.70)
========================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Showscan Entertainment Inc.
Consolidated Statements of Stockholders' (Deficiency) Equity
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Series A Convertible Series C Convertible
Preferred Stock Preferred Stock Common Stock
---------------------------------------------------------------------------
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 - $ - 49,000 $ - 5,480,324 $ 5
Conversion of convertible notes to common
stock and other - - - - 161,734 1
Net loss - - - - - -
----------------------------------------------------------------------------
Balance at March 31, 1997 - - 49,000 - 5,642,058 6
Net loss - - - - - -
----------------------------------------------------------------------------
Balance at March 31, 1998 - - 49,000 - 5,642,058 6
Net loss - - - - - -
----------------------------------------------------------------------------
Balance at March 31, 1999 - $ - 49,000 $ - 5,642,058 $ 6
============================================================================
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
--------------------------------------
<C> <C> <C>
Balance at March 31, 1996 $ 41,704 $(28,411) $13,298
Conversion of convertible notes to common
stock and other 863 - 864
Net loss - (3,919) (3,919)
---------------------------------------
Balance at March 31, 1997 42,567 (32,330) 10,243
Net loss - (8,532) (8,532)
---------------------------------------
Balance at March 31, 1998 42,567 (40,862) 1,711
Net loss - (4,201) (4,201)
---------------------------------------
Balance at March 31, 1999 $ 42,567 $(45,063) $(2,490)
=======================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Showscan Entertainment Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (4,201) $ (8,532) $ (3,919)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 573 875 961
Amortization of film library 1,234 2,782 613
Amortization of debt issue costs 235 199 198
Provision for doubtful accounts receivable 153 970 270
Provision for amounts due from affiliated entities - 279 -
Equity in net operations of O&O theatres, including
impairment loss 528 853 2,465
Accrued interest on note payable - 38 -
Changes in operating assets and liabilities:
Accounts receivable 332 (415) (1,101)
Due from affiliated entities 510 (189) 332
Equipment sales inventory 193 103 258
Unbilled receivables on uncompleted equipment
contracts 585 (708) 1,122
Prepaid expenses and other assets (46) 879 (1,784)
Investment in and advances to O&O theatres (88) 830 (164)
Accounts payable, accrued expenses and other 39 (5) (992)
Customer advances on uncompleted equipment contracts (850) 1,284 (1,110)
--------------------------------------------
Net cash used in operating activities (803) (757) (2,851)
Investing activities
Redemptions of short-term investments - - 3,086
Additions to film library (227) (1,027) (2,652)
Purchases of equipment and leasehold improvements and
other, net (61) 844 (76)
--------------------------------------------
Net cash (used in) provided by investing activities (288) (183) 358
</TABLE>
F-7
<PAGE>
Showscan Entertainment Inc.
Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Financing activities
Net (payments on) proceeds from 11% short-term
note payable $ (740) $ 870 $ -
------------------------------------------
Net cash (used in) provided by financing activities (740) 870 -
------------------------------------------
Net decrease in cash and cash equivalents (1,831) (70) (2,493)
Cash and cash equivalents at beginning of year 2,492 2,562 5,055
------------------------------------------
Cash and cash equivalents at end of year $ 661 $ 2,492 $ 2,562
==========================================
Supplemental disclosures of cash flow information
Interest paid $ 586 $ 463 $ 479
==========================================
Income taxes paid $ 4 $ 4 $ 4
==========================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements
March 31, 1999
1. Company Business and Summary of Significant Accounting Policies
Business of the Company
Showscan Entertainment Inc. (the Company) is a leader in the production and
distribution of exciting movie-based entertainment attractions to the out-of-
home entertainment marketplace. The Company's motion simulation and specialty
theatres are open or under construction around the world, located in theme
parks, motion picture mutiplexes, expos, world fairs, resorts, shopping centers,
casinos, museums and other tourist destinations.
The Company's simulation attractions combine the exhibition of a short action
film with multi-channel sound systems and synchronized theatre seat movement to
produce an immersive entertainment experience in which the theatre patron has
the perception of actually participating in the on-screen action. The
entertainment creates a "thrill ride" or action entertainment experience (such
as riding a runaway train or racing through outer space). The Company's
attractions incorporate various proprietary technologies, including the award
winning and patented 70mm filming and projection process known as Showscan(R).
The Company believes that films made and exhibited in the Showscan process
create a visual effect of depth, clarity and realism that is superior to any
other film format. The Showscan process is also used for the exhibition of films
in large screen specialty theatres at world fairs, tourist destinations, trade
conventions and other locations where the operator desires the impact of the
large-screen, intense image that a Showscan film provides.
The Company is presently in the business of: (i) licensing and distributing the
films in its library to all operators of simulation attractions (including those
produced using the Showscan Process and those acquired from other producers);
(ii) licensing the proprietary technologies necessary to produce and exhibit the
Company's films; (iii) selling and installing motion simulation attractions
(including 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 motion simulation 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.
F-9
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. Company Business and Summary of Significant Accounting Policies (continued)
Business of the Company (continued)
The Company's primary business strategy, since March 1997, is to develop high
margin recurring revenues from the licensing and distribution of its film
library to all owner/operators of simulation attractions (including those
installed by Showscan and those previously installed by competitors of Showscan)
and from ticket sales at, and the licensing of its film library to, its O&O
Theatres. The Company seeks to increase the demand for its film library by
significantly increasing the installed base of both its motion simulation
attractions and specialty theatres.
