<PAGE>
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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 December 31, 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 February 11, 2000, 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 December 31, 1999
and March 31, 1999 3
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended December 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 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 1. Legal Proceedings 20
- -------------------------
Item 6. Exhibits and Reports on Form 8-K 20
- ----------------------------------------
Signatures 21
Exhibit Index 22
</TABLE>
2
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PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements
- ------------------------------
SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Share Information)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
---------------- ----------------
(Unaudited) (Note)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 362 $ 661
Accounts receivable (net of allowances) 1,134 1,676
Unbilled receivables on uncompleted
film and equipment contracts 289 123
Due from affiliated entities, net of allowances (Note 7) 236 284
Equipment sales inventory 1,043 993
Prepaid expenses and other current assets 244 239
------ ------
Total current assets 3,308 3,976
Film library (net of amortization) 2,154 2,758
Patents and other intellectual properties (net of
amortization) 141 467
Other assets, including equipment and leasehold
improvements, net of accumulated depreciation and
amortization 594 758
------ ------
Total assets $6,197 $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>
December 31, March 31,
1999 1999
---------------- -------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
- ----------------------------------------------
Current liabilities:
Accounts payable $ 910 $ 555
Customer advances on uncompleted film and
equipment contracts 1,873 1,467
Accrued expenses and other current liabilities 4,268 2,477
11% note payable (Note 4) - 260
8% convertible notes, due June 30, 2000 (Note 5) 5,690 5,690
-------- --------
Total current liabilities 12,741 10,449
-------- --------
Stockholders' deficit:
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 (49,117) (45,063)
-------- --------
Total stockholders' deficit (6,544) (2,490)
-------- --------
Total liabilities and stockholders' deficit $ 6,197 $ 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 Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
------------------------------------ ---------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Film licensing and production services $ 915 $ 767 $ 2,030 $ 2,317
Equipment sales and related services 1,327 569 2,663 3,450
------ ------- ------- -------
2,242 1,336 4,693 5,767
Costs of revenues 1,497 906 3,366 3,516
------ ------- ------- -------
Gross profit 745 430 1,327 2,251
Costs and expenses:
General and administrative expenses 1,376 1,425 4,498 4,009
Depreciation and amortization 143 166 429 432
------ ------- ------- -------
1,519 1,591 4,927 4,441
------ ------- ------- -------
Operating loss (774) (1,161) (3,600) (2,190)
Other income (expense):
Equity in net operations of O&O Theatres (15) (15) (46) (149)
Other income, including interest 4 5 23 62
Interest and other expenses (114) (194) (431) (624)
------ ------- ------- -------
(125) (204) (454) (711)
------ ------- ------- -------
Net loss $ (899) $(1,365) $(4,054) $(2,901)
====== ======= ======= =======
Basic and diluted net loss per common
share (Note 6) $ (.16) $ (.24) $ (.72) $ (.51)
====== ======= ======= =======
</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>
Nine Months Ended
December 31,
1999 1998
-------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,054) $(2,901)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 429 432
Amortization of film library 684 763
Amortization of debt issue costs - 193
Equity in net operations of O&O theatres 46 149
Accrued interest on debt 342 342
Provision for doubtful accounts 690 90
Changes in operating assets and liabilities:
Accounts receivable and due from affiliates (100) 519
Equipment sales inventory (50) (240)
Unbilled receivables on uncompleted film and
equipment contracts (166) (795)
Prepaid expenses (5) (328)
Investment in and advances to O&O theatres - (203)
Accounts payable, accrued expenses and other
current liabilities 1,804 (167)
Customer advances on uncompleted equipment
contracts 406 1,091
------- -------
Net cash provided by (used in) operating activities $ 26 $(1,055)
------- -------
Cash flows from investing activities:
Purchases of equipment and leasehold
improvements (17) (7)
Additions to film library (48) (105)
------- -------
Net cash used in investing activities $ (65) $ (112)
------- -------
</TABLE>
(Continued)
6
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SHOWSCAN ENTERTAINMENT INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1999 1998
---------------------------------
(Unaudited)
<S> <C> <C>
Balance forwarded $ (39) $(1,167)
----- -------
Cash flows from financing activities:
11% note payable (260) (290)
----- -------
Net cash used in financing activities (260) (290)
----- -------
Net decrease in cash and cash equivalents (299) (1,457)
Cash and cash equivalents, beginning of period 661 2,492
----- -------
Cash and cash equivalents, end of period $ 362 $ 1,035
===== =======
Supplemental disclosures of cash flow information:
Interest paid $ - $ 338
===== =======
Income taxes paid $ - $ -
===== =======
</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 and the nine-month period ended
December 31, 1999 are not necessarily indicative of the results that may be
expected either for the last fiscal 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 the nine months ended December 31, 1999
and continues to decline subsequent to December 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 significant
reductions in cash which could result in the Company not being able to meet its
operating needs. The Company is exploring possible financing, however, recent
operating losses, the Company's declining cash balances, the Company's
historical stock performance, and a general decrease in investor interest in the
Company's industry, make it difficult for the Company to attract financing on
terms that are deemed to be favorable to the Company. In the event that cash
flow from operations is less than that anticipated and the Company is unable to
secure additional financing, in order to preserve cash, the Company would be
required to reduce expenditures for new films and effect further reductions in
its corporate infrastructure, either of which could have a material adverse
effect on the Company's future operations and/or require it to seek a negotiated
or bankruptcy enforced reorganization with its creditors.
