<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
---------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to __________
Commission file number 0-15939
SHOWSCAN ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3940004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3939 Landmark Street
Culver City, California 90232
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 558-0150
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
As of November 1, 1999, the Registrant had 5,642,058 shares of Common Stock,
$.001 par value, issued and outstanding.
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This report contains 22 consecutively numbered pages.
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SHOWSCAN ENTERTAINMENT INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
Condensed Consolidated Balance Sheets as of June 30, 1999
and March 31, 1999........................................................ 3
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 1999 and 1998....................................... 5
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 1999 and 1998....................................... 6
Notes to the Condensed Consolidated Financial Statements................... 8
Item 2. - Management's Discussion and Analysis of
- -------------------------------------------------
Financial Condition and Results of Operations.................... 11
---------------------------------------------
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 20
- ----------------------------------------
Signatures................................................................. 21
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements
- ------------------------------
SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Share Information)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------- ---------
(unaudited) (Note)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 347 $ 661
Accounts receivable (net of allowances) 988 1,676
Unbilled receivables on uncompleted
film and equipment contracts 316 123
Due from affiliated entities, net of allowances (Note 7) 175 284
Equipment sales inventory 1,091 993
Prepaid expenses and other current assets 457 239
------ ------
Total current assets 3,374 3,976
Film library (net of amortization) 2,578 2,758
Patents and other intellectual properties (net of
amortization) 358 467
Other assets, including equipment and leasehold
improvements, net of accumulated depreciation and
amortization 690 758
------ ------
Total assets $7,000 $7,959
====== ======
</TABLE>
Note: The balance sheet at March 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
(Continued)
3
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SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Balance Sheets (continued)
(Dollars in Thousands Except Share Information)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------- ----------
(unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
- ----------------------------------------
Current liabilities: $ 757 $ 555
Accounts payable
Customer advances on uncompleted film and 2,168 1,467
equipment contracts 2,552 2,477
Accrued expenses and other current liabilities 5,690 5,690
8% convertible notes (Note 5) - 260
11% note payable (Note 4) -------- --------
11,167 10,449
Total current liabilities -------- --------
Stockholders' deficiency:
Series A Convertible Preferred Stock, $.001 par value;
150,000 shares authorized, no shares issued and
outstanding - -
Series C Convertible Preferred Stock, $.001 par value;
100,000 shares authorized; 49,000 shares issued and
outstanding - -
Common stock, $.001 par value; 20,000,000 shares
authorized; 5,642,058 shares issued and outstanding 6 6
Additional paid-in capital 42,567 42,567
Accumulated deficit (46,740) (45,063)
-------- --------
Total stockholders' deficiency (4,167) (2,490)
-------- --------
Total liabilities and stockholders' deficiency $ 7,000 $ 7,959
======== ========
</TABLE>
Note: The balance sheet at March 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
4
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SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Information)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
--------------------------
(Unaudited)
<S> <C> <C>
Revenues:
Film licensing and production services $ 527 $ 626
Equipment sales and related services 20 1,136
---------- --------
547 1,762
Costs of revenues 395 1,280
---------- --------
Gross profit 152 482
Costs and expenses:
General and administrative expenses 1,522 1,270
Depreciation and amortization 143 170
---------- --------
1,665 1,440
Operating loss ---------- --------
(1,513) (958)
Other income (expense):
Equity in net operations of O&O Theatres (9) (58)
Other income, including interest 14 18
Interest and other expenses (169) (214)
---------- --------
(164) (254)
---------- --------
Net loss $ (1,677) $ (1,212)
========== ========
Basic and diluted net loss per common
share (Note 6) $ (.30) $ (.21)
========== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
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SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
----------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,677) $ (1,212)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 143 170
Amortization of film library 209 255
Equity in net operations of O&O Theatres 9 58
Accrued interest on debt 114 152
Provision for doubtful accounts 330 30
Changes in operating assets and liabilities:
Accounts receivable 467 (170)
Equipment sales inventory (98) (147)
Unbilled receivables on uncompleted film and
equipment contracts (193) (867)
Prepaid expenses (173) 168
Investment in and advances to O&O Theatres - (43)
Accounts payable, accrued expenses and other
current liabilities 154 (268)
Customer advances on uncompleted equipment
contracts 701 1,510
-------- --------
Net cash used in operating activities
$ (14) $ (364)
-------- --------
Cash flows from investing activities:
Additions to film library (29) (6)
Other assets (11) 73
-------- --------
Net cash (used in) provided by investing activities $ (40) $ 67
-------- --------
</TABLE>
(Continued)
6
<PAGE>
SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
-----------------------------
(Unaudited)
<S> <C> <C>
Balance forwarded $ (54) $ (297)
---------- ---------
Cash flows from financing activities:
Payments on 11% note payable (260) -
---------- ---------
Net cash used in financing activities (260) -
---------- ---------
Net decrease in cash and cash equivalents (314) (297)
========== =========
Cash and cash equivalents, beginning of period 661 2,492
========== =========
Cash and cash equivalents, end of period $ 347 $ 2,195
========== =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
7
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SHOWSCAN ENTERTAINMENT INC.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1--Introduction:
- ---------------------
The accompanying unaudited condensed consolidated financial statements of
Showscan Entertainment Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected either for any other
quarter in the fiscal year ending March 31, 2000 or for the entire fiscal year
ending March 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended March 31, 1999.
