===========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-22558
IWERKS ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-4439361
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
4540 West Valerio Street
Burbank, California 91505-1046
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(818) 841-7766
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 and 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 May 10, 1996, the Registrant had 11,131,746 shares of Common
Stock, $.001 par value, issued and outstanding.
========================================================================
<PAGE>
IWERKS ENTERTAINMENT, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
Condensed Consolidated Balance Sheets as of March 31, 1996
and June 30, 1995 2
Condensed Consolidated Statements of Operations for the Three
and Nine Months ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 1996 and 1995 5
Notes to the Condensed Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
---------------------------------------------
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 12
--------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 12
-----------------------------------------
Signatures 13
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
1996 1995
-------- -------
(unaudited)
Current assets:
Cash and cash equivalents $7,210,779 $13,813,975
Investment in debt securities 10,362,548 4,536,727
Trade accounts receivable, net of
allowance for doubtful accounts 4,555,523 6,458,720
Costs and estimated earnings in excess
of billings on uncompleted contracts 4,710,547 2,811,292
Inventories 3,251,772 2,142,382
Related party receivables and other 471,242 401,595
---------- -----------
Total current assets 30,562,411 30,164,691
Investment in debt securities, excluding
current portion 5,745,243 2,234,983
Properties, net:
Portable simulation theaters at cost,
net of accumulated depreciation 9,446,708 10,334,456
Property and equipment at cost, net of
accumulated depreciation and amortization 3,652,682 4,884,202
Film inventory at cost, net of
amortization 3,433,509 4,874,332
--------- ---------
16,532,899 20,092,990
Goodwill, net of amortization 17,586,138 18,264,772
Other assets 742,936 868,616
----------- -----------
Total assets $71,169,627 $71,626,052
=========== ===========
See accompanying notes.
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
1996 1995
-------- -------
(unaudited)
Current liabilities:
Accounts payable and accrued expenses $11,732,972 $12,676,461
Notes payable to related parties,
current portion 445,173 423,638
Notes payable and capital leases,
current portion 885,471 1,558,026
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,120,478 2,530,094
Deferred revenue 430,734 1,933,819
---------- -----------
Total current liabilities 15,614,828 19,122,038
Notes payable to related parties, excluding
current portion 584,464 823,534
Notes payable and capital leases
excluding current portion 390,333 1,306,867
---------- ---------
Total liabilities 16,589,625 21,252,439
Stockholders' equity:
Common stock and paid-in capital, $.001
par value, 20,000,000 shares authorized,
issued and outstanding 10,870,325 and
10,591,764, respectively 75,286,765 73,202,960
Deficit (20,706,763) (22,829,347)
------------ ------------
Total stockholders' equity 54,580,002 50,373,613
------------- -------------
Total liabilities and stockholders'
equity $71,169,627 $71,626,052
=========== ===========
See accompanying notes.
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
March 31, March 31,
1996 1995 1996 1995
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenue $13,825,491 $10,837,918 $37,128,392 $32,547,045
Cost of sales 7,642,055 12,201,084 21,601,011 25,344,721
----------- ------------ ----------- -----------
Gross margin 6,183,436 (1,363,166) 15,527,381 7,202,324
Selling, general, and
administrative expenses 4,921,394 7,124,838 13,742,138 17,321,480
Research and development 110,326 186,893 269,248 716,283
----------- ----------- ---------- ----------
Income (loss)
from operations 1,151,716 (8,674,897) 1,515,995 (10,835,439)
Interest income 299,268 224,080 891,573 699,225
<PAGE>
Interest expense 72,953 160,076 284,984 409,617
---------- ---------- ---------- ----------
Net income (loss) $1,378,031 ($8,610,893) $2,122,584 (10,545,831)
========== =========== ========== ===========
Net income (loss)
per common share $0.12 ($0.85) $0.18 ($1.05)
========== =========== ========== ===========
Weighted average
shares outstanding 11,893,415 10,120,696 11,611,526 10,050,718
========== =========== ========== ===========
</TABLE>
See accompanying notes.
