<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1996
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common stock, $.001 par value
Preferred Stock Purchase Rights
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any Amendment to this
Form 10-K. [_]
At August 19, 1996, there were outstanding 11,642,517 shares of the Common Stock
of Registrant, and the aggregate market value of the shares held on that date by
non-affiliates of Registrant, based on the closing price ($9.125 per share) of
the Registrant's Common Stock on the NASDAQ National Market System was
$96,172,545. For purposes of this computation, it has been assumed that the
shares beneficially held by directors and executive officers of Registrant were
"held by affiliates;" this assumption is not to be deemed to be an admission by
such persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement relating to its 1996 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Annual Report.
<PAGE>
IWERKS ENTERTAINMENT, INC.
CROSS-REFERENCE SHEET
The following items in Part III of Registrant's Annual Report on Form 10-K
for its fiscal year ended June 30, 1996 are incorporated herein by reference to
Registrant's Proxy Statement and appear therein under the section headings
indicated below:
<TABLE>
<CAPTION>
Item Form Heading Section Heading
- ---- ------------ ---------------
<C> <C> <S>
10. Directors and Executive Proxy Statement - Election of Class I
Officers of the Registrant Directors - Information with respect
to Nominees, Directors and Executive
Officers
11. Executive Compensation Proxy Statement - Management -
Compensation of Executive Officers
12. Security Ownership of Proxy Statement - Principal Stockholders
Certain Beneficial Owners
and Management
13. Certain Relationships and Proxy Statement - Management - Certain
Related Transactions Relationships and Related Transactions
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
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GENERAL
Iwerks Entertainment, Inc. and its subsidiaries ("Iwerks" or the "Company")
is a leading provider of high-tech software-based theatre attractions for the
out-of-home entertainment market. Iwerks' products combine advanced theatre
systems with entertainment or educational software to create high-impact
"attractions" which immerse audiences in the action. Iwerks' products include
ride simulation, giant screen, 360 degree, 3-D, and various other specialty
attractions. In addition, Iwerks owns and operates a fleet of touring ride
simulation theatres. The Company also produces film and video software for ride
simulators and special format theatres.
The primary markets for Iwerks' attractions are theme parks, museums,
various types of location-based-entertainment centers, visitor centers, world
expositions and special events. The popularity of entertainment attractions of
the type sold by the Company has led to their increasing use as the featured
attraction in these locations. In addition, high-profile retail sites and
casinos are expanding their entertainment offerings to broaden appeal and
stimulate repeat visits. The Company's attractions are well suited to meet this
demand because, in addition to their drawing power, they require relatively
little space and can be easily refreshed by changing the film or other software.
The Company also owns and operates a fleet of 17 portable ride simulation
theatres and is exploring other potential touring opportunities. Further, an
important element of the Company's business strategy is the participation in the
operation of its fixed-base attractions either through direct equity ownership
or through other participation arrangements. The Company is currently a
participant in four joint ventures to own and operate ride simulation theatres
in the United States, Australia and parts of Asia. The Company continues to
evaluate new opportunities to participate in the operation of its fixed-based
attractions.
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OUTLOOK
The reader of this document is cautioned that with the exception of the
historical information, the matters presented herein 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 cost of sales and the ability of the Company to
manufacture and maintain pricing at a level to sustain 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 operated strategy,
the success of the Company's film software, the affects of competition and the
results of litigation in process.
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<PAGE>
Fiscal 1996 was marked by a return of the Company to profitability after
two years of losses and significant changes enacted late in the 1995 fiscal
year. The restructuring and consolidation was completed in Fiscal 1996 and
involved the closure of the Sarasota, Florida manufacturing facility and
relocation to the Burbank, California facility. In August 1995, the Company
relocated its portable touring operations from Newport Beach, California to
Burbank, California. All of the Company's operations other than regional sales
offices are now located in Burbank, California. The Company employed 162 persons
at August 1, 1996 compared to 175 at September 10, 1995 and 253 at August 29,
1994.
Since inception in 1986, Iwerks has installed 255 fixed-base and touring
attractions of which 242 continue to operate in 28 countries. Of these, 102
were ride simulation theatres, which Iwerks supports with a library of 33 motion
simulation films, the industry's largest motion simulation film library.
Iwerks' motion simulation film projects include: Red Rock Run, a computer
generated high speed ride through a volcano; Aliens(TM): Ride at the Speed of
Fright based on the futuristic movie thriller of the same name; Dino Island: a
fantasy based on a newly discovered volcanic island with prehistoric mammals;
Days of Thunder: The Ride, featuring a "200 mph race" to the checkered flag at
the Daytona 500, for Paramount Parks; RoboCop: The Ride, a futuristic fantasy
ride through the streets of Detroit with the popular movie character, "RoboCop,"
The Right Stuff: Mach One Adventure, a film based upon the theatrical release of
the same name for Time Warner Six Flags theme parks; as well as projects for The
Walt Disney Company, Universal Studios-Florida and NASA. Iwerks has the largest
installed base of ride simulation theatres and the largest library of ride
simulation films in the world.
In fiscal 1996, the Company determined to expand its participation in joint
ventures with operators of its fixed-base attractions. In April 1996, the
Company entered into a joint venture with Hoyt's Corporation to develop up to 10
ride simulation theatres as part of Hoyt's International exhibition circuit. In
May 1996, the Company signed a similar arrangement providing for the development
of up to five ride simulation theatres in Dave & Busters' restaurant
/entertainment centers and in August 1996, the Company entered into a joint
venture with Cyberdome International, Inc. ("Cyberdome") to develop a ride
simulation theatre in the old Studio 54 space in New York, New York.
Iwerks is a Delaware corporation with principal executive offices located
at 4540 West Valerio Street, Burbank, California 91505, telephone number (818)
841-7766. In addition to its principal executive offices, Iwerks has sales
offices in Sarasota, Florida and Hong Kong.
BUSINESS STRATEGY
Historically, the Company's primary source of revenue has been the sale of
its attractions to customers who own and operate them. Although hardware sales
accounted for a majority of revenues in fiscal 1996, a key strategy of Iwerks is
to continue building a recurring revenue base. To further this goal, the Company
produces and licenses its entertainment and educational software for exhibition
on its installed base of attractions. The Company also owns and operates a fleet
of 17 touring ride simulation theatres from which it derives admission and
sponsorship revenue and the Company is pursuing other opportunities to
participate in the operation of attractions.
<PAGE>
A key strategy to build recurring revenues began in Fiscal 1996 with the
Company's entry into joint venture and partnership relationships with operators
of entertainment centers. In Spring 1996, the Company entered into a joint
venture arrangement with Hoyt's Cinemas, an international multi-plex theatre
operation, to open 10 simulation theatres in Australia and in other countries in
which Hoyt's operates. The first of these opened in Melbourne, Australia in
July 1996. Another venture was formed with Dave and Buster's Inc., a Texas
based operator of entertainment centers in the United States. This venture
plans to install up to 5 simulation theatres with the first scheduled to open in
September 1996. The Company also entered into an agreement in August 1996 with
Cyberdome to develop a ride simulation theatre in New York. These recent
agreements supplement the Company's existing partnership at PIER 39 San
Francisco and its ownership and royalty interests in the Company's theatre
system at The Foxwoods Casino in Ledyard, Connecticut.
IWERKS PRODUCTS
FIXED-BASE RIDE SIMULATION THEATRES. Iwerks' line of fixed-base ride
simulators is marketed as Iwerks TurboRide and combines high-resolution
projector film or video software, digital surround sound and moving seats to
fully involve the audience in a realistic, but simulated experience. Software
currently available includes a variety of live action and fantasy experiences
such as flying at supersonic speeds, riding a roller coaster, white-water
rafting and space and underwater adventures. The Company's ride simulation
theatre product line is the broadest in the industry, enabling the Company to
offer its customers both seat and platform-based simulators in a variety of
configurations and at multiple price points. The Company derived approximately
44%, 40% and 44% of its revenues from the sale of fixed-base ride simulation
theatres in fiscal 1994, 1995 and 1996. The Company's ride simulators are
designed to operate in theatres which typically seat 18 to 100 people, and
feature screens up to 52 feet high and six-channel surround sound. In these
rides, guests watch a high resolution film with a fast action point of view
perspective while sitting in seats that move in synchronization with the action
on the screen. Films for Iwerks' ride simulation theatres typically range
between three and five minutes. The Iwerks TurboRide can be reprogrammed to
create new adventures.
PORTABLE RIDE SIMULATION THEATRES. Iwerks also has developed a portable
ride simulation theatre called the "Reactor," which is transported by tractor
trailers. The trailers transform to create a theatre with a high definition
video projection system and digital surround sound. The Reactor incorporates the
same motion simulation technology as Iwerks Turbo Ride and can accommodate up to
18 people per show. The Reactors can be used to exhibit Iwerks' ride simulation
films developed for its fixed-base ride simulation theatres as well as films
developed specifically for use in the Reactor at air shows, boat and car races,
state fairs and other special events. Iwerks also seeks corporate sponsors for
its touring Reactor units. Its principal sponsor, AT&T, is currently leasing six
Reactors for a North American tour. The Company derived approximately 13%, 18%,
and 20% of its revenues in fiscal 1994, 1995 and 1996 from the operation and
sponsorship of portable ride simulation theatres.
GIANT SCREEN THEATRES. Iwerks' giant screen theatres are marketed under the
name Iwerks CineDome and Iwerks Theatres, and feature screens which are much
larger than standard movie screens and projection systems that deliver a
sharper, brighter image than conventional
<PAGE>
movies. The result is a high-impact, immersive, sensory experience for the
audience. These theatres seat up to 630 people, have steeply raked seating and
exhibit films typically lasting between 15 and 40 minutes.
Iwerks' giant screen theatres are available in a variety of configurations.
Its flat screen theatres use screens as large as 81 feet high by 110 feet wide,
more than five times the size of a standard movie theatre screen. Iwerks' domed
screen theatres use a dome-shaped screen up to 88 feet in diameter which wraps
around and above the audience filling the audience's field of vision. Iwerks
also offers 3D systems which use dual projectors to create a 3D image. The
Company derived approximately 13%, 6% and 9% of its revenues from the sale of
giant screen theatres in fiscal 1994, 1995 and 1996.
360 DEGREE THEATRES. The Iwerks Video 360 Theatre is a video-based
cylindrical theatre. Because the video image is created from a digital source,
it can be manipulated through a show control system to make real-time
modifications to the projected image or to insert additional images from other
sources, such as audience members.
CUSTOM THEATRES. Iwerks offers a wide range of custom film and video-based
theatre systems utilizing 70 millimeter and 35 millimeter film formats. Custom
projects range from the sale of individual projectors to complete theatre
systems.
FILM SOFTWARE. Iwerks produces film and video software for Iwerks'
attractions with a production strategy that is similar to that of a movie
studio, where a small core of executives hire supplemental production talent and
specialists on a project-by-project basis. This structure allows Iwerks to
maintain creative and budgetary control of projects without incurring
substantial, continuing overhead expenses. Iwerks also provides executive
producer and postproduction services to third parties filming in the Company's
film or video projection formats. The Company derived approximately 3%, 18 % and
1.5% of its revenue in fiscal 1994, 1995 and 1996 from film production
contracts.