Going Concern Matters
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company has incurred operating losses (aggregating $45,063,000) and has a
working capital deficiency of $6,473,000 at March 31, 1999. In addition, the
Company has extended the terms and conditions of its 8% Convertible Notes, which
were due on September 1, 1999 (see Note 3).
The Company's cash declined during fiscal 1999 and continues to decline
subsequent to March 31, 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 significantly reduced cash which could
result in the Company not being able to meet its operating needs. The Company is
actively exploring possible financing sources; however, recent and recurring
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.
F-10
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. Company Business and Summary of Significant Accounting Policies (continued)
Consolidation
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany amounts and transactions have
been eliminated in consolidation.
The Company accounts for its investment in O&O Theatres (see Note 7) using the
equity method of accounting.
Film Library
The Company's film library primarily consists of short "thrill-ride" or action
films that are exhibited in motion simulation attraction theatres worldwide.
Films are stated at the lower of unamortized cost or estimated realizable
values. The cost of a film includes the direct costs to produce or purchase the
film and the costs of production overhead, if any. The components of the
unamortized film library consist of the following:
<TABLE>
<CAPTION>
March 31
1999 1998
----------------------
<S> <C> <C>
Films in production $ 105 $ 610
Completed films in release 13,786 13,054
----------------------
13,891 13,664
Less accumulated amortization 11,133 9,899
----------------------
$ 2,758 $ 3,765
======================
</TABLE>
Films are being amortized over their estimated future revenue stream (generally
five to seven years) as revised quarterly, if applicable. The Company estimates
that approximately 80% of unamortized film costs at March 31, 1999, will be
amortized over the next three fiscal years.
Patents and Other Intellectual Properties
Patents (expiring in fiscal year 2002) and other intellectual properties
represent the excess of the total purchase cost over the values assigned to
tangible assets at the date of acquisition of the Showscan process.
F-11
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. Company Business and Summary of Significant Accounting Policies (continued)
Patents and Other Intellectual Properties (continued)
Amortization is provided on the basis of the ratio of annual revenues to
projected revenues over the lives of the patents, as revised quarterly, if
applicable, from the Showscan process with minimum annual amortization of
approximately $434,000 (equal to 1/15 of the original balance of $6,504,000).
Accumulated amortization of the patents and other intellectual properties was
$6,038,000 and $5,604,000 at March 31, 1999 and 1998, respectively.
Equipment Sales Inventory
Equipment sales inventory, consisting primarily of film exhibition and motion
simulation system equipment packages and related components, is valued at the
lower of average cost or market.
Equipment sales contracts are accounted for using the percentage-of-completion
method of accounting, generally measured by the percentage of labor hours
incurred to date to the estimated total labor hours for each contract. When
revenues and cost estimates for a contract indicate an ultimate loss, that loss
is recognized immediately.
The Company provides, by a current charge to income, an amount it estimates will
be needed to cover future warranty obligations for equipment sales inventory
sold during the year.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost.
Depreciation of equipment is computed using the straight-line method over the
estimated useful lives of the respective assets, generally seven to 12 years.
Amortization of leasehold improvements is computed using the straight-line
method over the lease term. Depreciation and amortization of equipment and
leasehold improvements was $139,000, $441,000 and $527,000 for the years 1999,
1998 and 1997, respectively.
Film Licensing Revenues
Revenues from film license agreements are recognized when the license period
begins and the film is available pursuant to the terms of the license agreement
and accepted by the customer.
F-12
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. Company Business and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for taxes using Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less or investments in money market funds
to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses. The Company generally requires customers to furnish
irrevocable letters of credit on equipment sales and to pay film licensing
revenues at the beginning of the license period in order to minimize the
Company's credit risk.
Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities are the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Accrued participations and royalties $1,238,000 $1,305,000
Accrued cost of film and equipment sales 362,000 558,000
Other items 877,000 378,000
-------------------------
$2,477,000 $2,241,000
=========================
</TABLE>
F-13
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
1. Company Business and Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. The Company has elected to account for its stock
compensation arrangements under the provisions of APB 25, "Accounting for Stock
Issued to Employees." The Company has adopted the pro forma disclosures
requirements of SFAS 123 (see Note 6).
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Net Loss Per Common Share
Per share information has been determined on the basis of 5,642,058 weighted
average shares outstanding for the years ended March 31, 1999 and 1998,
respectively. Per share information has been determined on the basis of
5,594,245 weighted average shares outstanding for the year ended March 31, 1997.
2. Equipment and Leasehold Improvements
Equipment and leasehold improvements at March 31, 1999 and 1998, were as
follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Showscan equipment $1,979,000 $1,979,000
Leasehold improvements 927,000 927,000
Office furniture and equipment 678,000 665,000
-----------------------
3,584,000 3,571,000
Less accumulated depreciation and amortization 3,263,000 3,124,000
-----------------------
$ 321,000 $ 447,000
=======================
</TABLE>
F-14
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
3. 8% Convertible Notes
In September 1995, the Company completed a private placement of $7,000,000 in
Convertible Notes which matured on September 1, 1999, and bore interest at 8%
per annum payable semiannually. 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. In connection with the placement, $619,000 of debt issue costs were
incurred and were being amortized over the life of the notes.