Note 2--Going Concern Matters:
- ------------------------------
The Company's cash declined during Fiscal 1999 and continues to decline
subsequent to June 30, 1999. The Company expects to experience further declining
balances during the remainder of Fiscal 2000. Management believes that its
existing cash balances, combined with anticipated cash flow from operations, may
not be sufficient to meet its cash requirements through the end of Fiscal 2000.
If the Company is unable to achieve its projected cash flow from operations, the
Company will experience significant reductions in cash which could result in the
Company not being able to meet its operating needs. The Company is actively
exploring possible financing, however, recent 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 affect
on the Company's future operations and/or require it to seek a negotiated or
bankruptcy enforced reorganization with its creditors.
Note 3--Owned and Operated Theatres ("O&O Theatres"):
- -----------------------------------------------------
The Company retains an ownership interest in selected Showscan motion
simulation Theatre Attractions ("Showscan Attractions") through various joint
venture arrangements. The Company currently operates and/or has an ownership
interest in Showscan Attractions at Universal CityWalk in Universal City,
California (opened in November 1993) and Osaka, Japan (opened in August 1995)
(collectively, the "O&O Theatres"). Generally, in each of these arrangements,
the Company receives reimbursement for direct expenses, a percentage of each
theatre's cash flow (equal to its ownership
8
<PAGE>
percentage), and receives separately annual film licensing revenues and
management fees (if applicable). The Company accounts for its investment in the
O&O Theatres under the equity method of accounting.
Note 4--11% Promissory Note:
- ----------------------------
On November 1, 1997, the Company completed a private placement of a
$1,000,000 promissory note through an unaffiliated third party. The note, which
was originally due on November 15, 1998, was amended on November 10, 1998. The
note bore interest at a rate of 11% per annum. Principal and interest were paid
in full in April 1999, pursuant to the November 10, 1998 amendment.
Note 5--8% Convertible Notes:
- -----------------------------
On September 1, 1995, the Company completed a private placement of
$7,000,000 in secured convertible notes ("8% Convertible Notes") with an
unaffiliated third party. The 8% Convertible Notes were to mature on September
1, 1999 and bear interest at 8% per annum which is payable semi-annually and are
convertible at the option of the holder into shares of the Company's common
stock ("Common Stock") at a conversion price of $5.75 per share. Through June
30, 1999, $1,310,000 of such notes had been converted into 227,819 shares of
Common Stock leaving an outstanding balance of $5,690,000. The notes are secured
by substantially all of the assets of the Company, although the security
excludes the Company's film library and the capital stock of its subsidiaries,
which includes its O&O Theatres.
Effective September 1,1999, the Company entered into an Extension and
Security Agreement with the holders of its outstanding 8% Convertible Notes due
September 1, 1999, providing for the following: (1) an extension of the maturity
date from September 1, 1999 to March 1, 2000, with interest to continue to
accrue at 8% per annum, (2) a prepayment provision whereby the Company can at
any time, prior to March 1, 2000, pay off the notes at 67.5% of their carrying
value (such amount currently equaling $3,840,750) plus all accrued and unpaid
interest from September 1, 1998. In connection with any such future prepayment,
the Company has agreed to issue warrants to purchase 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.