Iwerks has a film library which includes the distribution rights to 33 ride
simulation films, 3 giant screen films and seven 3D films. Iwerks' library of
ride simulation films is the largest in the industry. In addition to the
Iwerks' film library, owners of Iwerks' giant screen theatres have access to a
library of over 100 films which are generally available in the marketplace. The
Company believes that the quality and size of its film library is a significant
competitive advantage in the markets in which it competes, particularly in the
ride simulation market. As the installed base of theatres grows, film licensing
revenue is expected to increase.
Iwerks' recent ride simulation films include Aliens(TM): Ride at the Speed
of Fright based on the futuristic movie thriller of the same name; a fantasy
ride through a dinosaur-inhabited island, Dino Island a space chase adventure
fantasy, Moon Raid Alpha; a film for Time Warner Six Flags theme parks called
The Right Stuff; a film for the Iwerks Reactor called Fly With The Blue Angels
featuring the Blue Angels flight team; a film for Paramount theme parks based on
the motion picture, Days of Thunder; a film based on the motion picture,
RoboCop; and SOS, an underwater fantasy created by computer generated animation.
Many of the Company's ride simulation and other productions have received
industry recognition. Dino Island was rated best new attraction at the
International Association of Amusement Parks and Attractions, (IAAPA),
<PAGE>
our industry's annual trade show, 1994. SOS won first place awards at the
"Imagine '92" Film Festival, at IAAPA 1992, the theme park industry's primary
international trade show and convention, the Computer Animation Festival '92 and
the Ars Electronica Festival '92. Haunts of the Olde Country has received awards
at the Cannes Film Festival 1994, Worldfest Houston International Film Festival
- - 1994 and the US Int.'s Film and Video Festival - 1994. Dino Island was also
recognized at the Worldfest Houston International Film Festival - 1994.
Typically, a film produced for exhibition on a theatre system is sold or
licensed to a customer as part of the sale of the theatre system. Where sold,
the customer pays all or most of the production cost; Iwerks attempts to retain
limited distribution rights beyond an exclusive exhibition territory retained by
the customer. Where licensed, Iwerks typically licenses the film for a one-year
period for a flat fee which varies based upon the film. In limited cases,
Iwerks will accept its fees as a percentage of the ticket sales. Film rentals
vary according to the quality of the film, the initial price paid for the
theatre systems and other factors.
FIXED BASE ATTRACTIONS. The Company owns and operates a Virtual Adventures
attraction at Foxwoods Resort/Casino in Ledyard, Connecticut and owns 50% of a
fixed base ride simulation theatre at Pier 39 in San Francisco through a limited
partnership. The Company continues to evaluate other opportunities to
participate in the ownership and operation of fixed-base attractions. These may
include equity participation in selected attractions or licensing arrangements.
The Company may acquire these rights through the contribution of equipment or by
direct investment. As noted earlier, the Company has recently entered into
partnership arrangements with Hoyt's Cinemas (the first venue opened in July
1996) and with Dave and Buster's Inc., both operators of entertainment centers.
The Company also entered into an agreement in August 1996 with Cyberdome to
develop a ride simulation theatre in New York.
MARKETING AND CUSTOMERS
Iwerks distributes its theatre systems, software and services through
multiple distribution channels including a direct sales and marketing force as
well as independent sales agents in selected areas. The sales and marketing
staff consists of an Executive Vice President and twenty-nine other employees. A
foreign sales office located in Hong Kong, provides support to Iwerks' Japanese
and Asian marketing programs and assists in customer service. In addition,
Iwerks has sales professionals located in Holland, Atlanta, Georgia and
Sarasota, Florida. Iwerks also has agreements with five independent sales
representatives covering the countries of Japan, Taiwan, Thailand, Hong Kong,
Korea, and other parts of Asia, Australia, Brazil, China, Germany, Israel,
Spain, and Switzerland.
Iwerks markets its attractions, including theatre systems and film
software, mainly to theme parks, museums, visitor centers, casinos, world
expositions, location-based-entertainment centers and special events. Iwerks'
theatre systems include projection and audio equipment, show control systems,
film handling equipment and, in most instances, ride simulation systems. The
customer supplies its own theatre space and other necessary leasehold
improvements to operate the theatre. Iwerks provides installation, training,
design, maintenance and other support services.
The primary market for Iwerks' ride simulation theatres has been the
worldwide amusement and theme park industry. Continuing sales will come from
previously existing parks
<PAGE>
looking for new attractions, and parks under development looking for an array of
attractions. Most new park development is occurring outside of the United States
and management believes that international operators will continue as important
customers for this product. Iwerks has also developed customers in the family
entertainment center, institutional and casino markets as well as tourist,
vacation, shopping and convention locations for its ride simulation theatres.
Iwerks sells its ride simulation theatres at prices which are separately
negotiated, depending upon the product, the number of motion bases, the
configuration of the theatre space, optional components selected and the level
of design service provided. The Company licenses its ride simulation films for a
range of prices depending on the film and the license term.
Iwerks tours its Reactor units at a variety of special events, primarily
air shows, boat and car races, state fairs, trade shows and other outdoor
events. Revenue is generated through admission tickets of between $3 and $5 per
person or through lease of the system to corporate sponsors who may use the
system for promotional campaigns in connection with new product introductions
and other promotional purposes. In 1993, the Company leased two Reactor units in
connection with PepsiCo's Rock Reality Tour promoting the introduction of
Crystal Pepsi. As part of the tour, two Reactor units traveled to 64 cities in
North America, including two in Canada, and featured the first ride simulation
rock video, Mindblender, based upon Peter Gabriel's song, Kiss That Frog. The
Company is currently touring six units for AT&T's True Voice marketing program.
Iwerks is currently exploring other sponsorship opportunities.
The primary markets for Iwerks' giant screen and 3D theatres have been
museums, visitor centers, world expositions and other institutional exhibition
facilities frequented by large numbers of visitors. Iwerks sells its giant
screen and 360 degree theatres at prices which are separately negotiated.
The Iwerks Video 360 and Iwerks Virtual Adventures attractions are being
marketed to a variety of markets.
One of Iwerks' customers, AT&T, and two of Iwerks' customers, Paramount
Parks and Chiryu each accounted for more than 10% of Iwerks' revenues in fiscal
1995 and 1994, respectively. No single customer accounted for more than 10% of
revenues in fiscal 1996.
Iwerks' sales typically are made pursuant to written contracts, and are
denominated in United States dollars. International sales are generally backed
by letters of credit. Consequently, Iwerks' operations have not historically
been subject to risks attendant to currency fluctuations. During fiscal 1994,
1995 and 1996, 43%, 55% and 47% of Iwerks' revenues, respectively, were derived
from sales outside the United States. Iwerks' sales contracts typically provide
for progress payments which are timed to match related expenditures by Iwerks.
The customer generally has the right to terminate the contract before completion
by paying Iwerks its nonrecoverable costs plus a termination fee. No customers
terminated a contract during fiscal 1994, one customer terminated a contract in
fiscal 1995, and two customers terminated a contract in fiscal 1996. Iwerks
offers a warranty on sales of its products, generally for a period of 12 months.
Iwerks believes that its material contract terms are consistent with industry
practices.
<PAGE>
ENABLING TECHNOLOGIES
With limited exceptions, the underlying technologies employed by Iwerks are
in the public domain and generally available in the marketplace. However, Iwerks
possesses substantial expertise in the design, modification and engineering of
projection, film-handling, camera and audio technologies which it believes to be
an important competitive factor.
IMAGING SYSTEMS. Iwerks offers a variety of technologically advanced
imaging systems.
Iwerks Quatro(TM) is a 70-millimeter projection system designed to offer
small ride simulation venues high-clarity film quality in locations which were
previously limited to video systems. The Iwerks Quatro(TM) houses four ride
simulation films on one reel, reduction printed from the larger format 870 to
35mm image size; two operating in the forward direction and two in the reverse
direction. This eliminates the need for a film storage system while providing
fast cycle times. All claims have been allowed on the Company's patent
application on certain features of the Quatro(TM) projection system.
Iwerks 870 is an eight perforation, 70-millimeter film system that operates
at 30 frames per second. By comparison, most motion picture theatres use four
perforation, 35-millimeter film that runs at 24 frames per second and standard
70-millimeter film is five perforation which also runs at 24 frames per second.
The larger frame size and faster speed gives Iwerks 870 a brighter and sharper
image without the flicker and stroboscopic effects common with conventional 35-
and 70-millimeter film systems. Iwerks 870 is used in the Company's array of
ride simulation systems and destination theatres common to museums and visitors
centers where screen sizes smaller than 60' high and 80' wide or dome screens of
75' or less in diameter are suitable.
Iwerks 1570 is a fifteen perforation, 70-millimeter rolling loop projection
system which handles the largest commercially available film size. This system
projects an image area more than nine times that of conventional 35-millimeter
film and 300% larger than standard 70-millimeter film. Iwerks 1570 is capable of
achieving the screen sizes up to 81' high and 110' wide and dome screens up to
88' in diameter that are generally found in high capacity theatres at world
expositions and larger museums and visitor centers. Iwerks 870 and 1570 are used
in the Iwerks CineDome and Iwerks Theatres.
Iwerks offers high resolution digital video imaging systems that utilize a
laser disc source and produces a high quality video image. This imaging system
is ideal for Iwerks Reactors and small ride simulation theatre systems. In the
Iwerks VideoDrome 360, the video imaging and show control systems allow real-
time manipulation of the projected image to allow a variety of special effects.
MOTION BASES. Iwerks' ride simulation theatres utilize seat-based and
platform-based ride simulation technologies with per-base capacities ranging
from two to thirty. The Turbo Tour is a compact and highly responsive three-axis
system, allowing a multitude of combinations of pitch (tilt from front to rear),
vertical (move up and down) and roll (tilt from side to side) movements, which
keep passengers in constant motion with the image. Each motion base is a self-
contained system, requiring only electronic communications and electrical power
connections. The Motion
<PAGE>
Master is four-axis seat-based technology which permits pitch, vertical, roll
and sway (a lateral side-to-side movement). This system provides every rider an
identical experience, generally requires less space per seat and is very cost
effective. The Gemini6 and Transporter are two- and four-seat, six-axis motion
bases capable of producing the most realistic motion simulation available. These
six-axis systems permit pitch, roll, vertical, sway, yaw (a turning motion), and
surge (forward and back), all the motions available within a given motion
envelope. The Freedom Six is a large platform-based six-axis system which has
generally been custom designed to meet a customers requirements for capacity.
FILM STORAGE. Iwerks' film-based systems are offered with specially
designed film loop cabinets. These cabinets allow the film to be spliced into an
endless loop more fully automating the projection system and providing the
fastest possible recycle time for maximum theatre throughput. The loop cabinet
also includes other important features: the film is housed in a dust-free
humidity-controlled environment; the film is cleaned twice on each trip through
the system so that dust picked up during projection doesn't accumulate; and the
film picture area never rubs on itself or any other surface, eliminating
degradation common on reel to reel and platter systems.