The notes were convertible into common stock at the option of the holder at a
conversion price (subject to certain anti-dilution adjustments) of $5.75 per
share (the closing price on the Nasdaq National Market on the transaction
closing date). Through March 31, 1999, $1,310,000 of notes were converted into
227,819 shares of common stock, leaving an outstanding balance of $5,690,000.
This balance, together with interest from September 2, 1998 to September 1,
1999, was not paid when the notes matured on September 1, 1999.
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 an aggregate of 750,000 shares of the
Company's Common Stock at an exercise 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 provisions contained in that certain Theater Rights Agreement
between the Company and United Artists Theatre Circuit Inc. (UA), subject to
certain adjustments, then the Company will use a minimum of 60% of such proceeds
to prepay the notes in the same manner. The Company has instituted binding
arbitration proceedings against UA
F-15
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
3. 8% Convertible Notes (continued)
seeking payment of an amount in excess of $5,000,000, and UA has counterclaimed
in the arbitration for unspecified damages in connection with certain contract
breaches it alleges against the Company (see Note 8).
The fair value of the Convertible Notes was determined using valuation
techniques that considered cash flows discounted at current market rates and
management's best estimate for instruments without quoted market prices. At
March 31, 1999 and 1998, the carrying value of the Convertible Notes exceeded
the fair value by approximately $200,000 and $500,000, respectively.
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.
5. Preferred Stock
The Company is authorized to issue preferred stock in one or more series and to
fix the rights, preferences, privileges, qualifications, limitations,
restrictions and the number of shares constituting any such series.
The Company is authorized to issue a total of 10,000,000 shares of preferred
stock of which 49,000 shares are issued as of March 31, 1999. Accordingly,
9,951,000 shares of preferred stock are available for issuance.
Series C Convertible Preferred Stock (Series C)
The Company has 49,000 shares of Series C outstanding. The Series C is
convertible into common stock at $5.04 per share (subject to certain anti-
dilution adjustments), has a liquidation preference of $100 per share, and
provides voting rights as if such shares had been fully converted into common
stock. Each share of Series C entitles the holder to receive
F-16
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
5. Preferred Stock (continued)
Series C Convertible Preferred Stock (Series C) (continued)
dividends in an amount equal to 110% of the dividends per share declared on each
share of common stock. The Company may elect to pay dividends on the Series C
either in cash or in additional shares of Series C based on its liquidation
preference of $100 per share.
The Series C is senior to the common stock of the Company; additionally, a
majority of the holders of Series C must consent to (a) the issuance of any
equity securities ranking senior to, or on parity with, the Series C, and (b)
the repurchase or retirement of any equity securities of the Company other than
the Series C.
Series D Participating Preferred Stock (Series D)
The issuance of 10,000 shares of Series D was authorized in November 1994, in
connection with the adoption of the Company's stockholder rights plan.
In connection therewith, the Company issued a dividend of one preferred share
purchase right (a Right) for each outstanding share of common stock and for each
share of common stock issuable upon conversion of outstanding Series C to the
stockholders of record on November 11, 1994. Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of Series D at
a purchase price of $40 per one one-thousandth of a share of Series D, subject
to adjustment (the Purchase Price).
The Rights may be exercised (a) 20 days after a person or group of persons has
become the beneficial owner of 20% or more of the common stock then outstanding
(an Acquiring Person), or (b) 20 business days after the date of commencement of
a tender or exchange offer the consummation of which would result in a person or
group of persons becoming an Acquiring Person. The Rights, which do not have any
voting rights, expire on November 11, 2004, and may be redeemed by the Company
at a price of $.01 per Right, subject to adjustment, at any time prior to their
expiration and prior to such time as any person or group of persons becomes an
Acquiring Person.
In the event that a person or group of persons becomes an Acquiring Person, each
Right will entitle its holder to purchase, at the Right's then Purchase Price, a
number of shares of common stock of the Company having a market value of twice
the Purchase Price. If certain
F-17
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
5. Preferred Stock (continued)
Series D Participating Preferred Stock (Series D) (continued)
mergers or sales of assets by the Company occur, each Right shall entitle the
holder to purchase, at the then Purchase Price, a number of shares of common
stock of the surviving corporation or purchaser having a market value of twice
the Purchase Price.
6. Stock Options and Warrants
Options
The Company currently has two stock option plans in effect, the 1987 Option Plan
and the 1992 Option Plan (collectively, the Plans). The Plans provide for the
issuance of nonqualified and qualified stock options under the Internal Revenue
Code of 1986, as amended. An aggregate of 300,000 shares of common stock were
initially reserved for grant under the 1992 Option Plan to officers, directors
and employees as well as independent contractors and consultants who performed
services for the Company. In 1995, the 1992 Option Plan was amended to permit
the grant of up to 800,000 shares of common stock and such number of shares have
been reserved for grant at March 31, 1999. All remaining shares reserved for
grant under the 1987 Option Plan were canceled upon adoption of the 1992 Option
Plan. Persons who are not employees of the Company are eligible to receive only
nonqualified stock options. The options may be granted for a term of up to 10
years. If an incentive stock option is granted to an individual owning more than
10% of the total combined voting power of all classes of the Company's stock,
the exercise price of the option may not be less than 110% of the fair market
value of the underlying shares on the date of the grant and the term of the
option may not exceed five years.