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
March 31,
--------
1996 1995
---- ----
OPERATING ACTIVITIES
Net cash provided by operating
activities $4,908,248 $1,104,388
INVESTING ACTIVITIES
Investment in limited partnership - (213,640)
Investment in portable simulation
theaters (139,600) (291,353)
Purchases of property and equipment (363,081) (1,706,212)
Additions to film inventory (349,866) (2,812,318)
Sale (purchase) of debt
securities (9,326,081) 2,787,464
Acquisition of minority interest - (1,600,000)
----------- -----------
Net cash used in investing
activities (10,178,628) (3,836,059)
FINANCING ACTIVITIES
Proceeds from issuance of debt - 1,857,589
Repayment of notes payable from
related parties (217,535) (106,969)
Repayment of notes payable (1,496,075) (1,448,877)
Payments on capital leases (93,015) (88,613)
Exercise of stock options 235,271 165,621
Exercise of warrants 225,552 -
Retirement of Stock (250,000) -
Other 262,986 98,621
----------- -----------
Net cash provided (used) by
financing activities (1,332,816) 477,372
<PAGE>
----------- ----------
Net increase (decrease) in cash (6,603,196) (2,254,299)
Cash and cash equivalents
at beginning of period 13,813,975 8,457,883
------------ -----------
Cash and cash equivalents at
end of period $7,210,779 $6,203,584
----------- ----------
Supplemental disclosures of cash
flow information
Cash paid during the period for:
Interest, net of amount capitalized $321,689 $319,922
========== ==========
Income taxes $ - $ -
========== ==========
Supplemental disclosures of non-cash
activities
Accrued expenses decreased by $1.6 million and stockholders' equity
increased by corresponding amounts resulting from the class action litigation
settlement agreement completed during the three months ended December 31,
1995.
See accompanying notes.
<PAGE>
IWERKS ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Introduction
---------------------
The accompanying condensed consolidated financial statements of Iwerks
Entertainment, Inc. (the "Company") have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures made are adequate to make information presented not misleading.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position
of the Company as of March 31, 1996 and the results of its operations for
the three and nine months ended March 31, 1996 and 1995 and the cash flows
for the nine months ended March 31, 1996 and 1995 have been included. The
results of operations for interim periods are not necessarily indicative of
the results which may be realized for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's latest Annual Report on Form 10-K as
<PAGE>
filed with the SEC (file no. 0-22558).
Note 2 - Net Income (Loss) Per Common Share
-------------------------------------------
The net income (loss) per share for the three and nine month periods
ended March 31, 1996 and 1995 are based on the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consisting of outstanding stock options and warrants have
been included in the calculation to the extent they are dilutive. Fully
diluted amounts for the three and nine months ended March 31, 1996 do not
materially differ from the amounts presented herein.
Note 3 - Investment in Debt Securities
--------------------------------------
In accordance with the Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities (Special
Report - November 1995), the Company has reassessed the classification of
its investments in debt securities under Statement 115. At December 31,
1995, the investment in debt securities is classified as available-for-sale
and is stated at fair value, with the unrealized gains and losses, net of
tax, reported in stockholders' equity. The unrealized gain included in
stockholders' equity at March 31, 1996 is $10,000.
Note 4 - Litigation
-------------------
The Company reached an agreement with the plaintiffs to settle all
pending shareholder class action suits against the Company and certain of
its officers and directors in the United States District Court for the
Central District of California. The principal terms of the agreement call
for the establishment of a settlement fund consisting of: (1) $1.75
million, to be paid by the Company's insurance carrier (with any unclaimed
amounts being returned to the carrier); and (2) 250,000 shares of the
Company's common stock and 500,000 warrants to purchase the Company's
common stock, to be issued by the Company (with any unclaimed stock or
warrants being returned to the Company). The warrants will be exercisable
for a period of three years from the date of issuance, and the exercise
price will be $2.00 below the average trading price of the Company's stock
during the 30 days following May 3, 1996. The Company will receive the
proceeds from the exercise of the warrants if and when they are exercised.
The Company previously took a charge against earnings in the fourth quarter
of fiscal 1995 to reflect the anticipated costs of the settlement.
In the class action litigation referred to above, 108 class members
have opted out of the class and are not included in the settlement. One of
the individuals not included in the settlement, Fred Hollingsworth III, a
former director of Iwerks Entertainment, Inc. and former chief executive
officer and founder of Omni Films International, Inc., individually filed
on April 15, 1996 a complaint against Iwerks Entertainment, Inc. and
certain of its current and former officers and directors. The complaint
seeks unspecified damages arising from alleged misstatements in connection
with the acquisition by Iwerks of Omni Films International, Inc. in May
1994. The Company has not yet filed an answer to the complaint and
intends to vigorously defend against the action. There can be no assurance
that others not included in the settlement will not file similar claims in
the future.