("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
instituted binding arbitration proceedings against UATC seeking payment of an
amount in excess of $5,000,000, and UATC has counterclaimed in the arbitration
for unspecified damages in connection with certain contract breaches it alleges
against the Company (see Note 7).
9
<PAGE>
Note 6--Loss per common share:
- ------------------------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128), effective with its March 31, 1998 fiscal
year end. SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) and supersedes APB Opinion No. 15, "Earnings Per Share"
(APB No. 15). SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS. Basic EPS excludes the dilutive effects, if any, of
common stock equivalents, and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to
APB No. 15, with certain modifications. SFAS No. 128 also required dual
presentation of basic EPS and diluted EPS on the face of the income statement
for all periods presented. All earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to the SFAS No. 128
requirements.
Per share information has been determined by using 5,642,058 weighted
average shares outstanding for the three-months ended June 30, 1999 and 1998.
Note 7--Receivables from affiliated entities:
- ---------------------------------------------
In August 1994, the Company and UATC agreed to be partners in a venture
called Showscan/United Artists Theatre Joint Venture ("UA Venture"). Pursuant to
a Theater Rights Agreement, as amended (TRA), UATC 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
theatres in or adjacent to existing or to-be-built UATC theatre multiplexes. As
of the August 1999 date, UATC had failed to purchase and/or install 16 of the
required sites.
On September 1, 1999, the Company initiated binding arbitration against
UATC with the American Arbitration Association ("AAA"). The TRA among the
Company, UATC and the UA Venture requires that all disputes thereunder be
submitted to AAA for binding arbitration in Phoenix, Arizona. 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.
At June 30, 1999, affiliates of certain directors owed the Company a
combined balance of $175,000 related to advances made by the Company on their
behalf to several O&O Theatres to satisfy capital calls to cover operating
expenses at such theatres. In July, 1998, the affiliates indicated to the
Company that they disputed their obligation to pay these sums; accordingly, the
Company fully reserved for such amounts in its March 31, 1998 consolidated
balance sheet. During 1999, the Company and the affiliates entered into an
agreement whereby the Company can retain the affiliates respective proceeds from
the sale of the theatre system equipment from the San Antonio attraction, which
closed in September 1997, and to the extent there is a shortfall, to reimburse
the Company accordingly.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Overview:
- ---------
Showscan Entertainment Inc. (the "Company") is a provider of movie-based
motion simulation theatre attractions ("Showscan Attractions") to the expanding
out-of-home entertainment market. The Company's business includes: (i) licensing
and distributing the films in its library to all operators of simulation
attractions (including those installed by the Company and those previously
installed by competitors of the Company); (ii) licensing the proprietary
technologies necessary to produce and exhibit Showscan films; (iii) selling and
installing Showscan Attractions including the equipment necessary for each
(including motion bases, projectors, screens, sound systems, synchronization and
show control, and theatre design packages); (iv) producing films using the
Showscan process; and (v) to a limited extent, establishing Showscan Attractions
in which the Company has an economic interest ("O&O Theatres"). The Company is
also committed to the continued recognition of the Showscan(R) brand name
worldwide.
The principal sources of the Company's revenues are the licensing of the
Showscan film library and technologies, the sale and installation of projectors,
screens, sound systems and other equipment used to exhibit Showscan films, and
the sale of motion bases and other equipment used in most Showscan Attractions.
The Company currently derives most of its revenues from export sales (60-85% for
each of the three years ended March 31, 1999 and the three-month period ended
June 30, 1999). The Company does not believe that inflation has had a material
impact on the Company's net revenues or on its results of operations for the
three most recent fiscal years and the three-month period ended June 30, 1999.
Comparison of the three months ended June 30, 1999 and 1998:
- ------------------------------------------------------------
Revenues for the three-month period ended June 30, 1999 (the "Three Month
Period") decreased by $1,215,000 or 69% from revenues for the three-month period
ended June 30, 1998 primarily due to the lack of equipment sales and related
services during the current period.
Film licensing and production service revenues in the Three Month Period
decreased by $99,000 or 16% to $527,000 from $626,000 in the three-month period
ended June 30, 1998. The decrease was primarily due to (i) renegotiation of
certain film licensing contracts, and (ii) the closure of one of the O&O
Theatres shortly after the prior year period.