MANUFACTURING
During fiscal 1996, IWERKS manufactured and assembled its theatre systems
at its facilities in Burbank, California. A majority of the components for
Iwerks' theatre systems are purchased from outside vendors. Iwerks'
manufacturing operations consist of assembly, testing, quality control and
system integration of its theatre system components, subassemblies and final
assemblies, including modifications and the programming of the show-control and
motion-control components, and installation of the completed theatre systems.
Iwerks' manufacturing operations utilize a wide variety of electrical and
mechanical components, raw materials and other supplies and services. Iwerks has
developed multiple commercial sources for most components and materials, but it
does use single sources for a limited number of standard and custom components.
While delays in delivery of such single source components could cause delay in
shipments of certain products by Iwerks, at this time, Iwerks has no reason to
believe that any of the single-source vendors present a serious risk. Consistent
with industry practice, Iwerks generally purchases components of its theatre
systems upon receipt of an order. Certain components used by Iwerks, including
lenses, hydraulic power sources and motion bases must be ordered up to four
months in advance to assure timely delivery. Iwerks maintains an inventory of
these items as it deems appropriate to service forecasted demand.
Ballantyne of Omaha, a leading manufacturer of professional motion picture
projectors, supplies Iwerks with its 870 projectors. Iwerks makes substantial
modifications to the projectors to make them suitable for Iwerks' use. Lenses
and lamphouses incorporated in the projection systems are supplied to Iwerks by
third parties. If the Ballantyne projectors were for any reason to become
unavailable, Iwerks believes that it would be able to substitute other
projectors; however, Iwerks may experience a temporary reduction of quality
until Iwerks' engineers are able to design the necessary modifications to
achieve the desired quality. A reduction in quality could have a material
adverse impact on Iwerks' business.
Iwerks and Vickers Incorporated, a leading manufacturer of hydraulic
components, jointly developed the hydraulically actuated seats which are used in
the Turbo Tour ride simulation
<PAGE>
theatre. Under the agreement pursuant to which the hydraulically actuated seats
were developed, Iwerks owns all rights in and to the seats. Vickers continues as
the sole manufacturer of these motion bases on behalf of Iwerks; however, Iwerks
has the right under its agreement with Vickers to secure alternate sources of
manufacturing at any time. The metal fabrication portion of the Motion Master is
performed by a third party. To the extent that the outside supplier may be
unable to produce acceptable quality or with acceptable lead times, the Company
may experience a temporary reduction in its ability to deliver this product.
This could have a material adverse impact on the Company's business.
RISK FACTORS
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DEPENDENCE ON PRODUCTION OF FILM SOFTWARE. The Company's ability to
implement its business strategy depends in large part upon its ability to
successfully create, produce and market entertainment and educational film
software for exhibition in its theatre systems. The size and quality of the
Company's library of film software titles is a material factor in competing for
sales of the Company's attractions and developing the Company's base of
recurring revenue. The Company has invested $5.0 million, $2.6 million and $ .8
million in film software during fiscal 1994, 1995 and 1996. At June 30, 1996,
the Company had recorded on its balance sheet film inventory with a net value of
$3.4 million. The Company generally produces and develops specialty films and
videos for its library with production budgets in a range of approximately
$100,000 to $2.0 million. While the Company may enter into participation,
licensing or other financing arrangements with third parties in order to
minimize its financial involvement in production, the Company is generally
subject to substantial financial risks relating to the production and
development of new entertainment and educational software. The Company typically
is required to pay for the production of software during the production period
prior to release and typically is unable to recoup these costs from revenues
from exhibition licenses prior to 24 to 36 months following release. There can
be no assurance that the Company will be able to create and produce additional
software for its library which will be perceived by its customers to be of high
quality or high entertainment value.
The Company periodically reviews the net realizable value of its film
inventory and makes adjustments to its carrying value when appropriate. In
fiscal 1995, the Company reduced its film inventory by $3.4 million. While the
current carrying value of the Company's film inventory reflects management's
belief that the Company will realize the net value recorded on the Company's
balance sheet, there can be no assurance that the Company will be able to do so.
A determination by the Company to write down any material portion of its film
inventory will have a materially adverse impact on the Company's results of
operations.
DEPENDENCE OF OWNED AND OPERATED OPERATIONS UPON SPONSORSHIP REVENUES. The
Company derived $2.1 million, $3.7 million and $7.4 million of revenues for
fiscal 1994, 1995 and 1996, respectively, from sponsorship of its fleet of
touring motion simulators. Sponsorship revenues prior to January 1996 were
primarily derived from a single contract with a major telecommunications company
that has sponsored the Company's touring motion simulators since March 1994. In
January 1996, the Company entered into a sponsorship contract with a
<PAGE>
foreign sponsor, which contract expired in August 1996. There can be no
assurance that the Company will be able to extend or replace its existing
sponsorship arrangements when they expire. If the Company is unable to maintain
sponsorship revenues in the future at levels commensurate with that experienced
in the past, it could have a material adverse effect on the revenues and gross
profit margins derived by the Company from its Owned and Operated attractions
which would be mitigated, in part, by any additional revenues derived by the
Company from deployment of the touring units at other venues.
INTENSE COMPETITION; UNPREDICTABILITY OF CONSUMER TASTES. Competition in
each of the markets in which the Company competes is intense. IWERKS' 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 its direct
competitors, IWERKS also faces 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 IWERKS.
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 for the out-of-home entertainment
industry in response to these developments that are or may be directly
competitive with the Company's products. There is severe competition for
financial, creative and technological resources in the Company's industry and
there can be no assurance that the Company's existing products will continue to
compete effectively or that its products under development will ever be
competitive. Further, the commercial success of the Company's products is
ultimately dependent upon audience reaction. The Company believes that 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.
HISTORY OF OPERATING LOSSES; FLUCTUATING PERIODIC OPERATING RESULTS AND
CASH FLOW. The Company has sustained substantial operating losses in three of
its last five fiscal years. As of June 30, 1996, the Company's accumulated
deficit was $19.7 million. Although the Company reported profits for fiscal
1996, there can be no assurance that the Company will be consistently profitable
on either a quarterly or an annual basis or that it will be able to sustain
revenue growth in the future.
The Company has experienced quarterly fluctuations in operating results and
anticipates that these fluctuations will continue in future periods. The
Company's 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 and the amount of revenues from portable
simulation theatre and film licensing agreements. In particular, fluctuations in
theatre system 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. While a significant
portion of the Company's expense levels are relatively fixed, and the timing of
<PAGE>
increases in expense levels is based in large part on the Company's forecasts of
future sales. If net sales are below expectations in any given period, the
adverse impact on results of operations may be magnified by the Company's
inability to adjust spending quickly enough to compensate for the sales
shortfall. The Company may also choose to reduce prices or increase spending in
response to market conditions, which may have a material adverse effect on the
Company's results of operations.
Over the last three years certain events have contributed to fluctuations
in the Company's results of operations and financial condition. In the fourth
quarter of fiscal 1994, the Company experienced certain cost overruns on two of
its new products, along with some accelerated research and development costs
associated with those products. In the third quarter of fiscal 1995, the
Company's cost of sales increased dramatically as a percent of sales as a result
of a one-time $4.5 million write-down of certain assets, primarily film costs,
and third and fourth quarter sales and general administration expenses increased
as a result of restructuring charges related to the closure of the Company's
Sarasota, Florida facility, its consolidation of its operations and litigation
costs associated with the settlement of a securities class action lawsuit,
pursuant to which certain common stock and warrants have been issued.
INTERNATIONAL OPERATIONS. A significant portion of the Company's sales are
made to customers located outside of the United States, primarily in the Far
East, Europe and Canada. During fiscal 1994, 1995 and 1996, 43%, 55% and 47% of
the Company's revenues, respectively, were derived from sales outside the United
States. During fiscal 1996, the only foreign market with revenues over 10% of
the Company's revenues was the Japanese market with 11%. The Company expects
that international operations will continue to account for a substantial portion
of its revenues in the near future and maintains an office in Hong Kong to
support sales to Asia and one office in Holland to support sales in Europe.
International operations and sales may be subject to political and economic
risks, including political instability, currency controls, exchange rate
fluctuations, and changes in import/export regulations, tariff and freight
rates. 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 the
Company, or in the reduction of potential purchases of the Company's products.
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 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 resulting
in price and other concessions and discounts by the Company in order to maintain
sales activity. Although the Company has not experienced a reduction in unit
sales of its products to date, certain of its competitors have reported that the
recent recession in the United States has had an adverse impact on their sales
activity. Consequently, the Company is
<PAGE>
unable to predict to what extent, or for what period, a recessionary climate
would adversely affect sales of the Company's products.
DEPENDENCE ON SENIOR MANAGEMENT; RECENT CHANGES TO KEY PERSONNEL. Since
January 1995, all of the Company's executive officers have changed. The
recruitment, retention and motivation of skilled executives, sales, technical
and creative personnel and other employees are important to the Company's
operations. The Company's recent history has placed, and could continue to
place, a significant strain on the Company's management and other resources. In
addition, there is competition for management and creative personnel in the
Company's industries. Although the Company has not experienced significant
problems in recruiting and retaining qualified personnel, there can be no
assurance that it will not encounter such problems in the future. Should any key
executive officer cease to be affiliated with the Company before a qualified
replacement is found, the Company's business could be materially adversely
affected.
VOLATILITY OF STOCK PRICE. The Company's stock price has been, and is
likely to continue to be, highly volatile. The market price of the Common Stock
has fluctuated substantially in recent periods. During the 12 months prior to
August 19, 1996, the Company's market price has ranged from a low of $4.625 per
share to a high of $12.00 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 and acquisition or loss of significant customers may affect or be
perceived to affect the Company's operations, or changes in earnings estimates
by analysts, among other factors, could cause the market price of the Common
Stock 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 Common Stock.
LITIGATION: Iwerks has been named as a defendant in an action filed on or
about April 15, 1996, entitled Hollingsworth v. Iwerks Entertainment, Inc., et
al., Circuit Court of the 12th Judicial District for Sarasota, Florida, Case No.
CA-01 96-1930. Fred Hollingsworth III, a former director of Iwerks
Entertainment, Inc. and former chief executive officer and founder of Omni Films
International, Inc., filed suit against the Company and seven of its current or
former officers and directors. The complaint seeks unspecified damages arising
from alleged misconduct, including alleged misstatements and omissions, in
connection with the acquisition by Iwerks of Omni Films International, Inc. in
May 1994. The case has now been removed to the United States District Court for
the Middle District of Florida. The Company believes it has meritorious defenses
regarding this matter and, therefore, intends to vigorously defend against this
action. However, due to the uncertainties inherent in litigation, and because no
discovery has yet been undertaken, the ultimate outcome of this matter cannot be
ascertained at this time.
The Company is also a party to various other actions arising in the
ordinary course of business which, in the opinion of management, will not have a
material adverse impact on the Company's financial condition; however, there can
be no assurance that the Company will not become a party to other lawsuits in
the future, and such lawsuits could potentially have a material adverse effect
on the Company's financial condition and results of operations.