<PAGE>
Note 5 - Restructuring Charges
------------------------------
The major components of the restructuring plan adopted in fiscal 1995
as it related to the closure of the Sarasota, FL facility included the
termination of employees, cancellation of leases and the write-off of
certain property and equipment. The restructuring plan was executed over
the period from April 1995 to November 1995. Since the operations of the
Sarasota, FL facility are being incorporated into the Company's Burbank, CA
facility, there was no effect on revenues or net operating income other
than the costs associated with the restructuring.
Termination benefits totaling $250,000 for 32 employees as described
in Note 2 to the Consolidated Financial Statements for the fiscal year
ended June 30, 1995 were accrued in the third quarter of fiscal 1995. The
termination benefits were paid ratably during the first and second quarters
of fiscal 1996. The employees affected were primarily production and
engineering staff at the Sarasota, Florida facility. The difference
between the estimated costs accrued in the third quarter of fiscal 1995
and actual costs were immaterial.
The estimated costs associated with the cancellation of leases of
$250,000 and the write-off of certain property and assets at the Sarasota
facility of $527,000 were accrued in the third quarter of fiscal 1995. The
ultimate negotiated settlement of the Sarasota leases included the turnover
of certain property and assets at the Sarasota facility along with a cash
payment of $86,000. This settlement was recorded in the first quarter of
fiscal 1996 and resulted in an immaterial adjustment to the estimated
accrual. In the fourth quarter of fiscal 1995, property and certain
assets was charged to the reserve in the amount of $446,000 (as disclosed
on page 37, Note 2 to the Consolidated Financial Statements) with the
balance charged to the reserve in the first quarter of fiscal 1996.
Costs associated with the relocation and consolidation costs were
charged to operations in the periods in which they occurred. Charges of
$53,100 were made in the fourth quarter of fiscal 1995. Charges of
$115,531 and $82,950 were made in the first and second quarters of fiscal
1996, respectively and were less than the original estimate of $550,000.
The relocation and consolidation was completed in November 1995.
Note 6 - Cash and Cash Equivalents
----------------------------------
The Company places its temporary cash investments with one high
quality financial institution. Investments with an original maturity of
three months or less are classified as cash equivalents.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS:
----------------------
For the nine months ended March 31, 1996 Iwerks Entertainment, Inc. (the
"Company") recorded revenues of $37,128,392 compared to $32,547,045 for the
same period last year. Net income for the nine months ended March 31, 1996 was
$2,122,584 or $.18 per share compared to a net loss of $10,545,831 or $1.05 per
share for the same period last year.
For the three months ended March 31, 1996 the Company recorded revenues of
$13,825,491 compared to $10,837,918 for the same period last year. Net income
for the three months ended March 31, 1996 was $1,378,031 or $.12 per share
compared to a net loss of $8,610,893 or $.85 per share for the same period last
year.
COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995:
----------------------------------------------------------------------------
REVENUES
--------
The Company's revenues are primarily derived from the manufacture and sale
of specialty theater systems (hardware), software licensing to the installed
base of these systems and the ownership and operation ("O&O") of mobile
simulation theaters. The following table presents summary information
regarding these revenues:
Periods Ended March 31,
-----------------------
Three Months Nine Months
------------ -----------
1996 1995 1996 1995
---- ---- ---- ----
Hardware sales &
service $ 7,505 $ 5,257 $ 20,545 $ 18,016
Owned and operated 4,149 1,328 10,451 5,803
Software licensing 1,611 1,345 4,670 3,998
Film Production and
other 560 2,908 1,462 4,730
------ ------ ------ ------
Total $ 13,825 $ 10,838 $ 37,128 $ 32,547
======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
------------------------------------------
Hardware sales and service increased for the three months ended March 31,
1996 as compared to the same period last year as a result of an increase in the
number of contracts, the higher average contract value and the generally higher
production level to meet scheduled deliveries.
<PAGE>
The significant increase in O & O revenues over the same quarter last year
resulted from the increased sponsorship revenues. The additional portable
simulation theaters that were added during the last year allowed greater
participation in sponsorship events including international tours. The increase
in sponsorship revenues for the third fiscal quarter as compared to the same
period last year helped to offset the normal seasonal decline in O & O revenues
with the limited number of events available during the winter months. O & O
revenues for the quarter include foreign source revenues from Taiwan, Puerto
Rico, Argentina and a cancellation settlement for an event in Japan.