The Plans provide that the aggregate fair market value (determined at the time
the option is granted) of the common stock with respect to which incentive stock
options are exercisable for the first time by an optionee during any calendar
year shall not exceed $100,000.
The Company has elected to follow APB 25 (see Note 1) in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS 123 requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-18
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
6. Stock Options and Warrants (continued)
Options (continued)
Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for each of the years
ended March 31, 1999 and 1997 (there were no options granted in fiscal 1998):
risk-free interest rates ranging from 5% to 6%, volatility factors of the
expected market price of the Company's common stock of 1.57 (1999) and .361
(1997), and a weighted average expected life of the options ranging from seven
to 10 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Given this method of
amortization, the initial impact of applying SFAS 123 on pro forma net income
and pro forma earnings per share is not representative of the potential impact
on pro forma amounts in future years, when the effect of amortization from
multiple awards would be reflected. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $(4,725,000) $(9,137,000) $(4,475,000)
Pro forma loss per share $ (0.84) $ (1.62) $ (0.80)
</TABLE>
F-19
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
6. Stock Options and Warrants (continued)
Options (continued)
The following is a summary of Company stock options granted and canceled through
March 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 728,500 $ 6.34 774,250 $ 6.75 605,750 $ 7.51
Granted 162,000 $ 0.16 - $ - 200,000 $ 4.75
Canceled (215,500) $ 7.52 (45,750) $ 7.48 (31,500) $ 8.81
---------------------------------------------------------------------------------------------
Outstanding at end of year 675,000 $ 4.48 728,500 $ 6.34 774,250 $ 6.75
=============================================================================================
Exercisable at end of year 426,125 $ 6.11 512,129 $ 7.10 364,688 $ 7.30
=============================================================================================
Weighted average fair value of
options granted during year $ 0.11 $ 2.41
================ ================
</TABLE>
Exercise prices for options outstanding at March 31, 1999, ranged from $0.16 to
$9.06. The weighted average remaining contractual life of those options is seven
years. Options generally vest over a period of four or five years from
respective grant dates.
The following table summarizes information about fixed stock options outstanding
at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$0.1562 - $3.625 295,000 8.73 $ 1.30 81,125 $ 2.187
$6.125 - $9.0625 380,000 5.40 $ 6.95 345,000 $ 7.031
</TABLE>
F-20
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
6. Stock Options and Warrants (continued)
Warrants
In August 1994, the Company issued to UA warrants to purchase an aggregate of
552,000 shares of common stock, at exercise prices ranging from $6.50 to $8.50,
subject to certain anti-dilution adjustments. The warrants became exercisable at
dates from August 22, 1995 (300,000) and annually thereafter at 75,000 per year
with the remaining 27,000 exercisable on August 22, 1999, and have expiration
dates of either August 22, 1999 (525,000) or August 22, 2000 (27,000).
In September 1995, the Company issued warrants to purchase an aggregate of
150,000 shares of common stock at an exercise price of $5.75 per share, subject
to certain anti-dilution adjustments, to financial advisors who assisted in the
private placement of the Convertible Notes. The warrants became exercisable on
September 1, 1996, and expire on September 1, 2000.
Shares of the Company's common stock reserved for issuance upon exercise of
stock options, warrants, preferred stocks and convertible notes are as follows:
<TABLE>
<CAPTION>
March 31, 1999
Range of March 31
Exercise Prices 1999 1998
-------------------------------------------
<S> <C> <C> <C>
1987 and 1992 Option Plans $ 0.1562 - 797,000 801,200
$ 9.0625*
$ 5.75 - $8.50 702,000 1,774,283
Warrants $ 5.04** 972,222 972,222
Series C $ 5.75** 989,567 989,567
Convertible Notes -----------------------
3,460,789 4,537,272
=======================
</TABLE>
* At March 31, 1999 and 1998, there are 122,000 and 72,700 shares,
respectively, reserved for options which are still available for grant.
** Subject to certain anti-dilution provisions.
F-21
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
7. Owned and Operated Theatres
The Company has a 50% ownership interest in theatre attractions at Universal
CityWalk in Universal City, California (opened November 1993) and Osaka, Japan
(opened August 1995). Generally, in each of these arrangements, the Company
receives reimbursement for direct expenses (as defined), a percentage of each
theatre's cash flow (equal to its ownership percentage), and receives separately
annual film licensing revenues, and management fees (if applicable).
Affiliated Ventures
- -------------------
The Universal CityWalk Venture (CityWalk Venture) is a joint venture which is
50% owned by a wholly owned subsidiary of the Company, and 50% owned by
affiliates of certain of the directors. The CityWalk Venture also entered into a
10-year profit sharing lease with the owner of Universal CityWalk pursuant to
which the owner contributed one-half of the costs incurred for the construction
of the theatre. In general, the CityWalk Venture is obligated to pay a base rent
plus 50% of the cash flow, as defined, from the operations of the theatre.