<PAGE>
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
leases its corporate headquarters and manufacturing facilities. The Company
could be held liable for the costs of remedial actions with respect to hazardous
substances on such properties under the terms of the governing lease and/or
governing law. Although the Company has not been notified of, and is not
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 its leased
properties. In addition, the Company's subcontractors and other third parties,
which it has contractual relations with, are similarly subject to such laws.
EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Board of Directors has
the authority to issue up to 1,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of Preferred Stock. While the Company has no present
intention to issue shares of Preferred Stock, such issuance, while providing
desirable flexibility in connection with the possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or preventing a
change in control of the Company and entrenching existing management. In
addition, such Preferred Stock may have other rights, including economic rights
senior to the Common Stock, and, as a result, the issuance thereof could have a
material adverse effect on the market value of the Common Stock.
A number of provisions of the Company's Certificate of Incorporation and
By-Laws and certain Delaware laws and regulations relating to matters of
corporate governance, certain rights of Directors and the issuance of preferred
stock without stockholder approval, may be deemed to have and may have the
effect of making more difficult, and thereby discouraging, a merger, tender
offer, proxy contest or assumption of control and change of incumbent
management, even when stockholders other than the Company's principal
stockholders consider such a transaction to be in their best interest.
In addition, the Company has adopted a Stockholder Rights Plan (the
"Agreement"). Pursuant to the Agreement each outstanding share of the Company's
Common Stock has received one Right as a dividend that becomes exercisable upon
certain triggering events related to an unsolicited takeover attempt of the
Company.
PATENTS AND TRADEMARKS
Iwerks has been issued US Patents on features of Iwerks' motion base and
motion control system used in its ride simulation theatres and all claims have
been allowed on its patent applications on certain features of its new
Quatro(TM) projection system. Iwerks has registered its principal trademarks in
the United States and selected other countries.
<PAGE>
EMPLOYEES
At August 1, 1996 Iwerks employed 162 persons, of whom 20 employees were
employed in management, finance and administration, 25 were employed in sales
and marketing, and 117 were employed in operations. Although Iwerks has not
experienced difficulties in obtaining qualified personnel and anticipates that
it will be able to continue to recruit qualified personnel for its operations,
there can be no assurance that such personnel will be available when required.
None of Iwerks' employees are represented by a collective bargaining agreement.
Iwerks believes that its relations with its employees are good.
ITEM 2. PROPERTIES.
- ------------------
Iwerks maintains its principal facility in Burbank, California where it
leases space under four separate leases on adjacent facilities consisting of
36,000, 23,460, 7,596 and 5,184 square feet each, expiring between September 30,
1996 and October 14, 1996. Iwerks leases the space for an aggregate lease
payment of approximately $40,000 per month. Notice of extension has been given
for the four leases, that will now expire from September 30, 1999 to September
30, 2001, with a revised rental cost of approximately $41,200 per month. Iwerks
believes that its current facilities are adequate to meet its needs for the
immediate future. If Iwerks' operations were to expand, Iwerks may require
additional office, warehouse and manufacturing facilities. Iwerks believes that
suitable facilities nearby Iwerks' principal facility in Burbank, California are
generally available.
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------
Iwerks has been named as a defendant in an action filed on or about
April 9, 1996, entitled Hollingsworth v. Iwerks Entertainment, Inc., et al.,
Circuit Court of the 12th Judicial District for Sarasota, Florida, Case No. CA-
01 96-1930. Fred Hollingsworth III, a former director of Iwerks Entertainment,
Inc. and former chief executive officer and founder of Omni Films International,
Inc., filed suit against the Company and seven of its current or former officers
and directors. The complaint seeks unspecified damages arising from alleged
misconduct, including alleged misstatements and omissions, in connection with
the acquisition by Iwerks of Omni Films International, Inc. in May 1994. The
case has now been removed to the United States District Court for the Middle
District of Florida. The Company believes it has meritorious defenses regarding
this matter and, therefore, intends to vigorously defend against this action.
However, due to the uncertainties inherent in litigation, and because no
discovery has yet been undertaken, the ultimate outcome of this matter cannot be
ascertained at this time.
The Company is also a party to various other actions arising in the
ordinary course of business which, in the opinion of management, will not have a
material adverse impact on the Company's financial condition; however, there can
be no assurance that the Company will not become a party to other lawsuits in
the future, and such lawsuits could potentially have a material adverse effect
on the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -----------------------------------------------------------
During the last quarter of the Registrant's fiscal year ended June 30,
1996, no matter was submitted to a vote of the security holders of the
Registrant.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -----------------------------------------------------------------------------
The Company's Common Stock trades under the symbol "IWRK" on the NASDAQ
National Market System. The following table sets forth the range of high and low
last sale prices per share for the Common Stock on the NASDAQ National Market
System for the periods indicated.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Year ending June 30, 1997
First quarter (through August 19, 1996) 10 3/8 7
Year ended June 30, 1996
Fourth quarter ended June 30, 1996 12 6 15/16
Third quarter ended March 31, 1996 8 1/4 6 1/8
Second quarter ended December 31, 1995 6 7/8 4 5/8
First quarter ended September 30, 1995 6 3/8 4
Year ended June 30, 1995
Fourth quarter ended June 30, 1995 4 1/2 2 7/8
Third quarter ended March 31, 1995 5 3/8 4
Second quarter ended December 31, 1994 6 1/2 4 3/8
First quarter ended September 30, 1994 7 4 3/8
</TABLE>
As of August 19, 1996, the Company had 441 stockholders of record. The
Company has in excess of 400 beneficial holders of its common stock.
DIVIDEND POLICY
The Company has not paid any dividends on its common Stock and currently
intends to retain any future earnings for use in its business. Therefore, the
Company does not anticipate paying any dividends on its Common Stock in the
foreseeable future.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
- -------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................... $18,188 $32,239 $36,625 $ 44,975 $48,516
Cost of sales......................................... 12,021 21,932 28,921 33,080 28,675
------- ------- ------- -------- -------
Gross margin.......................................... 6,167 10,307 7,704 11,895 19,841
Selling, general and administrative expenses.......... 5,527 8,307 13,199 24,940 17,019
Research and development.............................. 317 588 3,027 848 358
------- ------- ------- -------- -------
Income (loss) from operations......................... 323 1,412 (8,522) (13,893) 2,464
Interest income....................................... 39 97 984 1,042 1,164
Interest expense...................................... 102 64 478 537 380
------- ------- ------- -------- -------
Income (loss) before provision for income taxes....... 260 1,445 (8,016) (13,388) 3,248
Provision for income taxes............................ 30 198 39 85 149
------- ------- ------- -------- -------
Net income (loss)..................................... $ 230 $ 1,247 $(8,055) $(13,473) $ 3,099
======= ======= ======= ======== =======
Net income (loss) per common share.................... $ .04 $ .18 $ (1.05) $ (1.32) $ .26
======= ======= ======= ======== =======
Weighted average shares outstanding................... 5,978 6,967 7,666 10,210 12,144
======= ======= ======= ======== =======
BALANCE SHEET DATA (AT END OF YEAR):
Cash and investment in debt securities................ $ 1,328 $ 2,101 $26,526 $20,586 $25,281
Total assets.......................................... 10,098 25,386 81,235 71,626 72,926
Notes payable and capital lease obligations
(excluding current portion)........................... 134 2,757 3,349 2,130 2,732
Stockholders' equity.................................. 1,082 7,278 62,335 50,374 56,665
</TABLE>
Selected financial data includes Omni since the acquisition date of May 18,
1994.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS.
- -------------
GENERAL
IWERKS is engaged in the business of designing, engineering, manufacturing,
marketing and servicing specialty theatre systems which employ a variety of
projection, show control, motion simulation and software technologies. The
Company also owns and operates or has a financial interest in both mobile and
fixed-location motion simulation theatres.
Since its inception in 1986, Iwerks has expanded on its initial proprietary
large format 870 film projection product to include motion simulation, 360
degree video, 1570 large format projection, group interactive, and 3-D
attractions. The Company also developed and built a fleet of 17 mobile motion
simulation attractions which it owns and operates. To support these systems, the
Company has produced a library of film software which it licenses to operators
of its systems. With this diverse array of software driven entertainment
products, in 1992 Iwerks developed a strategy for entertainment centers that
would incorporate each of its products along with food service and retail sales.
To support this strategy, the Company committed significant resources to film
software, research and development and expansion of its corporate
infrastructure. In May 1994 Iwerks acquired Omni Films International, Inc., a
Sarasota, Florida competitor.
Fiscal 1995 was a year of significant change for the Company. A principal
operating strategy of the Company had been the development of a new type of
entertainment venue which the Company referred to as "Cinetropolis entertainment
centers." As conceived by the Company, this product combines IWERKS attractions
with restaurants and specialty retail concepts in a highly themed environment to
create a "movie-based entertainment center." The Company devoted significant
resources in fiscal 1993 and 1994 to the development and marketing of this new
entertainment concept. Included in this effort was substantial research and
development expenditures in fiscal 1993 and 1994 to complete two new
attractions, the Company's Virtual Adventures attraction and IWERKS 1570
attractions. In addition, during these periods and in the first half of 1995,
the Company committed significant resources to the production of film software
for exhibition at Cinetropolis centers. In addition, the Company significantly
expanded its corporate infrastructure during this period to support an
anticipated successful roll-out of its Cinetropolis strategy. These efforts
contributed to a net loss recognized by the Company in fiscal 1994 of
approximately $8.1 million.
In fiscal 1995, the Company took a number of steps designed to return the
Company to profitability. The Company brought in new management, consolidated
its operations into one primary location, implemented a reduction in force and
reoriented its product strategies. However, by taking these steps during the
fiscal year, the Company was required to recognize a number of accounting
charges which contributed to the Company's net loss for the year. Nevertheless,
management of the Company believed that the cumulative effect of these decisions
will result in a more cost efficient operation with fewer layers of management
and more rapid and direct decision making.
<PAGE>
The Company streamlined its management and concentrated its operations
under the supervision of four new executives. Roy A. Wright was appointed Chief
Operating Officer in December 1994 and assumed the position of Chief Executive
Officer on July 1, 1995.
The Company implemented, during fiscal 1995, a significant reduction in
force and consolidated all of its principal operations at its Burbank,
California facility. The Company employed 175 persons at September 10, 1995
compared to 253 at August 29, 1994, representing a 31% reduction in personnel.
During the third quarter of fiscal 1995, the Company approved a restructuring
plan which involved the closure of its Sarasota, Florida manufacturing facility.
The relocation of these operations to Burbank, California was expected to be
complete by Fall of Calendar 1995. In August 1995, the Company relocated its
portable touring operations from Newport Beach, California to Burbank,
California. With the completion of the Sarasota consolidation, all of the
Company's operations other than regional sales offices are located in Burbank,
California.