Sponsorship events during the period were primarily derived from one customer
and are currently scheduled through the first fiscal quarter of 1997.
Software licensing revenues increased as a result of generally higher
licensing fees per location as well as the increasing base of installed
simulation theaters that license the Company's software.
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
-----------------------------------------
Hardware sales and service increased as compared to the comparable period
last year because of the higher number of contracts in process and the higher
value per contract.
O & O revenues include sponsorship and event revenues from the Company's
fleet of 17 Reactors (portable motion simulation theaters). The increase in O
& O revenues over the same nine month period last year resulted primarily from
the addition of 5 Reactors that were placed in service during the past year.
Event revenues declined with the increase in sponsorship show days that
generally produce a greater profit margin. Sponsorship event/tour revenues
benefited the most from the additional Reactors allowing for increased
international sponsorship activity as well as a significant increase in total
sponsorship days. The company received a payment in respect of an
international sponsorship event/tour which was canceled. Event revenues have
historically been seasonal and decline in the second and third fiscal quarters.
Sponsorship events during the period were primarily derived from one customer
and are currently scheduled through the first fiscal quarter of 1997.
Software licensing revenues increased as a result of generally higher
licensing fees per location as well as the increasing base of installed
theaters that license the Company's software. Film production revenues are
recorded only upon completion and no major film production contracts were
completed in the nine months ended March 31, 1996. Two film production
contracts are currently scheduled for completion during the fourth fiscal
quarter.
COST OF SALES AND GROSS MARGIN
------------------------------
Cost of sales consists principally of the costs of theater systems sold,
expenses associated with the operation of portable theaters (O & O), and costs
associated with film licensing primarily the amortization of film production
costs and royalty fees.
The overall gross profit margin percentage for the nine months ended March
31, 1996 and 1995 was 42% and 22%, respectively. The prior year's charge to
cost of sales included a write-down in the carrying value of certain assets,
primarily film costs. Excluding this charge, the prior year's comparable nine
month gross profit margin would have been approximately 34%. Although the
Company realized higher margins on its theatre hardware sales and film licensing
during the 1996 period, a significant factor in its improved margins in 1996 was
the favorable impact of cancellation fees recorded in respect of a cancelled
contract, which amounts were partially offset by costs incurred in anticipation
of performance under the cancelled contract.
<PAGE>
The overall gross profit margin percentage for the three months ended March
31, 1996 was 45% compared to a negative gross margin for the comparable quarter
last year which was adversely impacted by the write-down in the carrying value
of certain assets, primarily film costs. Excluding this charge, the prior
years comparable three month gross profit margin would have been approximately
24%. The gross profit margin percentage of 45% for the three months ended
March 31, 1996 also compares favorably with the first and second fiscal quarter
gross profit margins of 43% and 38%, respectively. Although the Company
realized higher margins on its theatre hardware sales and film licensing during
the 1996 period, a significant factor in its improved margins in 1996 was the
favorable impact of cancellation fees recorded in respect of a cancelled
contract, which amounts were partially offset by costs incurred in anticipation
of performance under the cancelled contract.
The overall profit margin is affected by seasonal fluctuations as well as
the mix of the Company's various revenue sources. Accordingly, the gross
profit percentage in any past period may not be indicative of that which may be
experienced in future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative expenses (SG&A) include personnel and
related costs including travel for sales and administrative departments, trade
shows and other promotional expenses, sales commissions, public relation costs,
outside consulting and professional fees including audit and legal fees,
amortization of goodwill and other administrative costs.
SG&A costs for the nine months ended March 31, 1996 and 1995 were
$13,742,138 and $17,321,480, respectively. SG&A costs for the quarter ended
March 31, 1996 and 1995 were $4,921,394 and $7,124,838, respectively. Included
in the three and nine month periods ended March 31, 1995 is approximately $2.6
million of charges related to the write-off of fixed and other assets and a
restructuring charge related to the operational consolidation of the Sarasota
and Newport Beach facilities to the Burbank facility. Excluding these non-
recurring items, SG&A decreased during the recent nine month as compared to
same period last year substantially from the cost benefits achieved by the
consolidation of operations as previously noted. The adjusted comparison of
SG&A costs for the three months ended March 31, 1996 reflects increased
personnel costs for the quarter of approximately $850,000.