Note 3--Owned and Operated Theatres ("O&O Theatres"):
- ----------------------------------------------------
The Company retains an ownership interest in selected Showscan motion
simulation Theatre Attractions ("Showscan Attractions") through various joint
venture arrangements. The Company currently operates and/or has an ownership
interest in Showscan Attractions at Universal CityWalk in Universal City,
California (opened in November 1993) and Osaka, Japan (opened in August 1995)
(collectively, the O&O Theatres). Generally, in each of these arrangements, the
Company receives reimbursements for direct expenses, a percentage of each
theatre's cash flow (equal to its ownership percentage), and receives separately
annual film licensing revenues and management fees (if applicable). The Company
accounts for its investment in the O&O Theatres under the equity method of
accounting.
8
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Note 4--11% Promissory Note:
- ----------------------------
On November 1, 1997, the Company completed a private placement of a
$1,000,000 promissory note through an unaffiliated third party. The note which
was originally due on November 15, 1998, was amended on November 10, 1998. The
note bore interest at a rate of 11% per annum. Principal and interest were paid
in full in April, 1999, pursuant to the November 10, 1998 amendment.
Note 5--8% Convertible Notes:
- -----------------------------
On September 1, 1995, the Company completed a private placement of
$7,000,000 in secured convertible notes ("8% Convertible Notes") through an
unaffiliated third party. The 8% Convertible Notes matured on September 1, 1999
and bear interest at 8% per annum which is payable semi-annually and are
convertible at the option of the holder into shares of the Company's common
stock ("Common Stock") at a conversion price of $5.75 per share. Through
December 31, 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, together
with accrued, but unpaid, interest since September 1, 1998. 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.
Effective February 1, 2000, the Company amended the Extension and Security
Agreement to extend the maturity date to June 30, 2000. 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 June 30, 2000, then, on such date, the noteholders will receive as
additional collateral a security interest in the Company's film library.
Additionally, the Company agreed that to the extent it obtains any third-party
financing, not less than 75% of such proceeds shall be applied by the Company to
prepay the notes at the 67.5% discounted rate described above, plus all accrued
and unpaid interest on such prepaid amount. The Company further agreed that if
it receives any amounts pursuant to the liquidated damages provision contained
in that certain Theater Rights Agreement between the Company and United Artists
Theatre Circuit, Inc. (UATC), subject to certain adjustments, then the Company
will use 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 breeches it alleges against the Company (see Note 7). The
arbitration hearings are presently set for April 24-28, 2000.
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
9
<PAGE>
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 all periods presented.
Note 7--Receivables from affiliated entities:
- ---------------------------------------------
In August, 1994, the Company and UATC entered into a Theatre Rights
Agreement ("TRA"). Pursuant to the TRA, as amended, UATC agreed to purchase and
install (directly or pursuant to a joint venture) at least twenty-four (24)
motion simulation attraction theatres in or adjacent to existing or to-be-built
UATC theatre multiplexes. As of the August 1999 date, UATC had failed to
purchase and/or install 16 of the required sites.