The Company had an interest in Cinemania (UK) Limited, an entity that was 50%
owned by a wholly owned subsidiary of the Company, and 50% owned by affiliates
of certain of the directors. Cinemania (UK) Limited closed its theatres on July
3, 1998. The accompanying statement of operations for the year ended March 31,
1998, includes a noncash charge of $313,000 to reflect an impairment loss
recognized on the Company's investment in Cinemania (UK) Limited.
The accompanying statement of operations for the year ended March 31, 1997,
includes a noncash charge of $1,771,000 to record the impact of the adoption of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," by the joint ventures. Under the equity method
of accounting, the Company has recognized its share of joint venture charges;
accordingly, the carrying value of investments in, and advances to, O&O theatres
in the accompanying consolidated balance sheets was reduced by these charges.
The Company has through other financing and/or joint venture arrangements
entered into the following additional theatre ventures:
F-22
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
7. Owned and Operated Theatres (continued)
UA Venture
- ----------
In August 1994, the Company and UA agreed to be partners in a venture called
Showscan/United Artists Theatres Joint Venture (UA Venture).
Pursuant to a Theatre Rights Agreement, as amended (TRA), UA agreed to offer to
the UA Venture for ownership and operation by the UA Venture, up to 24-theatre
sites prior to August 19, 1999, for the installation of motion simulation
attraction threatres in or adjacent to existing or to-be-built UA theatre
multiplexes. If the UA Venture declined to acquire a particular site, then UA
was required to install a motion simulation attraction theatre at such site. As
of August 19, 1999, UA had offered eight sites of which the UA Venture declined
all of these sites as these sites did not meet the criteria of the UA Venture.
UA 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 UA in
the resale of these sites and to date has sold three such sites. The Company
receives a commission, plus reimbursement for all costs of removal,
refurbishment, crating, shipping and installation and specific warranties, as
applicable. The TRA contains certain provisions that require UA to make payments
to the Company if UA is unable to meet its obligations under that agreement. The
TRA provided that two motion simulation attraction theatres be installed and in
operation in Malaysia no later than December 31, 1995. UA was unable to meet
this commitment (see Note 8). The TRA contains further provisions that required
UA to make payments to the Company if UA was unable to meet its obligations and
that require the Company to make payments to UA if the Venture was unable to
meet certain of its obligations. UA was obligated to pay the Company $330,000
for each Showscan Attraction which was not purchased and installed by August
1999 (16 sites) and the Company was obligated to pay UA $165,000 if the UA
Venture did not select a joint venture site by August 1999. UA could also have
satisfied its obligations if it had purchased at least $14 million of motion
simulation and/or projection equipment from the Company. Through August 19,
1999, UA had only purchased approximately $7 million of equipment. All payments
were payable to each party in August 1999. No such payments have been made
through October 1999. The Company estimates that it is owed in excess of $5
million pursuant to the provisions of the TRA and has instituted binding
arbitration proceedings against UA in order to obtain payment (see Note 8).
F-23
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
7. Owned and Operated Theatres (continued)
Osaka Theatre
- -------------
The Osaka theatre is 50% owned by a wholly owned subsidiary of the Company and
50% by Imagine Japan, Inc. Sega Enterprises, Ltd. operates the Osaka theatre in
exchange for a certain percentage of the gross receipts.
The accompanying statement of operations for the year ended March 31, 1999,
includes a noncash charge of $268,000 to reflect an impairment loss recognized
on the Company's investment in the Osaka theatre.
The Company continues to record its proportionate share of losses from the
existing O&O Theatres, as it is committed to provide further financial support
to these theatres.
8. Receivables from Affiliated Entities
At March 31, 1998, the Company was due $712,000 from UA in connection with the
TRA as discussed in Note 7. The payment terms provided for (a) interest on the
unpaid principal balance to be charged at 7.5% and (b) principal and interest to
be paid in full on or before December 31, 1996 (Maturity Date); provided,
however, that if the UA Venture had not accepted one of the theatre sites it had
been offered by UA prior to the Maturity Date, the Maturity Date would be
extended until 30 days after the date that the UA Venture did accept, but in no
event was the Maturity Date to be extended later than August 19, 1999. In July
1998, the Company and UA reached an agreement to settle the amount owed by means
of a $315,000 payment, the purchase by the Company of certain new simulation
equipment and other assets owned by UA, the offset of certain amounts and the
payment of the remaining amounts by August 19, 1999. At August 19, 1999, UA
still owed the Company $82,000 pursuant to the terms of this settlement
agreement. Furthermore, on September 1, 1999, the Company initiated binding
arbitration against UA with the American Arbitration Association (AAA). The TRA
among the Company, UA and the UA Venture requires that all disputes thereunder
be submitted to the AAA for binding arbitration in Phoenix, Arizona. The claim
alleges, among other things, breach of contract in connection with UA's failure
to make certain payments of liquidated damages due under the TRA on August 19,
1999, including the above $82,000. The Company's claim seeks payment of an
amount in excess of $5,000,000. UA has counterclaimed in this arbitration for
unspecified monetary damages in connection with certain breaches of contract
that it alleges against the Company (see Note 7).