RESEARCH AND DEVELOPMENT
------------------------
Research and development costs for the nine months ended March 31, 1996
were $269,248 compared to $716,283 for the same period last year. R&D costs
for the three months ended March 31, 1996 were $110,326 compared to $186,893
for the same period last year. The reduction reflects the substantial
completion of the development of the Company's Quatro 70-mm projection system
in the last fiscal year. No projects of a comparable cost magnitude have been
initiated during the current fiscal year.
INTEREST INCOME AND EXPENSE
---------------------------
Interest income for the nine months ended March 31, 1996 and 1995 was
<PAGE>
$891,573 and $699,225, respectively. Interest income for the three months
ended March 31, 1996 and 1995 was $299,268 and $224,080, respectively.
Interest income is derived from the Company's investments, primarily in U.S.
Treasury Notes. The increase in interest income for both the three and nine
month periods resulted from higher invested balances and improved utilization
of idle cash balances during the recent periods.
Interest expense for the nine months ended March 31, 1996 and 1995 was
$284,984 and $409,617, respectively. Interest expense for the three months
ended March 31, 1996 and 1995 was $72,953 and $160,076, respectively. Interest
expense is primarily financing costs on portable simulation theaters. The
decrease resulted from the lower debt balances as compared to the comparable
periods last year.
NET INCOME
----------
Net income for the nine months ended March 31, 1996 was $2,122,584 or $.18
per share compared to a net loss of $10,545,831 or $1.05 per share for the same
period last year. Net income for the three months ended March 31, 1996 was
$1,378,031 or $.12 per share compared to a net loss of $8,610,893 or $.85 per
share for the same period last year. The improvement in net income for both
the three and nine month periods ended March 31, 1996 as compared to the
comparable periods last year resulted primarily because the prior year periods
included significant charges which are discussed in Notes 4 and 5 for which
there were no comparable charges in the current periods. In addition, both
revenues and gross profit margins improved from the comparable periods last
year after adjustment for last year charges. Although the Company realized
higher margins on its theatre hardware sales and film licensing during the 1996
period, a significant factor in its improved margins in 1996 was the favorable
impact of cancellation fees recorded in respect of a cancelled contract, which
amounts were partially offset by costs incurred in anticipation of performance
under the cancelled contract.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's operating activities for the nine months ended March 31, 1996
generated a positive cash flow in excess of $4.9 million. Net cash provided by
operating activities for the last seven fiscal quarters exceeded $9.7 million.
Investing activities for the last nine months consisted primarily of the
purchase of $9.3 million in debt securities, thereby increasing interest income
for the period. Cash used in financing activities of $1.3 million consisted
primarily of payments for notes payable and capital leases and the retirement
of stock.
The Company maintains a line of credit with Bank of America in the amount
of $5 million. At March 31, 1996, there were no amounts outstanding on the
line of credit and the Company was in compliance with all covenants. Together
with existing cash balances, short-term investments in debt securities and cash
flows from operations, the Company believes that it has adequate liquidity to
meet its cash requirements for at least the next twelve months, after which
time it may be required to raise additional cash through the sale of equity or
debt securities. In addition, to the extent the Company experiences growth in
the future, or its cash flow operations is less than anticipated, the Company
may be required to obtain additional sources of cash.
The Company does not anticipate the need to retire its debt security
investments before maturity to meet cash requirements, however, should
unanticipated events require early retirement of these investments, the Company
could incur a loss on their sale. At March 31, 1996, the investment in debt
securities are classified as available-for-sale and is stated at fair market
value with the unrealized gain of $10,000 reported in stockholders' equity.
<PAGE>
OUTLOOK
With the exception of the historical information, the matters discussed above
include forward-looking statements that invovle risks and uncertainties. Among
the important factors that could cause actual results to differ from those
indicated in the forward-looking statements are costs of sales and the ability
of the company to maintain pricing at a level necessary to maintain gross profit
margins, the level of selling, general and administrative costs, the performance
by the Company under its existing purchase and sponsorship contracts and the
ability to obtain new contracts, the success of the Company's owned and
operating strategy, the success of the Company's film software and the affects
of competition.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
--------------------------
The Company reached an agreement with the plaintiffs to settle all
pending shareholder class action suits against the Company and certain of
its officers and directors in the United States District Court for the
Central District of California. The principal terms of the agreement call
for the establishment of a settlement fund consisting of : (1) $1.75
million, to be paid by the Company's insurance carrier (with any unclaimed
amounts being returned to the carrier); and (2) 250,000 shares of the
Company's common stock and 500,000 warrants to purchase the Company's
common stock, to be issued by the Company (with any unclaimed amounts being
returned to the Company). The warrants will be exercisable for a period of
three years from the date of issuance, and the exercise price will be $2.00
below the average trading price of the Company's stock during a specified
time period. The Company will receive the proceeds from the exercise of
the warrants if and when they are exercised.