On September 1, 1999 the Company initiated binding arbitration against UATC
with the American Arbitration Association (AAA). The TRA among the Company,
UATC and UA Venture requires that all disputes thereunder be submitted to the
AAA for binding arbitration in Phoenix, Arizona. The suit alleges, among other
things, breach of contract in connection with UATC's failure to make certain
payments of liquidated damages due under the TRA on August 19, 1999. The suit
seeks payment of an amount in excess of $5,000,000. UATC has counterclaimed in
this arbitration for unspecified monetary damages in connection with certain
breaches of contract that it alleges against the Company. The arbitration
hearings are presently set for April 24-28, 2000.
At December 31, 1999, affiliates of certain directors owed the Company a
combined balance of $175,000 related to advances made by the Company on their
behalf to several O&O Theatres to satisfy capital calls to cover operating
expenses at such theatres and certain other administrative costs. In July,
1998, the affiliates indicated to the Company that they disputed their
obligations to pay the then outstanding amounts due; accordingly, the Company
fully reserved for such amount in its March 31, 1998 consolidated balance sheet.
During 1999, the Company and the affiliates entered into an agreement whereby
the Company will retain the affiliates respective proceeds from the sale of the
theater system equipment from the San Antonio attraction, which closed in
September 1997, and to the extent there is a shortfall, to reimburse the Company
accordingly.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Overview:
- ---------
Showscan Entertainment Inc. (the "Company") is a leading provider of movie-
based motion simulation theatre attractions ("Showscan Attractions") to the 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 and specialty theatres 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 nine-month period ended
December 31, 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 nine-month period ended December
31, 1999.
Comparison of the nine months ended December 31, 1999 and 1998:
- ---------------------------------------------------------------
Revenues for the nine-month period ended December 31, 1999 (the "Nine Month
Period") decreased by $1,074,000 or 19% to $4,693,000 from revenues of
$5,767,000 for the nine-month period ended December 31, 1998.
Film licensing and production service revenues in the Nine Month Period
decreased by $287,000 or 12% to $2,030,000 from $2,317,000 in the nine-month
period ended December 31, 1998. The decrease was primarily due to the closure of
the UATC "Starport" entertainment centers (see "Dependence on Major Customers"),
and the renegotiation of a North American film licensing contract due to
economic conditions within the customer's industry.
Revenues from equipment sales and related services for the Nine Month
Period decreased $787,000 or 23% to $2,663,000 from $3,450,000 in the nine-month
period ended December 31, 1998. The decrease is due to the decrease in the
number of Showscan Attractions shipped during the Nine Month Period as compared
to the corresponding prior year nine-month period. Three Showscan Attractions
were shipped in the Nine Month Period as compared to four units shipped in the
nine-month period ended December 31, 1998.
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
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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 72% of revenues in the Nine Month Period as compared
to 61% in the nine-month period ended December 31, 1998. Equipment cost of
sales to total equipment sales increased to 89% in the Nine Month Period from
65% in the nine-month period ended December 31, 1998. Equipment sales in the
Nine Month Period were relocation units which generally have lower sales prices
and reduced profit margins. Film licensing cost of sales to total film
licensing sales was 50% in the Nine Month Period as compared to 56% in the nine-
month period ended December 31, 1998.
Amortization of the film library for the Nine Month Period and the nine-
month period ended December 31, 1998 was $684,000 and $763,000, respectively.
During the nine-month period ended December 31, 1998, two films became fully
amortized, resulting in the amortization of fewer titles during the Nine Month
Period. The Company reviews film library estimated revenues on a quarterly
basis (based on the then current market conditions) and, where applicable,
unamortized film costs are written down to estimated net realizable value.
General and Administrative expenses increased $489,000 or 12% in the Nine
Month Period from the nine-month period ended December 31, 1998. The increase
can be primarily attributed to an increase in the allowance for doubtful
accounts recorded in the Nine Month Period.
The Company's net loss increased $1,153,000 or 40% in the Nine Month Period
to $4,054,000 from $2,901,000 in the nine-month period ended December 31, 1998
primarily due to (i) the decrease in the number of Showscan Attractions shipped,
(ii) an increase in the allowance for doubtful accounts during the Nine Month
Period, and (iii) a decrease in film licensing.
Comparison of the three months ended December 31, 1999 and 1998:
- ----------------------------------------------------------------
Revenues for the three-month period ended December 31, 1999 (the "2000
Third Quarter") increased by $906,000 or 68% from revenues for the three-month
period ended December 31, 1998 (the "1999 Third Quarter") due to an increase in
revenues recognized from equipment sales and related services in the 1999 Third
Quarter.