Revenues from equipment sales and related services for the Three Month
Period decreased to $20,000. The decrease is due to the decrease in the number
of Showscan Attractions shipped during the Three Month Period as compared to the
corresponding prior year three-month period. No Showscan Attractions were
shipped in the Three Month Period as compared to two units shipped in the three-
month period ended June 30, 1998.
11
<PAGE>
The Company recognizes equipment sales under the percentage-of-completion
method of accounting, generally measured by the percentage that the labor hours
incurred to date bears to the estimated total labor hours of each contract. This
results in a disparity in the comparison of equipment sales revenues over
different time periods, as the Company records revenues under this method rather
than on the date that the sales agreement is signed. The actual signing of a
Showscan Attraction sale precedes its delivery and installation by an average of
five to six months. Accordingly, the recognition of revenue for equipment sales
during the current and future quarters is affected by (i) the timing of such
sales; (ii) the schedule of the build-out of the Showscan Attractions; and (iii)
the shipment, delivery and installation of the equipment and related services.
Costs of revenues were 28% of revenues in the Three Month Period as
compared to 27% in the three-month period ended June 30, 1998.
Amortization of the film library for the Three Month Period and the three-
month period ended June 30, 1998 was $209,000 and $255,000, respectively. The
Company reviews film library estimated revenues on a quarterly basis (based on
the then current market conditions) and, where applicable, unamortized film
costs are written down to estimated net realizable value.
General and Administrative expenses increased $252,000 or 20% in the Three
Month Period from the three-month period ended June 30, 1998. The increase is
attributed to an increase to the allowance for doubtful accounts to reflect the
uncertainty of collection from one of the Company's Asian customers ($300,000).
The loss on investment in O&O Theatres decreased to $9,000 in the Three
Month Period from $58,000 in the three-month period ended June 30, 1998
primarily as a result of the Company's closing of the Trocadero Showscan
Attraction in London (closed on July 2, 1998). 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 inherently increasing the operating expenses
at the specific O&O Theatres.
The Company's net loss increased in the Three Month Period to $1,677,000
from $1,212,000 in the three-month period ended June 30, 1998 primarily due to
(i) the lack of equipment sales and (ii) the increase to the Company's reserve
for allowance for doubtful accounts included in General and Administrative
expenses.
Liquidity and Capital Resources:
- -------------------------------
At June 30, 1999, the Company's working capital was a negative $7.8
million. The $1.3 million decrease in working capital from March 31, 1999 was
primarily due to the operating loss of the Company in the Three Month Period.
Cash and cash equivalents at June 30, 1999 decreased by $314,000 from March
31, 1999, which was the result of $54,000 used in operating activities and
investing activities, and the $260,000 used in financing activities.
12
<PAGE>
Net cash used in operating and investing activities was minimal during the
period. Net cash used in financing activities was primarily due to the final
payment of $260,000 on the 11% note payable.
As the Company derives 60-85% of its business from export sales, its
liquidity may be adversely affected by changes in worldwide economic or
political conditions. Such factors as changes in foreign currency exchange rates
(which can significantly affect the affordability of the Company's products and
services), trade protection measures, and policies with respect to currency and
fiscal controls may negatively affect liquidity. The current Asian economic
situation has caused the re-negotiation of certain film licensing agreements and
the delay of certain projects.]
The Company's cash declined during Fiscal 1999 and continues to decline
subsequent to June 30, 1999. The Company expects to experience further declining
balances during the remainder of Fiscal 2000. Management believes that its
existing cash balances, combined with anticipated cash flow from operations, may
not be sufficient to meet its cash requirements through the end of Fiscal 2000.
If the Company is unable to achieve its projected cash flow from operations, the
Company will experience significant reductions in cash which could result in the
Company not being able to meet its operating needs. The Company is actively
exploring possible financing, however, recent 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 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:
- ------------------------
As of June 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
With the exception of the historical information, the matters discussed
above include forward-looking statements that involve risks and uncertainties.
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
13
<PAGE>
by the Company under its existing purchase contracts and the ability to obtain
new contracts, the success of the Company's owned and operating strategy, the
ability of the Company to identify and successfully negotiate arrangements with
joint venture and other strategic partners, the success of the Company's film
software, the effects of competition, general economic conditions and acts of
God and other events outside the control of the Company.