In the class action litigation referred to above, 108 class members
have opted out of the class and are not included in the settlement. One of
the individuals not included in the settlement, Fred Hollingsworth III, a
former director of Iwerks Entertainment, Inc. and former chief executive
officer and founder of Omni Films International, Inc., individually filed
on April 15, 1996 a complaint against Iwerks Entertainment, Inc. and
certain of its current and former officers and directors. The complaint
seeks unspecified damages arising from alleged misstatements in connection
with the acquisition by Iwerks of Omni Films International, Inc. in May
1994. The Company has not yet filed an answer to the complaint and
intends to vigorously defend against the action. There can be no assurance
that others not included in the settlement will not file similar claims in
the future.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits
11.1 Earnings per share
(b) Reports on Form 8-K
Form 8-K filed on April 15, 1996 - Items 6 and 7
SIGNATURE
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the city of
Burbank, State of California on the 17th day of May, 1996.
<PAGE>
IWERKS ENTERTAINMENT, INC.
(Registrant)
By: /s/ Francis T. Phalen
----------------------------
Executive Vice President
Chief Financial Officer
(Principal Finance Officer)
By: /s/ Guy L. Heyl
----------------------------
Vice President Finance
(Principal Accounting Officer)
EXHIBIT 11.1
IWERKS ENTERTAINMENT, INC.
EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
March 31, March 31,
1996 1995 1996 1995
-------------------------- -------------------------
<C> <C> <C> <C>
Weighted average
shares outstanding 10,565,134 10,120,696 10,441,541 10,050,718
Common equivalent
shares:
Options and warrants 1,328,281 (1) 1,169,985 (1)
----------- ---------- ---------- -------------
11,893,415 10,120,696 11,611,526 10,050,718
=========== =========== ========== =============
Net income (loss) $1,378,031 ($8,610,893) $2,122,584 ($10,545,831)
=========== ============ =========== =============
Net income (loss)
per share $0.12 ($0.85) $0.18 ($1.05)
=========== =========== =========== =============
</TABLE>
(1) These common equivalent shares were antidilutive.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 7,210,779
<SECURITIES> 16,107,791 (1)
<RECEIVABLES> 4,848,929
<ALLOWANCES> (293,406)
<INVENTORY> 3,251,772
<CURRENT-ASSETS> 30,562,411 (2)
<PP&E> 35,627,249 (3)
<DEPRECIATION> (19,094,350)(4)
<TOTAL-ASSETS> 71,169,627
<CURRENT-LIABILITIES> 15,614,828
<BONDS> 974,797 (5)
0
0
<COMMON> 75,286,765
<OTHER-SE> (20,706,763)(6)
<TOTAL-LIABILITY-AND-EQUITY> 71,169,627
<SALES> 37,128,392
<TOTAL-REVENUES> 38,019,965 (7)
<CGS> 21,601,011
<TOTAL-COSTS> 21,601,011
<OTHER-EXPENSES> 14,011,386 (8)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284,984
<INCOME-PRETAX> 2,122,584
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,122,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,122,584
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
<FN>
<F1> Includes non-current portion of investment in debt
securities of $5,745,243.
<F2> Includes costs and estimated earnings in excess of
billings on uncompleted contracts of $4,710,547 and
related party receivables and other of $471,242.
<F3> Includes portable simulation theatres of
$12,153,484 and film inventory of $13,903,213.
<PAGE>
<F4> Includes portable simulation theatres of $2,706,776
and film inventory of $10,469,704.
<F5> Includes notes payable, notes payable to related
parties and capital leases.
<F6> Accumulated deficit.
<F7> Includes interest income of $891,573.
<F8> Consists of selling general and administrative
expenses of $13,742,138 and research and
development of $269,248.
</FN>
</TABLE>