The lack of market response to the Company's Cinetropolis product strategy
led to a determination by new management to refocus the Company's approach to
the owned and operated market. The Company has modified its approach to the
Cinetropolis product strategy. It continues, however, to focus on opportunities
to participate in the ownership and operation of its attractions. The Company
owns and operates a fleet of 17 portable ride simulation theatres and is
exploring other potential touring opportunities. The Company continues to
evaluate opportunities to participate in the operation of its fixed-base
attractions either through direct equity ownership or through licensing
arrangements. In this regard, the Company is focusing on less capital intensive
strategies without the high level of commitment of management and other
resources employed in the past.
The foregoing resulted in several charges during fiscal 1995 that affected
the Company's results of operations. The Company incurred increased professional
and consulting fees during the year in connection with its review of operations,
which are included in SG&A for the year. The level of SG&A was negatively
impacted by a $1,027,000 restructuring charge associated with the Company's
decision to restructure its manufacturing operations and effect a reduction in
force. The change in the Company's Cinetropolis product strategy resulted in
accounting charges in the aggregate amount of $4.5 million, primarily consisting
of a write-down of $3.5 million in the carrying value of the Company's film
inventory and a write-down of $1 million in the carrying value of certain
property and equipment associated with the Company's Virtual Adventures
attraction.
In addition to the accounting charges discussed above, there is included in
the results of operations for the 1995 fiscal year an adjustment of
approximately $1,100,000 relating to the write-down of certain accounts
receivable and other assets.
During fiscal 1996, the management restructuring, facility consolidation,
and reductions in staff contributed to improve margins and reduce selling,
general and administrative expenses. These actions along with an increase in
total revenues have resulted in net income in all four quarters of fiscal 1996
as discussed in the following Results of Operations.
<PAGE>
RESULTS OF OPERATIONS
Iwerks derives its revenues primarily from three sources: sales of hardware
systems, owned and operated (primarily portable simulation theatres), and
licensing of films. To a lesser extent, revenues are also earned from service to
existing theatre owners and production of films for third parties.
Revenues on sales of theatre systems are recognized on the percentage-of-
completion method over the life of the contract; typically the majority of such
revenues are recognized in the 6 to 8 weeks prior to shipment of the theatre
system. Accordingly, the timing of shipment schedules as dictated by the
customer can result in variability of quarterly revenues and earnings. The gross
margin for each contract varies based upon pricing strategies, competitive
conditions and product mix.
Revenues from owned and operated (O & O) consist of portable ride
simulation theatre revenues derived primarily from corporate sponsorship or
ticket sales at state fairs, air shows, and similar events, as well as revenues
derived from fixed site joint venture revenues which includes the Company's
contractual share of the sites' revenues or profits as applicable. Admission
revenues from the portable ride simulation theatres are subject to variability
due to the seasonal nature of these events and are higher during the summer
months. Sponsorship and contract revenues for the portable theatres are
recognized ratably over the term of the contract.
The Company typically licenses its film software under one year film
license agreements and revenues and related expenses are recognized at the
beginning of the license period.
The Company recognizes revenues and costs associated with the production of
custom films at the time of completion and acceptance by the customer.
Accordingly, the timing of completion of custom films can result in substantial
variability of quarterly revenues and gross margin. The Company typically
realizes a smaller margin from the sale of custom films in comparison to its
theatre system sales.
On May 18, 1994, the Company acquired Omni Films International, Inc. for an
aggregate of $4.6 million in cash (net of cash received and including
acquisition costs) and 1,303,030 shares of the Common Stock of the Company. The
acquisition was accounted for under the purchase method and the related Goodwill
of $14,521,000 is being amortized over 30 years. The operations of Omni Films
have been consolidated with the operations of the Company since the date of
acquisition.
A significant portion of the Company's sales are made to customers located
outside of the United States, primarily in Asia, Canada and Europe. During
fiscal 1994, 1995 and 1996, 43%, 55% and 47% of the Company's revenues,
respectively, were derived from sales outside of the United States. The Company
expects that international sales will continue to represent a significant
portion of its revenues in the near future and maintains an office in Hong Kong
to support sales to Asia. International operations and sales may be subject to
political and economic risks, including political instability, currency
fluctuations, changes in import/export regulations, tariff and freight rates. In
addition, various forms of protectionist trade legislation have been proposed in
the United States and in certain other countries. Any resulting change in
current tariff structures or other trade and monetary policies could adversely
affect the Company's
<PAGE>
international operations. Political and economic factors have been identified by
the Company with respect to certain 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 the Company, or in the reduction of potential
purchases of the Company's products. Typically, sales are denominated in United
States dollars and are backed by letters of credit, which reduce the risks
attendant to international sales.
REVENUES
Revenues for the fiscal year ended June 30, 1994, 1995 and 1996 are
analyzed in the following table:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------------------------------------
1994 % 1995 % 1996 %
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Hardware sales & service $27,974,592 76% $24,744,947 55% $27,997,853 58%
Owned and operated 5,333,452 15% 9,278,716 21% 13,468,712 28%
Film licensing 1,237,862 3% 4,096,273 9% 4,800,035 10%
Film production and other 2,078,725 6% 6,854,994 15% 2,249,409 4%
----------- ---- ----------- ---- ----------- ----
$36,624,631 100% $44,974,930 100% $48,516,009 100%
=========== ==== =========== ==== =========== ====
</TABLE>
Total revenues for the fiscal years ended June 30, 1994, 1995 and 1996 were
$36,624,631, $44,974,930, and $48,516,009, respectively. The 23% increase in
total revenues from 1994 to 1995 resulted from the significant increase in
revenues from portable theatre events (O&O), a 231% increase in film licensing
and several custom film contracts for which there were no similar contracts in
either 1994 or 1996. Revenues in 1996 increased in all three primary revenue
sources with a 13% increase in hardware sales, a 45% increase in owned and
operated especially from foreign sources, and a 17% increase in film and other
software licensing.
Historically, a majority of the Iwerk's revenues have been generated by the
sale of hardware which is generally considered a one time sale even though it
initiates a recurring stream of film and other software license revenues
thereafter. The Company's strategy to develop recurring revenues includes both
film and other software licensing and owned and operated (O&O). O&O revenues are
derived from portable theatre events, Cinetropolis license and trademark fees,
and revenues from a growing network of joint venture fixed-location simulation
theatres. O&O revenues have increased 74% from 1994 to 1995 and 45% from 1995 to
1996. In fiscal 1996, these revenues include foreign source revenues from
Taiwan, Puerto Rico, Argentina, and a cancellation settlement for an event in
Japan. The fleet of touring ride simulation theatres grew from 12 at the close
of fiscal 1995 to 17 early in fiscal 1996. Sponsorship events during the period
were primarily with one customer and are currently scheduled through the first
fiscal quarter in 1997. Film licensing revenues increased 231% from 1994 to
1995, in part because of the Omni Films acquisition, and increased 17% from 1995
to 1996 because of the increase in the number of film license agreements.
Theatre hardware sales decreased 17% from 1994 to 1995 notwithstanding the
$10 million increase in hardware sales derived from the addition of the Omni
product line in May 1994 and increased 13% from 1995 to 1996 on increased demand
for the Company's theatre systems. Revenues in fiscal 1994 were favorably
affected by a single contract which accounted for approximately $6.6 million and
the hardware sales to Cinetropolis sites in the amount of $7 million. No
similarly large contracts occurred in fiscal 1995. Other revenues have various
<PAGE>
sources including exclusivity agreements, distribution rights, forfeited
deposits and settlements on canceled contracts.
COST OF SALES primarily includes costs of theatre systems sold, expenses
associated with operating portable ride simulation theatres, and costs
associated with film production and licensing fees. The cost of theatre systems
include the cost of components, customization, engineering, project management,
assembly, system integration and installation. Also included are royalties
payable to a former joint venture partner and estimated warranty expenses. The
costs associated with film license fees primarily reflect amortization of film
production costs and royalties paid to third parties over the lives of certain
films. The cost of sales associated with operating portable ride simulation
theatres include costs for personnel, depreciation, event fees, fuel, insurance
and maintenance. The Company's results of operations may vary significantly from
quarter to quarter depending on the timing of theatre system shipments, the mix
of theatre system contracts, the completion of custom film sales, the amount of
revenue attributable to portable ride simulation theatres and film licensing
agreements.
Cost of sales as a percentage of sales was 79%, 74% and 59% for the fiscal
years ended June 30, 1994, 1995 and 1996, respectively.
The improvement in gross profit margin from 1994 to 1995 came in spite of
the $4.5 million accounting charge to cost of sales reflecting a write down of
certain assets, primarily film costs. Without this charge, the gross profit
margin improved from 21% in 1994 to a 36% gross profit margin in 1995. This
increase came from improved results from portable theatre events with corporate
sponsorships and improved margins on higher service revenues. The profit margin
from the sale of theatre hardware improved from a 19% gross profit margin in
1994 to 34% in 1995 because of the additional theatre hardware sales from the
Omni product line.
The gross profit margin improved in 1996 to 41% primarily because of the
Company's focus on hardware profit margins as well as attention to pricing and
improved margins in O&O particularly the portable theatre events where the
margin was favorably impacted by cancellation fees associated with a canceled
contract, which amounts were partially offset by costs incurred in anticipation
of performance under the contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) include personnel
costs, trade shows and other promotional expenses, sales commissions, travel
expenses, public relations costs, amortization of goodwill, professional fees
and divisional administrative costs.
Selling, general and administrative expenses were $13,198,595, $24,940,040
and $17,018,553, for the years ended June 30, 1994, 1995 and 1996, respectively.
From 1994 to 1995, SG&A increased 89%. This increase resulted in part, from
the acquisition of Omni in May 1994 and the related additional sales and
marketing costs of approximately $1 million and acquisition related goodwill
amortization of $484,000, for which there was a full year of charges. Other
increased expenses include litigation costs associated with the class actions
claims of $1.7 million and increased bad debts of $1.1 million.
<PAGE>
The 32% decrease in SG&A from 1995 to 1996 resulted primarily from
reduction in marketing and administrative costs associated with the closure of
the Sarasota, Florida facility, and from the 1995 litigation costs and bad debt
charges, for which there were no comparable charges in 1996.
RESEARCH & DEVELOPMENT
Research and development costs decreased significantly during fiscal 1995
as compared to 1994 because of the substantial completion of the new product
projects, namely Virtual Adventures and Iwerks 1570, in 1994. Expenditures on
research and development during 1996 decreased further as the development effort
on the IWERKS Quatro(TM) projection system has been substantially completed. The
first sale of Quatro(TM) began in fiscal 1996 and it has become the projection
system of choice for smaller simulation theatres. The Company has applied for
patent protection of certain features on the Quatro(TM) and all claims have been
allowed on the Company's patent application.
INTEREST INCOME & EXPENSE
Interest income for 1994, 1995 and 1996 was $983,837, $1,042,607 and
$1,163,768, respectively. The increase from 1994 to 1995, as well as from 1995
to 1996, resulted primarily from higher invested cash balances during the
respective periods.
Interest expense for 1994, 1995 and 1996 of $478,235, $536,952 and $380,482
resulted primarily from financing costs on the portable ride simulation
theatres. Three portable units were added during 1994 and seven additional units
were added near the end of 1995. The financing for the five units placed in
service at the beginning of fiscal 1996 was not completed until immediately
prior to the end of the fiscal year and did not impact interest expense for
fiscal 1996.