Film licensing and production service revenues in the 2000 Third Quarter
increased by $148,000 or 19% to $915,000 from $767,000 in the 1999 Third
Quarter.
Revenues from equipment sales and related services for the 2000 Third
Quarter increased 133% to $1,327,000 from $569,000 in the 1999 Third Quarter.
The number of Showscan Attractions shipped increased from one in the 1999 Third
Quarter to two in the 2000 Third Quarter.
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-
12
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out of the Showscan Attractions; and (iii) the shipment, delivery and
installation of the equipment and related services.
Costs of revenues were 67% of revenues in the 2000 Third Quarter as
compared to 68% in the 1999 Third Quarter. Equipment cost of sales to total
equipment sales increased to 88% in the 2000 Third Quarter from 71% in the 1999
Third Quarter primarily as a result of a lower gross profit margin on the
shipments during the 2000 Third Quarter as compared to higher average gross
profit margins for the shipment in the 1999 Third Quarter. The lower gross
profit margin earned on the shipments during the 2000 Third Quarter is related
to the sale of relocation units which generally have lower sales prices, higher
costs and reduced profit margins. Film licensing cost of sales to total film
licensing sales was 36% in the 2000 Third Quarter as compared to 65% in the 1999
Third Quarter. This decrease in costs is primarily the result of lower producer
royalties paid due to a reduction in distribution of third party films during
the 2000 Third Quarter. Amortization of the film library for the 2000 Third
Quarter and the 1999 Third Quarter was $235,200 and $253,900, 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 decreased $49,000 or 3% in the 2000
Third Quarter from the 1999 Third Quarter.
The Company's net loss decreased 34% in the 2000 Third Quarter to $899,000
from $1,365,000 in the 1999 Third Quarter primarily due to the increase in the
number of Showscan Attractions shipped and the increase in film revenue.
Liquidity and Capital Resources:
- -------------------------------
At December 31, 1999, the Company's working capital deficit increased to a
deficit of $9,433,000 from $6,473,000 at March 31, 1999. The increase in working
capital deficit was primarily due to the operating loss of the Company in the
Nine Month Period.
Cash and cash equivalents at December 31, 1999 decreased by $299,000 to
$362,000 from the cash level at March 31, 1999. This reduction was the result
of $26,000 provided by operating activities, $65,000 used in investing
activities, and $260,000 used in financing activities. Net cash used in
financing activities was due to the final payment of $260,000 in April 1999 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 the Nine Month Period and continued to
decline during the nine-month period ending December 31, 1999. The Company
expects to experience further declining balances during the remainder of fiscal
2000. Management believes that the existing cash balances, combined with
anticipated cash flow from operations, may not be sufficient to meet its cash
requirements through the end of fiscal 2000. If the Company is unable to
achieve its projected cash flow from operations, the Company will experience
significantly reduced cash which could result in the Company not being able to
meet its operating needs. The Company is exploring possible financings,
however, recent operating
13
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losses, the Company's declining cash balances, the Company's historical stock
performance, and a general decrease in investor interest in the Company's
industry, make it difficult for the Company to attract financing on terms that
are deemed to be favorable to the Company. In the event that cash flow from
operations is less than that anticipated and the Company is unable to secure
additional financing, in order to preserve cash, the Company would be required
to reduce expenditures for new films and effect further reductions in its
corporate infrastructure, either of which could have a material adverse effect
on the Company's future operations and/or require it to seek a negotiated or
bankruptcy enforced reorganization with its creditors.
Impact of the Year 2000:
- ------------------------
As of December 31, 1999, the Company had completed the upgrade of its
existing computer software systems in anticipation of the Year 2000 conversion
problem. The Company has determined that the systems had been tested and were
operational and adequate for the Company's needs. At February 11, 2000, the
Company has experienced no system problems due to the transition from December
31, 1999 to January 1, 2000.
Forward Looking Statements
With the exception of the historical information, the matters discussed
above include forward-looking statements that involve risks and uncertainties.
Among important factors that could cause actual results to differ from those
indicated in the forward looking statements are revenue, costs of sales and the
ability of the Company to maintain pricing at a level to maintain gross profit
margins, the level of selling, general and administrative costs, the performance
by the Company under its existing purchase contracts and the ability to obtain
new contracts, the success of the Company's owned and operating strategy, the
ability of the Company to identify and successfully negotiate arrangements with
joint venture and other strategic partners, the success of the Company's film
software, the effects of competition, general economic conditions and acts of
God and other events outside the control of the Company.