F-24
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
8. Receivables from Affiliated Entities (continued)
During the fiscal years ended 1999, 1998 and 1997, the Company charged
approximately $319,000, $493,000 and $909,000, respectively, to the O&O Theatre
joint ventures. Such amounts have either been recognized as film rentals and
royalties ($224,000 in 1999, $390,000 in 1998 and $666,000 in 1997), or offset
against general and administrative expenses ($95,000 in 1999, $103,000 in 1998
and $243,000 in 1997) in the accompanying consolidated statements of operations.
Such amounts represent film rentals and royalties, and management and
administrative services provided by the Company to the O&O Theatre joint
ventures. The joint ventures owed the Company approximately $95,000 and $103,000
at March 31, 1999 and 1998, respectively (included in due from affiliated
entities), for such charges and for costs paid on behalf of the ventures.
At March 31, 1998, affiliates of certain directors owed the Company a combined
balance of $279,000 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. On July 8, 1998, the affiliates of the certain directors
indicated to the Company that they disputed their obligation to pay these sums.
Accordingly, the Company fully reserved for such amounts in its accompanying
consolidated balance sheet at March 31, 1998. 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 theatre system equipment
from the San Antonio attraction, which closed in September 1997, and to the
extent that there is a shortfall, to reimburse the Company accordingly.
9. Income Taxes
At March 31, 1999, the Company has net operating loss carryforwards for federal
and state income tax purposes of approximately $34,300,000 and $7,800,000,
respectively. The federal loss carryforwards expire through the year ending
2019. The state loss carryforwards expire through the year ending 2004. These
loss carryforwards can be used to offset future taxable income, if any. The
provision for income taxes for all years presented represents minimum state tax
liabilities.
F-25
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts utilized for income tax purposes. Significant
components of the Company's deferred tax assets as of March 31, 1999 and 1998,
are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------
<S> <C> <C>
Excess of book over tax depreciation $ 472 $ 498
Patent amortization 75 163
Amortization of film library 622 655
Allowance for bad debts 847 570
Other 986 535
Net operating loss carryforward 12,723 11,475
--------------------------------
15,725 13,896
Valuation allowance (15,725) (13,896)
--------------------------------
Total deferred taxes $ - $ -
================================
</TABLE>
10. Geographic Information and Significant Customers
The following table summarizes the Company's sources of revenues:
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
North America $ 1,173,000 $ 1,564,000 $ 6,767,000
International 6,854,000 8,850,000 10,944,000
-------------------------------------------------
Total revenues $ 8,027,000 $ 10,414,000 $ 17,711,000
==================================================
</TABLE>
During the fiscal years ended 1999 and 1998, the Company earned revenues of
$3,367,000 and $3,460,000, respectively, from significant customers (three
customers in 1999 and two customers in 1998). During the fiscal year ended 1997,
the Company earned revenues from a significant customer of $3,117,000. During
the fiscal years ended 1999, 1998 and 1997, the Company recognized domestic
revenues from UA of approximately $83,000, $100,000 and $5,405,000, respectively
(see Notes 7 and 8).
F-26
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies
The Company is obligated under various operating leases for its corporate
office, storage premises and equipment. Future net minimum rental payments under
these leases at March 31, 1999, are as follows:
<TABLE>
<S> <C>
2000 $ 441,000
2001 441,000
2002 436,000
2003 420,000
2004 105,000
-----------
$ 1,843,000
===========
</TABLE>
The corporate office lease provides for rent adjustments based on increases in
the Consumer Price Index. The Company has provided a letter of credit to its
landlord in the amount of $318,000 which permits the landlord to draw against
the letter of credit upon default by the Company (as defined) under the terms of
the lease. The letter of credit is secured by a cash deposit in the amount of
$318,000; such amount is included in other assets in the accompanying
consolidated balance sheet.
Total rental expense charged to operations for the years ended March 31, 1999,
1998 and 1997, was $417,000, $410,000 and $400,000, respectively.
Under the terms of a film production agreement, the Company has guaranteed, for
four years beginning in 1996, a minimum amount per year ($287,500) of proceeds
to the outside investors in the film project. If revenues, as defined, from the
distribution of the film are less than the required minimum amount, the Company
will contribute the difference to the outside investors. The Company's current
projections indicate that the revenues to be earned from the distribution of
this film over the remaining term of the agreement (fiscal 2000) will be
$402,000 less than the required minimum payments. The Company has accrued this
amount in the accompanying consolidated balance sheet at March 31, 1999.
The Company is obligated under various royalty agreements to pay royalties
(ranging from 1% to 3%) to various parties, generally based on the gross
receipts (as defined) from either the exploitation of the Showscan process (in
excess of certain amounts), the exploitation of Showscan feature-length motion
pictures, or other receipts.
F-27
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
On November 4, 1998, a customer filed suit against the Company alleging, among
other things, breach of contract, intentional misrepresentation and fraudulent
concealment in connection with the sale of a motion simulation attraction by the
Company to that customer. The suit seeks payment of $1,000,000 together with
other unspecified monetary damages as well as punitive damages. The Company
filed a cross-complaint against this customer alleging, among other things,
breach of contract in connection with the customer's refusal to pay for
equipment and services that the Company provided to the customer. Management of
the Company is vigorously contesting this matter and does not expect its
ultimate outcome to have a material adverse effect on the Company's results of
operations or financial position.