Factors That May Affect Future Results
Portions of this report on Form 10-Q (this "Report") may contain "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. The reader is cautioned that all forward-looking statements
are necessarily speculative and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements. The discussion below, together with portions
of the discussion elsewhere in this Report and in the Company's other reports on
file with the Securities and Exchange Commission, highlight some of the more
important risks identified by the management of the Company but should not be
assumed to be the only things that could affect future performance.
History of Operating Losses
- ---------------------------
For the fiscal years ending March 31, 1999, 1998 and 1997, the Company had
net losses of $4.2 million, $8.5 million, and $3.9 million, respectively. At
June 30, 1999, the Company had an accumulated deficit of $47 million. This
history of losses has had a negative impact on the Company's stock price and
will adversely effect the Company's ability to carry out its business strategy,
increase stockholder value, and to obtain financing in the future.
Capital Needs; Dilution; Risk of Foreclosure
- --------------------------------------------
Management of the Company has adopted a business strategy that includes
substantial investments in the expansion and marketing of its film library among
other things. This strategy carries with it a number of risks, including a level
of operating expenses and capital needs that cannot be adequately covered by the
Company's revenues and must be financed by funds obtained by raising additional
capital. 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
14
<PAGE>
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 the $5.7 million due on March 1, 2000. The Company is seeking
replacement financing but does not presently have any arranged. There can be no
assurance that the Company will be able to find new financing or that it will be
able to negotiate another extension with the current lender. If the Company is
unable to refinance or extend the existing indebtedness, then the holders of
that debt may seek to foreclose on their collateral which constitutes virtually
all of the assets of the Company. Such an action could force the Company to seek
bankruptcy protection.
Period to Period Fluctuations
- -----------------------------
The Company has experienced quarterly fluctuations in operating results and
anticipates that these fluctuations will continue in future periods. Operating
results and cash flow can fluctuate substantially from quarter to quarter and
periodically as a result of the timing of theatre system deliveries, contract
signings, the mix of theatre systems shipped, the completion of custom film
contracts, the amount of revenues from film licensing agreements, the timing of
sales of Showscan Attractions, the timing of delivery and installation of such
sales (pursuant to percentage of completion accounting) and any delays therein
caused by permitting or construction delays at the customer's site, the size,
type and configuration of the attractions sold, the timing of film rental
payments from existing attractions and the performance of those attractions that
pay film rental based on a percentage of box office and the timing of sales and
marketing efforts and related expenditures. In particular, fluctuations in
theatre system sales and deliveries from quarter to quarter can materially
affect quarterly and periodic operating results, and theatre system contract
signings can materially affect quarterly or periodic cash flow. Accordingly, the
Company's revenues and earnings in any particular period may not be indicative
of the results for any future period. The seasonal fluctuations also cause
gyrations in the Company's stock price.
The Company's performance depends primarily upon the number of motion
simulation attractions that it can sell and install. The Company's results have
followed a seasonal pattern, with revenues tending to be stronger in the second
and fourth fiscal quarters, reflecting the buying patterns of the Company's
customers for new motion simulation attractions.
New Product Development
- -----------------------
The Company operates in a technology driven segment of the entertainment
business. As such, the Company must continually improve its products to increase
their entertainment value while also facing pressure to continually reduce the
price of its products to respond to competitive pressures. Since several of the
Company's competitors have significantly more capital than the Company, the
Company has had to rely more on its suppliers and other third-parties to improve
the Company's existing products and to develop new ones. The inability of the
Company to develop new products and to respond to technological developments of
its competitors could have a materially adverse effect on the Company's
business, operations and financial condition.
15
<PAGE>
International Operations
- ------------------------
A significant portion of the Company's sales and film licensing are made to
customers located outside of the United States, primarily in the Far East,
Europe, Middle East and Australasia. During the fiscal years ended 1999, 1998,
1997, 85%, 85%, and 62% of the Company's revenues, respectively, were derived
from sales outside the United States. International operations and sales of the
Company may be subject to political and economic risks, including political
instability, currency controls, exchange rate fluctuations (which, in the event
of a decrease in value of foreign currency to the dollar, can significantly
affect the affordability of the Company's products overseas), changes in
import/export regulations, tariff and freight rates, longer accounts receivable
collection patterns, changes in regional or worldwide economic or political
conditions and natural disasters. The Company typically denominates the prices
of its films and equipment in United States Dollars. As a result of the recent
devaluation of a number of Asian countries' currencies relative to the Dollar,
the price of the Company's products to prospective buyers in such countries has
increased significantly. This effective price increase could adversely affect
the Company's future sales in the region and its ability to continue to
negotiate and receive its current levels of film rental from existing sites in
the region. In addition, various forms of protectionist trade legislation have
been proposed in the United States and certain other countries. Any resulting
changes in current tariff structures or other trade and monetary policies could
adversely affect the Company's international operations. Political and economic
factors have been identified by the Company with respect to certain of the
markets in which it competes. There can be no assurance that these factors will
not result in customers of the Company defaulting on payments due to it, or in
the reduction of potential purchases of the Company's products. The Company has
not engaged in any currency hedging programs.