NET INCOME
Net income (loss) for the fiscal years ended June 30, 1994, 1995 and 1996
was ($8,055,094), ($13,473,193) and $3,098,726, respectively. As noted earlier,
the losses incurred in fiscal 1994 resulted primarily from large research and
development costs associated with Virtual Adventures and Iwerks 1570, higher
than anticipated costs associated with the initial deliveries of these new
products and the increased selling, general and administrative (SG&A)costs
associated with the Cinetropolis strategy. The loss incurred in fiscal 1995
resulted from the costs of consolidating the Sarasota, Florida facility to
Burbank, the restructuring costs, the write-down of certain assets as a result
of the redirection of the Company's product strategy, and the costs associated
with settlement of the class action lawsuit. The net income recorded for fiscal
1996 reflects an improvement in both sales and profit margins and a reduction in
SG&A costs.
SEASONALITY AND FLUCTUATING QUARTERLY RESULTS
The following tables set forth unaudited data regarding operations for each
quarter of fiscal 1995 and 1996 and the percentage of the Company's revenue and
expenses represented by each item of the respective quarter. This quarterly
information has been prepared on the same basis as the annual consolidated
financial statements and, in management's opinion, contains all
<PAGE>
normal recurring adjustments necessary to fairly state the information set forth
herein. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
Fiscal 1995 Fiscal 1996
-------------------------------------- ----------------------------------------
First Second Third Fourth First Second Third Fourth
(Dollars in thousands) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------ ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................ $11,023 $10,686 $10,838 $12,428 $10,096 $13,207 $13,825 $11,388
------- ------- ------- ------- ------- ------- ------- -------
Cost of sales.......................... 6,867 6,276 12,201 7,736 5,720 8,239 7,642 7,074
------- ------- ------- ------- ------- ------- ------- -------
Selling, general and administrative.... 4,877 5,320 7,125 7,618 4,241 4,579 4,921 3,277
------- ------- ------- ------- ------- ------- ------- -------
Research and development............... 192 338 186 132 90 69 110 89
Interest (income) expense, net......... (127) (99) (64) (215) (96) (284) (226) (177)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
for taxes............................. (786) (1,149) (8,610) (2,843) 141 604 1,378 1,125
Provision for taxes.................... - - - 85 - - - 149
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)...................... $ (786) $(1,149) $(8,610) $(2,928) $ 141 $ 604 $ 1,378 $ 976
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
Percentage of Annual Total
-------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................ 24% 24% 24% 28% 21% 27% 29% 23%
------- ------- ------- ------- ------- ------- ------- -------
Cost of sales.......................... 21% 19% 37% 23% 20% 29% 27% 24%
------- ------- ------- ------- ------- ------- ------- -------
Selling, general and administrative.... 20% 21% 28% 31% 25% 27% 29% 19%
------- ------- ------- ------- ------- ------- ------- -------
Research and development............... 23% 40% 22% 15% 25% 19% 31% 25%
Interest (income) expense, net......... 25% 19% 13% 43% 12% 36% 29% 23%
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
for taxes............................. 6% 8% 64% 22% 4% 19% 42% 35%
Provision for taxes.................... - - - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)...................... 6% 8% 64% 22% 5% 19% 44% 32%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company's operating results fluctuate from quarter to quarter as a
result of the timing of theatre system shipments, the mix of theatre system
contracts, the completion of custom film contracts and the amount of revenues
from portable simulation theatre and film licensing agreements. Historically,
the first fiscal quarter generated the lowest quarterly revenue. With the
increase in revenues from Portable Theatre Events, where most revenues are
generated during the summer outdoor events season, this trend was broken in
fiscal 1995. Hardware sales will likely continue to experience inexplicable
quarterly fluctuations as they are substantially dependent on the customers'
varying delivery and installation requirements.
Over the last eight quarters, certain events have caused unusual
fluctuations. In the third quarter of fiscal 1995, cost of sales increased
dramatically as a percent of sales as a result of a one
<PAGE>
time $ 4.5 million write down of certain assets, primarily film costs, and third
and fourth quarter SG&A increased as a result of restructuring charges including
those related to the operational consolidation and the closure of the Sarasota,
Florida facility and litigation costs associated with the class action lawsuit.
In fiscal 1996, selling, general and administrative expenses increased in the
third quarter as performance compensation was accrued upon achieving a level of
profitability, and revenues and profit margin were favorably impacted in the
third quarter because of cancellation fees received in respect to a cancelled
contract. A significant portion of the Company's operating expenses are
relatively fixed, and planned expenditures are primarily based upon forecasts.
However, the sales cycle for the sale of a single attraction by the Company
typically ranges between six and nine months. The Company has little control
over the timing of customer purchases. In addition, the Company has experienced
significant increases in operating expenses to grow its corporate
infrastructure.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily from
net proceeds from the private placement of $10.3 million in Preferred Stock, net
proceeds of $47 million from the initial public offering of Common Stock in
fiscal 1994, and cash flow from operations. The Company has also received cash
in the amount of $5 million for the sale of certain distribution rights.
At June 30, 1994, the Company's principal source of liquidity included cash
of $8.5 million, investments in debt securities of $18.1 million, and $5.5
million of trade receivables. In addition, the Company had a $5 million bank
line of credit and its Omni subsidiary had a $1 million bank line of credit,
$600,000 under these lines were drawn down at June 30, 1994.
In fiscal 1995, approximately $4.9 million in cash was provided by
operations. Increases were primarily provided by an increase of $1.2 million in
net advance deposits collected on pending projects in excess of accumulated
costs to date and an increase in accrued expenses of $5.8 million. Offsetting
these cash sources was an increase of $1.5 million in trade accounts receivable
reflecting a decision to accept selected project payment plans with selected
terms.
The Company's major investing activities in fiscal 1995 included
approximately $2.6 million in film, $1.2 million in property, plant and
equipment and $3.6 million in connection with portable simulation theatres.
Additional cash resources were used to pay a related party debt of $1.6 million
for the acquisition in May 1994 of a minority interest and an additional $1.0
million for the remainder 5% interest in IWERKS Touring Technologies, Inc. from
a Company officer.
In fiscal 1996, approximately $3.7 million in cash was provided by
operating activities, primarily from net income of $3.1 million, depreciation
and amortization of $6.4 million, and a decrease in accounts receivable of $1.3
million. Offsetting these cash sources were increases in inventories and costs
and estimated earnings in excess of billings on uncompleted contracts, and
decreases in accounts payable and accrued expenses of $4.2 million. The
Company's major investing activities included the purchase of debt securities
and to a lessor extent the purchases for property and equipment and additions to
the film library. During fiscal 1996, the major financing activities were the
repayment of notes payable and the $3,000,000 proceeds from the financing of
five Reactors that were placed in service early in the fiscal year.
<PAGE>
At June 30, 1996, the Company had cash and debt securities investments of
approximately $25.3 million, up from approximately $20.6 million at June 30,
1995. In addition, the Company has a $5 million bank line of credit, none of
which was drawn down at June 30, 1995 and 1996. The Company is in compliance
with all material covenants required under that line of credit. The Company
anticipates that its operating and investment activities in fiscal 1997 and
beyond, including expected investments in O & O joint ventures which could be
significant, will use cash and expects that its cash balance will decline.
However, the Company believes that its existing cash balances, the proceeds of
the debt securities it owns as they mature, potential financing from the
Company's $5 million line of credit, and cash flow from operations will be
sufficient to meet its cash requirements through fiscal 1997, 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 from operations is less than anticipated, the Company
may be required to obtain additional sources of cash.
OUTLOOK
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 materially
from those indicated in the forward looking statements are costs of sales and
the ability of the Company to manufacture and maintain pricing at a level to
sustain gross profit margins, the level of selling, general and administrative
costs, the performance by the Company under its existing purchased and
sponsorship contract and the ability to obtain new contracts, the success of the
Company's owned and operated strategy, the success of the Company's film
software, the effects of competition, and those other factors discussed above in
Management's Discussion and Analyses of Financial Condition and Results of
Operations, and elsewhere in this report.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ---------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Iwerks Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Iwerks
Entertainment, Inc. as of June 30, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Iwerks
Entertainment, Inc. at June 30, 1995 and 1996 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all materials respects the information set forth therein.
Los Angeles, California /s/ Ernst & Young LLP
August 2, 1996
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,731,332 $12,674,206
Investment in debt securities (Note 4) 12,619,370 6,781,548
Trade accounts receivable, net of allowance
for doubtful accounts (Note 1) 6,458,720 5,176,226
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note 5) 2,811,292 5,583,368
Inventories 2,142,382 2,798,244
Related party receivables (Note 8) 70,995 64,049
Refundable income taxes 330,600 -
----------- -----------
Total current assets 30,164,691 33,077,641
Investment in debt securities, excluding
current portion 2,234,983 5,825,747
Portable simulation theatres at cost, net of
accumulated depreciation 10,334,456 9,083,796
Property and equipment at cost, net of
accumulated depreciation and amortization
(Note 7) 4,884,202 3,518,908
Film inventory at cost, net of amortization
(Note 1) 4,874,332 3,372,332
Goodwill (Note 3) 18,264,772 17,359,926
Other assets 868,616 687,826
----------- -----------
Total assets $71,626,052 $72,926,176
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,371,768 $ 2,634,257
Accrued expenses 9,304,693 7,667,218
Notes payable to related parties, current
portion (Note 8) 423,638 874,699
Notes payable, current portion (Note 9) 1,435,345 570,532
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 5) 2,530,094 1,106,019
Deferred revenue (Note 8) 1,933,819 60,803
Capital leases, current portion (Note 12) 122,681 615,003
------------ ------------
Total current liabilities 19,122,038 13,528,531
Notes payable to related parties, excluding
current portion (Note 8) 823,534 -
Notes payable, excluding current portion
(Note 9) 1,034,861 81,164
Capital lease obligations, excluding
current portion (Note 12) 272,006 2,651,135
------------ ------------
Total liabilities 21,252,439 16,260,830
Commitments and contingencies (Note 12)
Stockholders' equity (Note 11):
Preferred stock, $.001 par value,
1,000,000 authorized, none issued
and outstanding - -
Common stock, $.001 par value,
20,000,000 shares authorized;
10,591,764 (1995) and 11,588,048
(1996) issued and outstanding 55,454 56,450
Paid-in capital 73,410,493 76,339,517
Unearned stock compensation (262,987) -
Deficit (22,829,347) (19,730,621)
------------ ------------
Total stockholders' equity 50,373,613 56,665,346
------------ ------------
Total liabilities and stockholders' equity $ 71,626,052 $ 72,926,176
============ ============
</TABLE>
See accompanying notes.