F-28
<PAGE>
Showscan Entertainment Inc.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
-----------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning Charged to Charged to Other Deductions - Balance at End
DESCRIPTION of Year Costs and Expenses Accounts - Describe Describe of Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended 1999:
Allowance for doubtful accounts $ 1,405,000 $ 153,000 $ - $ 203,000 (a) $ 1,355,000
============ ============ ================== ============== ============
Product warrant liability $ 91,000 $ 17,000 $ - $ 4,000 (b) $ 104,000
============ ============ ================== ============== ============
Year ended 1998:
Allowance for doubtful accounts $ 425,000 $ 1,249,000 $ - $ 269,000 (a) $ 1,405,000
============ ============ ================== =============== ============
Product warrant liability $ 180,000 $ - $ - $ 89,000 (c) $ 91,000
============ ============ ================== =============== ============
Year ended 1997:
Allowance for doubtful accounts $ 215,000 $ 270,000 $ - $ 60,000 (a) $ 425,000
============ ============ ================== =============== ============
Product warrant liability $ 182,000 $ 67,000 $ - $ 69,000 (a) $ 180,000
============ ============ ================== =============== ============
</TABLE>
(a) Represents write-off of uncollectible accounts receivable.
(b) Represents actual warranty expenditures.
(c) Represents actual warranty expenditures and a reduction in the liability.
F-29
<PAGE>
EXHIBIT 10.39
EXTENSION AND SECURITY AGREEMENT
--------------------------------
This EXTENSION AND SECURITY AGREEMENT (this "Agreement") is entered into as
---------
of September 1, 1999 by and between SHOWSCAN ENTERTAINMENT INC., a corporation
existing under the laws of the State of Delaware (the "Company") and BANCA DEL
-------
GOTTARDO, a corporation duly organized with limited liability and existing under
the laws of Switzerland, both in its individual capacity and in its capacity as
representative for the Noteholders (as defined below) ("Banca del Gottardo").
------------------
Recitals
--------
A. The Company and Banca del Gottardo are parties to that certain Note
Purchase, Paying and Conversion Agency Agreement, entered into effective as of
August 14, 1995, between the Company and Banca del Gottardo (as amended to date
and as further amended by this Agreement, the "Note Purchase Agreement").
-----------------------
Capitalized terms used herein without definition shall have the meanings
provided in the Note Purchase Agreement.
B. The current outstanding principal amount of the Notes is Five Million,
Six Hundred Ninety Thousand Dollars ($5,690,000).
C. The Noteholders have agreed, pursuant to that terms of this Agreement,
to extend the maturity date of the Notes to March 1, 2000.
Agreement
---------
NOW THEREFORE, in consideration of the premises and the mutual agreements
and covenants hereinafter contained, the parties hereto agree as follows:
1. The Company and Banca del Gottardo hereby agree that the date for
repayment of the principal amount of the Notes shall be extended from September
1, 1999 to March 1, 2000, with interest to continue to accrue on the Notes at
the rate provided in the Notes until March 1, 2000.
2. Banca del Gottardo hereby confirms its prior agreement with the
Company to accept at any time on or prior to the maturity date (which after
giving effect to paragraph 1 shall be March 1, 2000) as full satisfaction for
the Notes (a) a payment (the amount of such payment, the "Pay-Off Amount") equal
--------------
to the then outstanding principal amount of the Notes times sixty-seven and one-
half percent (67.5%) plus all accrued and unpaid interest, calculated from
September 1, 1998 to the date of such payment, on the full outstanding principal
amount of the Notes and (b) warrants (such warrants, the "New Warrants") for
------------
750,000 shares of common stock of the Company, par value $0.001 per share, at a
strike price of $0.20 per share which New Warrant shall be issued pro rata to
the Noteholders based on the outstanding principal amount of the Notes held by
each Noteholder immediately prior to such payment.
3. The Company and Banca del Gottardo also agrees that (a) to the extent
that the Company obtains any third party financing, not less than seventy-five
percent (75%) of the proceeds from such financing (up to the then Pay-Off
Amount) shall be applied by the Company to prepay the Notes and (b) the price to
be paid for any portion of the Notes which is to be
<PAGE>
prepaid pursuant to this paragraph 3 shall be an amount equal to such principal
amount times sixty-seven and one-half percent (67.5%) plus all accrued and
unpaid interest, calculated as of the date of such prepayment, on such principal
amount, with such prepayment to be shared pro rata by all Noteholders. If the
Notes are prepaid in full pursuant to this paragraph 3, then the Noteholders
shall also be issued the New Warrants in accordance with the provisions of
paragraph 2(b).