Intellectual Property
- ---------------------
The Company has several United States patents on various processes and
elements related to film projection and motion simulation. The most important of
these patents expire in October 2001. Though the Company's patents have never
been challenged and the Company believes that they are valid, third parties
could still challenge the patents and a court could determine that one or more
of them are invalid. Declarations of invalidity, particularly of the Company's
key patents, could adversely affect the marketability of the Company's products
and services. In addition, the Company always faces the risk that new
technologies could be discovered that are superior to the Company's patents.
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.
16
<PAGE>
Additionally, the out-of-home entertainment industry in general is
undergoing significant changes, primarily due to technological developments as
well as changing consumer tastes. Numerous companies are developing and are
expected to develop new entertainment products or concepts for the out-of-home
entertainment industry in response to these developments that are or may be
directly competitive with existing products. There is severe competition for
financial, creative and technological resources in the industry and there can be
no assurance that existing products will continue to compete effectively or that
products under development will ever be competitive. Further, the commercial
success of products is ultimately dependent upon audience reaction. Audience
reaction will to a large extent be influenced by the audience's perception of
how the Company's products compare with other available entertainment options
out of the home. There can be no assurance that new developments in out-of-home
entertainment will not result in changes in consumer tastes that will make the
Company's products less competitive.
Volatility of Stock Price
- -------------------------
The Company's stock price has been, and could continue to be, highly
volatile. During the 12 months prior to November 1, 1999, the Company's closing
market price has ranged from a low of $0.04 per share to a high of $0.42 per
share. Future announcements concerning the Company or its competitors, quarterly
variations in operating results, introduction of new products or changes in
product pricing policies by the Company or its competitors, the acquisition or
loss of significant customers, or changes in earnings estimates by analysts,
among other factors, may affect or be perceived to affect the Company's
operations and could cause the market price of the Company's shares to fluctuate
substantially. In addition, stock markets have experienced extreme price and
volume volatility in recent years. This volatility has had a substantial effect
on the market prices of securities of many smaller public companies for reasons
frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Company's shares.
Ability to Retain Key Personnel
- -------------------------------
Over the past four years, the Company has reduced its number of employees
by approximately 50% to 30. The pendency of the merger, the financial losses,
the potential for additional staff reductions and a tight job market have
resulted in some departures by key personnel. While none of the departures have
had a significant effect upon the Company's operations, there can be no
assurance that there will not be additional departures. In addition, the Company
may experience additional departures at its Board and management level which
could have a materially adverse effect on the Company's operations.
Environmental Matters and Other Governmental Regulations
- --------------------------------------------------------
Under various Federal, state and local environmental laws and regulations,
a current or previous owner or occupant of real property may become liable for
the costs of removal or remediation of hazardous substances at such real
property. Such laws and regulations often impose liability without regard to
fault. The Company could be held liable for the costs of remedial actions with
respect to hazardous substances at its corporate headquarters under the terms of
the governing
17
<PAGE>
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
respective proposals with regard thereto. It is anticipated that Showscan's film
license revenues from Imagine Japan will be significantly less than the $1.1
million received in Fiscal 1999. 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.
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.
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
18
<PAGE>
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.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
9a) Exhibits
--------
The exhibit listed below is filed as part of this Report.
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Culver City,
State of California on the 7th day of December, 1999.
Showscan Entertainment Inc.
---------------------------
(Registrant)
By /s/ DENNIS POPE
---------------
Dennis Pope
President - Chief Executive Officer
(Authorized Officer and Principal
Executive Officer)
21
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page Number
- -------------- ----------- -----------
27.1 Financial Data Schedule 23
22
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<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
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