Factors That May Affect Future Results
Portions of this report on Form 10-Q (this "Report") may contain "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. The reader is cautioned that all forward-looking statements
are necessarily speculative and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements. The discussion below, together with
portions of the discussion elsewhere in this Report and in the Company's other
reports on file with the Securities and Exchange Commission, highlight some of
the more important risks identified by the management of the Company but should
not be assumed to be the only things that could affect future performance.
History of Operating Losses
- ---------------------------
For the fiscal years ending March 31, 1999, 1998, and 1997 the Company had
net losses of $4.2 million, $8.5 million, and $3.9 million, respectively. At
December 31, 1999, the Company had an accumulated deficit of $49.1 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.
14
<PAGE>
Capital Needs; Dilution; Risk of Foreclosure
- --------------------------------------------
Management of the Company has adopted a business strategy that includes
substantial investments in the expansion and marketing of its film library among
other things. This strategy carries with it a number of risks, including a
level of operating expenses and capital needs that cannot be adequately covered
by the Company's revenues and must be financed by funds obtained by raising
additional capital. To date, the Company's primary source of capital has been
from debt and equity financings. Unless the Company is able to obtain
additional proceeds from such financing sources the Company will have to
restructure its business and operations. A number of factors will make it
difficult for the Company to obtain equity financing in the future, including
the significant losses the Company incurred in the last fiscal year, the de-
listing of the Common Stock from the Nasdaq National Market(R), the on-going
financial turmoil in Asia (historically the Company's largest market), the
Company's historical stock performance, and a general decrease in investor
interest in the Company's industry. The Company's lack of assets that are
available for collateral and its cash flow fluctuations may make it difficult
for the Company to attract additional debt financing. Any investor or lender
may require a significant equity position in the Company that could result in
dilution of the Company's present stockholders. In addition to curtailing its
business strategy, the Company has debt obligations ($5,690,000) from a
financial institution, which have had their maturity extended from September 1,
1999 to March 1, 2000, pursuant to an Extension and Security Agreement. 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
and accrued, but unpaid, interest since September 1, 1998. Accordingly,
effective February 1, 2000, the Company amended the Extension and Security
Agreement to extend the maturity date to June 30, 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.
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.
15
<PAGE>
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.
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, 1996 and 1995, 85%, 85%, 62%, 61% and 69% of the Company's revenues,
respectively, were derived from sales outside the United States. International
operations of the Company may be subject to political and economic risks,
including political instability, currency controls, exchange rate fluctuations
(which, in the event of a decrease in value of foreign currency to the dollar,
can significantly affect the affordability of the Company's products overseas),
changes in import/export regulations, tariff and freight rates, longer accounts
receivable collection patterns, changes in regional or worldwide economic or
political conditions and natural disasters.
The Company typically denominates the prices of its films and equipment in
United States Dollars. As a result of the recent devaluation of a number of
Asian countries' currencies relative to the U.S. Dollar, the price of the
Company's products to prospective buyers in such countries has increased
significantly. This effective price increase could adversely affect the Company
in the region and its ability to continue to
16
<PAGE>
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
which expires in October, 2001. Although the Company's patents have never been
challenged, the Company believes that all such patents are valid. 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.
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 December 31, 1999, the Company's
closing market price has ranged from a low of $0.0469 per share to a high of
$0.4219 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
17
<PAGE>
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 twenty-one months, the Company has reduced the number of its
employees by over 50% to under 30 employees. The possible merger of the
Company, the financial losses, the potential for additional staff reductions and
a tight job market have resulted in some departures by some 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 could experience departures at its Board
and Executive Management levels which could materially affect Company
operations.
Environmental Matters and Other Governmental Regulations
- --------------------------------------------------------
Under various Federal, state and local environmental laws and regulations,
a current or previous owner or occupant of real property may become liable for
the costs of removal or remediation of hazardous substances at such real
property. Such laws and regulations often impose liability without regard to
fault. The Company could be held liable for the costs of remedial actions with
respect to hazardous substances at its corporate headquarters under the terms of
the governing lease and/or governing law. Although the Company has not been
notified of, nor is otherwise aware of, any current environmental liability,
claim or non-compliance, there can be no assurance that the Company will not be
required to incur remediation or other costs in the future in connection with
these properties. The Company believes it is in compliance with all applicable
Federal, state and local environmental laws and regulations.