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Revenue $ 36,624,631 $ 44,974,930 $48,516,010
Cost of sales 28,920,617 33,080,372 28,674,960
------------ ------------ -----------
Gross margin 7,704,014 11,894,558 19,841,050
Selling, general, and administrative expenses 13,198,595 24,940,040 17,018,553
Research and development 3,027,373 848,166 358,094
------------ ------------ -----------
(Loss) income from operations (8,521,954) (13,893,648) 2,464,403
Interest income 983,837 1,042,607 1,163,768
Interest expense (478,235) (536,952) (380,482)
------------ ------------ -----------
(Loss) income before provision for
income taxes (8,016,352) (13,387,993) 3,247,689
Provision for income taxes (Note 10) 38,742 85,200 148,963
------------ ------------ -----------
Net (loss) income $ (8,055,094) $(13,473,193) $ 3,098,726
============ ============ ===========
Net (loss) income per common share $ (1.05) $ (1.32) $ .26
============ ============ ===========
Weighted average shares outstanding 7,665,641 10,209,663 12,144,299
============ ============ ===========
</TABLE>
See accompanying notes.
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred stock Common stock
------------------------ ---------------------
Paid-in Unearned stock Retained
Shares Amount Shares Amount capital compensation (deficit) Total
----------- ----------- ---------- -------- ----------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 2,566,110 $ 7,962,234 2,984,914 $47,850 $ 1,094,627 $(525,978) $ (1,301,060) $ 7,277,673
Issuance of Series E
convertible preferred
stock 210,526 2,000,000 2,000,000
Conversion of preferred
stock (Series A to E)
to common stock upon
consummation of the
initial public offering (2,776,636) (9,962,234) 2,413,819 2,414 9,959,820
Common stock options and
warrants exercised
(Note 11) 368,460 368 389,713 390,081
Issuance of common stock
in connection with the
initial public offering,
net of expenses 2,897,843 2,895 47,079,900 47,082,795
Issuance of common stock
in connection with
acquisition of Omni
(Note 3) 1,303,030 1,303 13,506,803 13,508,106
Amortization of unearned
stock compensation 131,495 131,495
Net loss (8,055,094) (8,055,094)
---------- ----------- ---------- ------- ----------- --------- ------------ ------------
Balance at June 30, 1994 - $ - 9,968,066 54,830 72,030,863 (394,483) (9,356,154) 62,335,056
========== =========== ========== ======= =========== ========= ============ ============
Common stock options
exercised (Note 11) 308,698 309 191,945 192,254
Issuance of common stock
in connection with the
minority interest
acquisition of Iwerks
Touring Technologies,
Inc. (Note 8) 315,000 315 1,187,685 1,188,000
Amortization of unearned
stock compensation 131,496 131,496
Net loss (13,473,193) (13,473,193)
---------- ------- ----------- --------- ------------ ------------
Balance at June 30, 1995 10,591,764 55,454 73,410,493 (262,987) (22,829,347) 50,373,613
========== ======= =========== ========= ============ ============
Issuance of common stock
in connection with the
class action settlement
(Note 16) 75,000 75 1,599,925 1,600,000
Common stock options and
warrants exercised
(Note 11) 961,284 961 1,579,059 1,580,020
Retirement of common stock (40,000) (40) (249,960) (250,000)
Amortization of unearned
stock compensation 262,987 262,987
Net income 3,098,726 3,098,726
---------- ------- ----------- --------- ------------ ------------
Balance at June 30, 1996 11,588,048 $56,450 $76,339,517 $ - $(19,730,621) $ 56,665,346
========== ======= =========== ========= ============ ============
</TABLE>
See accompanying notes.
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (8,055,094) $(13,473,193) $ 3,098,726
Adjustments to reconcile net (loss) income
to net cash provided by (used in)
operating activities:
Loss (income) from limited partnership 130,388 101,381 (46,279)
Depreciation and amortization 3,008,634 6,032,800 6,437,863
Write-down of other assets to net realizable value - 2,491,595 -
Write-down of film inventory to net realizable value - 3,507,201 -
Changes in operating assets and liabilities:
Trade accounts receivable, net (104,426) (1,530,097) 1,282,494
Costs and estimated earnings in excess
of billings on uncompleted contracts (2,344,269) 1,201,121 (2,772,076)
Inventories 35,744 861,908 (655,862)
Related party receivables 2,204,401 45,491 6,946
Refundable income taxes (330,600) - 330,600
Deferred tax assets 330,600 - -
Other assets (626,519) 629,470 120,252
Accounts payable (973,502) 661,363 (737,511)
Accrued expenses 836,349 5,808,921 (37,475)
Related party payable 235,000 - -
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,577,755) 28,641 (1,424,075)
Deferred revenue (2,678,890) (1,485,870) (1,873,016)
Income taxes payable (528,200) - -
------------ ------------ -----------
Net cash (used in) provided by
operating activities (10,438,139) 4,880,732 3,730,587
INVESTING ACTIVITIES
Investment in limited partnership - (218,000) -
Investment in patents - - (21,370)
Investment in portable simulation theatres (2,816,476) (3,627,636) (184,471)
Purchases of property and equipment (2,350,731) (1,222,396) (312,442)
Additions to film inventory (4,964,373) (2,624,068) (789,963)
Investment in debt securities (18,068,257) 3,213,904 2,247,058
Purchase of minority interest in ITT, net
of common stock issued - (2,646,000) -
Purchase of Omni Films International, Inc.,
net of cash acquired and stock issued (4,634,350) - -
------------ ------------ -----------
Net cash (used in) provided by investing
activities (32,834,187) (7,124,196) 938,812
FINANCING ACTIVITIES
Restricted cash for borrowing 379,078 - -
Proceeds from issuance of related party debt 600,000 - -
Proceeds from issuance of debt 546,381 1,364,569 -
Proceeds from capital lease - - 3,000,000
Repayment of notes payable to related parties (397,335) (398,639) (372,473)
Repayment of notes payable (603,410) (1,651,229) (1,818,510)
Payments on capital leases (121,062) (121,538) (128,549)
Issuance of preferred stock 2,000,000 - -
Issuance of common stock from the initial public
offering net of expenses 47,082,795 - -
Exercise of stock options and warrants 390,081 192,254 1,580,020
Retirement of common stock - - (250,000)
Other 131,495 131,496 262,987
------------ ------------ -----------
Net cash provided by (used in)financing
activities 50,008,023 (483,087) 2,273,475
------------ ------------ -----------
Net increase (decrease) in cash 6,735,697 (2,726,551) 6,942,874
Cash and cash equivalents at beginning of year 1,722,186 8,457,883 5,731,332
------------ ------------ -----------
Cash and cash equivalents at end of year $ 8,457,883 $ 5,731,332 $12,674,206
============ ============ ===========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest, net of amount capitalized $ 422,975 $ 385,663 $ 418,811
============ ============ ===========
Income taxes $ 527,000 $ 78,000 $ 61,000
============ ============ ===========
</TABLE>
<PAGE>
Supplemental disclosures of non-cash investing and financing activities -
In 1996, $1,600,000 was recorded to stockholders' equity from accrued
expenses due to the issuance of common stock and warrants in connection with
the finalization of the class action settlement.
Capital lease obligations increased by $50,000, in 1994, due to the
purchase of property and equipment and portable simulation theatres (none in
1995). Capital lease obligations increased by $3,000,000, in 1996, due to the
purchase of portable simulation theatres.
In 1994, the Company acquired Omni Films International, Inc. for
$19,169,607 including acquisition costs in exchange for Company common stock
valued at $13,508,106 and cash.
In 1995, the Company increased film inventory by $574,750 with a
corresponding increase in notes payable.
In 1994 and 1995, the Company acquired the minority interest of Iwerks
Touring Technologies, Inc. for $2,428,000 and $1,400,000, respectively, in
exchange for Company Common Stock valued at $828,000 and $360,000, respectively,
and cash.
See accompanying notes.
<PAGE>
IWERKS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION - Iwerks Entertainment, Inc. (the
"Company" or "Iwerks") originally incorporated in California and became a
Delaware corporation concurrent with its initial public offering in October
1993. The Company designs, manufactures, installs and services high resolution,
proprietary motion picture theatre attractions in amusement and theme parks,
world expositions, museums, visitor centers, casinos and newly emerging
entertainment venues. The Company's attractions are built around a variety of
theatre systems, including fixed and portable simulators, giant screen, 360
degree, 3D theatres, and virtual reality theatre systems. These theatre systems
use entertainment software to create a total reprogrammable attraction, complete
with all necessary hardware and software.
The Company operates in one business segment, the manufacture, distribution
and operation of entertainment and educational hardware and software.
The financial statements consolidate the accounts of the Company and its
wholly owned subsidiaries, Iwerks Attractions and Technologies, Iwerks Studios
Inc., Cinetropolis, Inc. ("Cinetropolis"), Omni Films International, Inc.
("Omni") and Discovery Theatre Group-San Francisco, Inc. and Iwerks Touring
Technologies, Inc. ("ITT"). All significant intercompany amounts and
transactions have been eliminated in consolidation.
Certain reclassifications were made to the financial statements for the
year ended June 30, 1995 in order to conform to the fiscal 1996 presentation.
REVENUE AND COST RECOGNITION - Revenue from fixed-price-contracts are
recognized on the percentage-of-completion method, measured by the ratio of
percentage of labor hours incurred to date to estimated total labor hours for
each contract. Management considers expended labor hours to be the best
available measure of progress on such contracts. A contract is considered
substantially complete upon delivery and acceptance of the product by the
customer. These contracts average six to nine months in duration.
The Company also earns revenues for the production of films for outside
parties. The Company recognizes revenue from such projects when the film is
complete and has been accepted by the customer.
Contract costs include direct materials, direct labor cost and indirect
costs related to contract performance, such as indirect labor, supplies and
tools. Costs and estimated earnings in excess of billings on uncompleted
contracts represents costs incurred and gross profit recognized in excess of
amounts billed. Billings in excess of costs and estimated earnings on
uncompleted contracts represents billings in excess of costs incurred and gross
profit recognized. Billings to
<PAGE>
customers are in accordance with the terms of the contract and generally follow
a payment schedule.
The Company provides a warranty for all contracts generally for a period of
twelve months. Such warranty costs are included in cost of sales. The warranty
accrual as of June 30, 1995 and 1996 was $1,317,825, and $1,112,974,
respectively, and are included in accrued expenses in the accompanying
consolidated balance sheet.
The Company performs a quarterly review of uncompleted contracts. Changes
in estimates are reflected in the period of the change. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined.
The Company generally licenses films at agreed-upon minimum amounts.
Revenues from film licenses are recognized when the license period begins and
the programming is available pursuant to the terms of the license agreement.
TRADE ACCOUNTS RECEIVABLE primarily consists of amounts due on contracts.
Allowance for doubtful accounts was $932,255 in 1995 and $292,990 in 1996.
INVENTORIES consist primarily of simulation system equipment components and
are stated at the lower of cost or market on a first-in, first-out basis.
FILM INVENTORY consists of production and print costs and are stated at the
lower of cost or net realizable value. The individual film forecast method is
used to amortize film costs. Costs accumulated in the production of a film are
amortized in the proportion that gross revenues realized bear to management's
estimate of total gross revenues expected to be received. Revenue estimates on
a film-by-film basis are reviewed quarterly by management and are revised, if
warranted, based upon management's appraisal of current market conditions.
Unamortized film costs are written down to net realizable value based on this
appraisal, where applicable. Estimated liabilities for royalties and
participation are accrued and expensed in the same manner as film costs are
amortized.