4. (a) In order to induce the Noteholders to extend the maturity date for
the Notes to March 1, 2000, the Company further agrees that if the Notes
are not prepaid in accordance with this Agreement on or prior to March 1,
2000, then as security for the due and punctual payment and performance of
all of the covenants and obligations of the Company under the Notes and the
Purchase Agreement, the Company hereby assigns and pledges to Banca del
Gottardo, for itself and for the ratable benefit of the Noteholders, and
hereby grants a security interest in favor of Banca del Gottardo, for
itself and for the ratable benefit of the Noteholders, in all of the
Company's right, title and interest in and to all of the following, whether
now or hereafter existing or in which the Company now has or hereafter
acquires an interest and wherever the same may be located (collectively,
the "New Collateral"): (i) all films, motion pictures and videos developed
--------------
(or in development), produced, distributed or obtained for distribution by
the Company (directly or indirectly) for release in any medium, whether now
known or hereafter devised (the "Films"), including the scenario,
-----
screenplay or script upon which they are based, at every stage of
development, whether preliminary, in process or in final form and whether
or not used in whole or in part in or as the basis of such Films; (ii) all
property rights related thereto, whether tangible or intangible or whether
now in existence or hereafter made or produced and whether or not in the
possession of the Company, including, without limitation, all copyrights,
rights under copyrights and copyright applications and all physical
properties relating to the Films, including, without limitation, films,
prints, negatives, positives and the like; (iii) all collateral, allied,
ancillary, subsidiary and merchandising rights therein, and all properties
and things of value pertaining thereto and all products and proceeds
thereof whether now in existence or hereafter made, acquired or produced;
and (iv) all proceeds and products of any and all of the foregoing and, to
the extent not otherwise included, all payments under insurance, or any
indemnity, warranty or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing.
(b) The Company and Banca del Gottardo specifically agree that the
security interest provided in this paragraph shall become effective as of
March 1, 2000 if, and only if, the Notes have not been satisfied in full on
or prior to such date. If the security interest provided in this paragraph
becomes effective, then the New Collateral shall become a part of the
Collateral under that certain Pledge/Security Agreement, made and entered
into effective September 1, 1995 (as amended to date, and as further
amended by this Agreement, the "Pledge Agreement"), by and among the
----------------
Company and Banca del Gottardo and all provisions of the Pledge Agreement,
including without limitation, all remedies thereunder shall apply to the
New Collateral as well as the Collateral.
5. The Company and Banca del Gottardo also agrees that (a) if the Company
receives any amount as the result of a collection by the Company pursuant to the
liquidated
2
<PAGE>
damages provisions contained in Section 3.2 of that certain Theater Rights
Agreement between the Company and United Artists Theater Circuit, Inc., not less
than the Pay-Off Percentage (as defined below) of the amount received from such
collection (up to the then Pay-Off Amount) shall be applied by the Company to
prepay the Notes and (b) the price to be paid for any portion of the Notes which
is to be prepaid pursuant to this paragraph 5 shall be an amount equal to such
principal amount times sixty-seven and one-half percent (67.5%) plus all accrued
and unpaid interest, calculated as of the date of such prepayment, on such
principal amount, with such prepayment to be shared pro rata by all Noteholders.
If the Notes are prepaid in full pursuant to this paragraph 5, then the
Noteholders shall also be issued the New Warrants in accordance with the
provisions of paragraph 2(b). For purposes of this paragraph 5, "Pay-Off
-------
Percentage" means (i) sixty percent (60%) times (ii) a percentage equal to one
- ----------
hundred percent (100%) minus the percentage of the current outstanding principal
amount of the Notes prepaid pursuant to paragraph 3. By way of example, if forty
percent (40%) of the principal amount of the Notes has been prepaid pursuant to
paragraph 3, then the Pay-Off Percentage shall be thirty-six percent (36%)
(sixty percent (60%) times sixty percent (60%) (one hundred percent (100%) minus
forty percent (40%))).
6. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
7. The terms of this Agreement shall be governed by Swiss law,
except that the terms of paragraph 4 of this Agreement shall be governed by the
laws of the State of California.
8. Except as specifically modified hereby, the provisions of the
Note Purchase Agreement and the Pledge Agreement shall remain in full force and
effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Extension and Security
Agreement as of the day and year first written above.
SHOWSCAN ENTERTAINMENT INC.
By: /s/ Dennis Pope
-------------------------------
Name: Dennis Pope
Title: President & CEO
BANCA DEL GOTTARDO, in its individual capacity and
as representative of the Noteholders
By: /s/ Fabio Testori
-------------------------------
Name: FABIO TESTORI
Title: Member of the Executive Board
By: /s/ Hans Gugolz
-------------------------------
Name: HANS GUGOLZ
Title: Member of Management
4
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-78236) pertaining to the 1992 Stock Option Plan of Showscan
Entertainment Inc. of our report dated October 22, 1999, with respect to the
consolidated financial statements and schedule of Showscan Entertainment Inc.
included in the Annual Report (Form 10-K) for the year ended March 31, 1999.
Ernst & Young LLP
Los Angeles, California
November 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 661
<SECURITIES> 0
<RECEIVABLES> 3,144
<ALLOWANCES> 1,185
<INVENTORY> 993
<CURRENT-ASSETS> 3,976
<PP&E> 3,584
<DEPRECIATION> 3,263
<TOTAL-ASSETS> 7,959
<CURRENT-LIABILITIES> 4,760
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> (2,490)
<TOTAL-LIABILITY-AND-EQUITY> 7,959
<SALES> 3,369
<TOTAL-REVENUES> 8,033
<CGS> 2,421
<TOTAL-COSTS> 3,495
<OTHER-EXPENSES> 6,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 778
<INCOME-PRETAX> (4,201)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,201)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,201)
<EPS-BASIC> (.74)
<EPS-DILUTED> (.74)
</TABLE>