Business Disruption
- -------------------
The Company's corporate headquarters are located in Los Angeles,
California, a region known for seismic activity. Operating results could be
materially affected by a significant earthquake or other natural disaster.
The 2000 issue software conversions did not pose any operational problems
for the Company's computer systems. The costs of such conversions were not
significant.
Dependence on Major Customers
- -----------------------------
The Company's motion simulation business has one significant concentration.
The concentration involves ongoing film licenses and is located in Japan where
Imagine Japan presently operates or is otherwise responsible for fifteen
simulation attractions. In the fiscal year ended March 31, 1999, Showscan
earned revenues from Imagine Japan in the amount of $1,101,000. As a result of
the continuing economic conditions in Japan, the amount spent on entertainment
activities has softened significantly and has affected virtually all out-of-home
attractions, including theme and amusement parks, destination resorts and the 15
simulation Showscan attractions covered by the agreement with Imagine Japan. It
is anticipated that Showscan's film license revenues from Imagine Japan will be
significantly less than the $1,101,000 received in fiscal 1999. The Company's
short and long term performance could be adversely impacted if disruptions were
to occur in any area of concentration such as order cancellations, license
terminations or payment problems.
18
<PAGE>
UATC has advised the Company that as part of its refocused and
regional/national business strategy that it has closed its entertainment centers
(called "Starports"), including the eight motion simulation attraction theaters
included in each. The Company is assisting UATC in the resale of these sites
and to date has sold three such sites. The Company receives a commission, plus
reimbursement for all costs of removal, refurbishment, crating, shipping and
installation and specific warranties, as applicable.
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 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 1. Legal Proceedings
- -------------------------
On October 22, 1999, VDI Media, Inc., a California corporation ("VDI") sued
the Company in Los Angeles County Superior Court. The suit alleges, among other
things, breach of contract and failure to pay amounts due. The suit seeks
payment of $112,360.82, plus interest and costs. The case is in the discovery
phase and no trial date has been set.
On November 10, 1999, Loro Parque, S.A., a corporation organized under the
laws of Santa Cruz de Tenerife, Canary Islands, Spain, sued the Company in Los
Angeles County Superior Court. The suit alleges, among other things, breach of
contract, breach of implied warranty, fraud and negligent misrepresentation in
connection with the sale of a large-format theatre by the Company. The suit
seeks payment of $5,000,000 together with other unspecified monetary damages as
well as punitive damages. The case is in the discovery phase and no trial date
has been set.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
--------
The exhibits listed below are filed as part of this Report.
Exhibit No. Description
----------- -----------
10.40 First Amendment to Extension and Security Agreement dated
as of February 1, 2000, by and between Showscan
Entertainment Inc. and Banca del Gottardo.
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 11th day of February, 2000.
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 No. Description Page Number
- ----------- ----------- -----------
10.40 First Amendment to Extension and Security Agreement 23
dated as of February 1, 2000, by and between
Showscan Entertainment Inc. and Banca del Gottardo.
27.1 Financial Data Schedule 25
22
<PAGE>
EXHIBIT 10.40
FIRST AMENDMENT TO EXTENSION AND SECURITY AGREEMENT
---------------------------------------------------
This FIRST AMENDMENT TO EXTENSION AND SECURITY AGREEMENT (this "Agreement")
is entered into as of February 1, 2000 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 by that
certain Extension and Security Agreement, dated as of September 1, 1999, by and
between the Company and Banca del Gottardo (the "Extension Agreement"), (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 the terms of this Agreement,
to extend the maturity date of the Notes to June 30, 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 March 1,
2000 to June 30, 2000, with interest to continue to accrue on the Notes at the
rate provided in the Notes until June 30, 2000.
2. Each other reference in the Extension Agreement to "March 1, 2000"
shall be amended and replaced with the date "June 30, 2000."
3. 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.
4. The terms of this Agreement shall be governed by Swiss law.
5. Except as specifically modified hereby, the provisions of the Note
Purchase Agreement, the Pledge Agreement and the Extension Agreement shall
remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this First Amendment to
Extension and Security Agreement as of the day and year first written above.
SHOWSCAN ENTERTAINMENT INC.
By: /s/ [ILLEGIBLE]^^
-------------------------
Name: [ILLEGIBLE]^^
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
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