Film inventory is comprised of the following:
<TABLE>
<CAPTION>
June 30,
---------------------------
1995 1996
----------- ------------
<S> <C> <C>
Films released $12,186,957 $ 13,623,600
Films in process and development 1,368,477 721,797
----------- ------------
Total 13,555,434 14,345,397
----------- ------------
Less accumulated amortization (8,681,102) (10,973,065)
----------- ------------
$ 4,874,332 $ 3,372,332
=========== ============
</TABLE>
The Company estimates that all of its unamortized released film cost will
be amortized over the next three years.
<PAGE>
PORTABLE SIMULATION THEATRES - Seventeen portable simulation theatres are in
operation at June 30, 1996 of which five new units were placed in service in
July of 1995. Revenues from ticket sales are recorded at the time collected and
fees from leasing of these simulators are recognized over the related lease
periods. Depreciation on the portable simulation theatres is computed using the
straight line method over the estimated useful lives of the related assets,
which range from seven to ten years. Accumulated depreciation was $1,634,557 in
1995 and $3,069,688 in 1996.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT is computed using the
straight line method over the estimated useful lives of the assets, which range
from three to ten years. Leasehold improvements are amortized over five years or
the term of the lease, whichever is shorter.
GOODWILL (excess purchase price and liabilities assumed over the fair market
value of assets acquired) primarily resulted from the acquisition of Omni and is
being amortized over thirty years using the straight line method (see Note 3).
The remaining goodwill relates to the acquisition of a minority interest in a
subsidiary in 1994 and 1995 (see Note 8) and prior acquisitions which are being
amortized over four to twenty-five years using the straight line method.
Goodwill is reviewed periodically to determine if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based upon discounted cash flows of the acquired
business over the remaining amortization period, then the carrying value of the
related goodwill will be reduced by the estimated shortfalls of cash flows.
Accumulated amortization was $987,565 in 1995 and $1,892,415 in 1996.
OTHER ASSETS - Patents expiring in 2008 are stated at cost, and are being
amortized using the straight line method over seventeen years. The covenant not
to compete in connection with the Omni transaction has been fully amortized at
June 30, 1996. Accumulated amortization was $154,659 in 1995 and $282,845 in
1996.
ACCRUED EXPENSES - The Company provides for commission and applicable royalties
on revenue recognition in connection with such agreements. The commission
accrual as of June 30, 1995 and 1996 was $821,358 and $1,073,564, respectively,
and the royalty accrual as of June 30, 1995 and 1996 was $229,270 and $871,045,
respectively. These amounts are included in accrued expenses in the
accompanying consolidated balance sheets.
The Company had legal accruals as of June 30, 1995 and 1996 in the amounts
of $1,619,466 and $209,120, respectively. The Company also had compensation
accruals in the amount of $141,000 and $950,000 as of June 30, 1995 and 1996,
respectively. These amounts are included in accrued expenses in the accompanying
consolidated balance sheets.
DEFERRED REVENUE represents advance payments for portable theatre systems or
distribution rights and is recognized over the life of the respective
agreements.
RESEARCH AND DEVELOPMENT COSTS are incurred in the design, construction and
testing of prototype systems and are charged to expense when incurred.
<PAGE>
INCOME TAXES - Effective July 1, 1990, the Company has applied Statement of
Financial Accounting Standards No. 109, (Accounting for Income Taxes), which
utilizes the liability method. Deferred income taxes under the liability method
arise primarily from the difference between the timing of recognition of certain
revenue and expense items for financial reporting and income tax purposes.
CASH AND CASH EQUIVALENTS - The Company places its temporary cash investments
with one high quality financial institution. The investments mature within 30
to 90 days and therefore are subject to limited risk.
INVESTMENT IN DEBT SECURITIES - During the three months ended December 31,
1995, 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 reassessed the classification of its investments
in debt securities under Statement 115. In light of this reassessment, the
Company reclassed its entire investment in debt securities from held to maturity
to available-for-sale. The realized and unrealized gain and loss at the date of
transfer was not material. Investment in debt securities at June 30, 1996 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 which
were not material for any year presented. The Company reclassified $8,082,643
at June 30, 1995 from cash to investment in debt securities to fully reflect the
proper classification of the current portion of investment in debt securities.
This will provide a comparable accounting classification with the fiscal 1996
presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments, other
than cash, accounts receivable and accounts payable, consist primarily of
investments in debt securities. The fair value of investments in debt
securities is based on quoted market prices.
CONCENTRATION OF CREDIT RISK - The Company is required by Statement of Financial
Accounting Standards No. 105, "Disclosure of Information About Financial
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk," to disclose significant concentrations of credit
risk regardless of the degree of such risk. The Company conducts ongoing credit
evaluations of all customers and believes the credit risk from its customers is
minimal.
QUALIFIED 401k PLAN - The Company has adopted a Defined Contribution 401k Plan
("Plan") for all of its eligible employees effective as of August of 1994. Under
the Plan, each employee who has attained the age of eighteen and who has
completed three months of service with the Company is eligible to become a
participant. Under the Plan, each participant is permitted to make tax deferred
voluntary contributions of an amount not to exceed the lessor of 15% of his or
her respective compensation and the applicable statutory limitation. The
Company has elected not to make any matching contributions to the Plan.
NET INCOME (LOSS) PER COMMON SHARE - The net income (loss) per share for the
years ended June 30, 1994, 1995 and 1996 is based on the weighted average number
of common and
<PAGE>
common equivalent shares outstanding during the period. Common equivalent shares
consisting of outstanding stock options and warrants are included in the
calculation to the extent they are dilutive. Common equivalent shares from
convertible preferred stock have been considered outstanding since the date of
issuance as preferred stock automatically converted to common stock when the
initial public offering was consummated on October 26, 1993.
Fully diluted amounts for each period do not materially differ from the
amounts presented herein.
The net loss per common share for the year ended June 30, 1994 calculated
pursuant to Accounting Principle Board Opinion No. 15, would be ($1.16).
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
STOCK-BASED COMPENSATION - The Company accounts for its stock compensation
arrangements under the provisions of Accounting Principle Board No. 25,
"Accounting For Stock Issued to employees" and intends to continue to do so.
2. RESTRUCTURING CHARGES
During the third quarter of fiscal 1995 the Company approved a
restructuring plan for the closure of its Sarasota, Florida ("Sarasota")
manufacturing facility. The restructuring plan has effected the operational
consolidation of the Company's manufacturing operations into one facility at the
Company's corporate headquarters in Burbank, California. The Company provided
$1,027,000 for this restructuring plan, which is included in selling, general
and administrative expenses in the 1995 statement of operations. The major
components of the charge include a combination of cash outlays for severance
payments (32 employees expected to be terminated) and lease cancellations of
approximately $500,000 and non-cash charges relating to the write-off of certain
property and equipment at the Sarasota facility.
The restructuring plan was executed over the period from April 1995 to
November 1995. Since the operations of the Sarasota facility have been
incorporated into the Company's Burbank 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 accrued in the
third quarter of fiscal 1995 were paid ratably during the first and second
quarters of fiscal 1996. The employees affected were primarily production and
engineering staff at the Sarasota facility. The difference between the estimated
costs accrued in the third quarter of fiscal 1995 and actual costs were
immaterial.
<PAGE>
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 were charged to the reserve
in the amount of $446,000 with the balance charged to the reserve in the first
quarter of fiscal 1996.
Costs associated with the relocation and consolidation 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.
3. ACQUISITION OF OMNI FILMS INTERNATIONAL, INC.
On May 18, 1994, the Company acquired Omni, a movie based entertainment
technology company, pursuant to an Agreement and Plan of reorganization, (the
"Merger Agreement"). Each of the then outstanding shares of Omni common stock
received $1.42 in cash and .424303 shares of Iwerks common stock. Further, each
Omni option and warrant outstanding was assumed by Iwerks and was converted into
an option or warrant to purchase Iwerks common stock, the number of which was
determined based on the number of shares of Iwerks common stock which would have
been received by the optionee or holder of such warrant by converting to an
equivalent exercise price of Iwerks assuming the option or warrant had been
exercised under the terms of the Merger Agreement.
The transaction was accounted for as a purchase by Iwerks of Omni resulting
in an aggregate purchase price of $19,169,607 including acquisition costs. The
aggregate purchase price of Omni in excess of the fair value of the identifiable
assets of Omni at the date of acquisition was $14,671,558. Based upon
management's review, $150,000 has been allocated to a covenant not to compete
and $14,521,558 has been allocated to goodwill. The operations of Omni have been
consolidated with the operations of the Company from May 18, 1994.
The following unaudited pro forma information for fiscal 1994 reflects the
results of the Company's consolidated operations as if the acquisition occurred
at the beginning of that fiscal year. The unaudited pro forma consolidated
financial results are not necessarily indicative of the actual results that
would have occurred had the acquisition occurred at the beginning of fiscal
1994.
<TABLE>
<S> <C>
Revenues $44,856,972
Net loss (9,424,571)
Net loss per share (1.07)
</TABLE>
<PAGE>
4. INVESTMENTS IN DEBT SECURITIES
The principal or face amount, cost, carrying amounts and fair values of the
Company's investments in debt securities (maturing from 1 - 15 months) at June
30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
Principal Carrying Fair
Security Amount Cost Amount Value
- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1995
- ----
U.S. Treasury Notes $14,668,414 $14,854,353 $14,854,353 $14,862,659
Less current portion 12,487,695 12,619,370 12,619,370 12,584,332
----------- ----------- ----------- -----------
$ 2,180,719 $ 2,234,983 $ 2,234,983 $ 2,278,327
=========== =========== =========== ===========
1996
- ----
U.S. Treasury Notes $10,877,133 $11,075,217 $11,075,217 $11,069,179
FNMA Discount Notes 1,500,000 1,532,078 1,532,078 1,533,592
----------- ----------- ----------- -----------
Total 12,377,133 12,607,295 12,607,295 12,602,771
Less current portion 6,660,727 6,781,548 6,781,548 6,809,634
----------- ----------- ----------- -----------
$ 5,716,406 $ 5,825,747 $ 5,825,747 $ 5,793,137
=========== =========== =========== ===========
</TABLE>
Realized gains or losses from debt securities sold during the year ended June
30, 1995 and 1996 were not material. The proceeds from sales of available for
sale securities for the years ended 1995 and 1996 was $39,350,995 and
$35,744,925, respectively. The basis on which cost was determined on
calculating gains and losses was the specific identification method.
5. BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Billings in excess of costs and estimated earnings on uncompleted contracts
at June 30, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 9,119,621 $ 14,156,568
Estimated earnings 6,515,085 13,911,786
------------ ------------
15,634,706 28,068,354
Less billings to date (15,353,508) (23,591,005)
------------ ------------
$ 281,198 $ 4,477,349
============ ============
</TABLE>
<PAGE>
Such costs are included in the accompanying balance sheets at June 30, 1995
and 1996 under the following captions:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 2,811,292 $ 5,583,368
Billings in excess of costs and estimated
earnings on uncompleted contracts (2,530,094) (1,106,019)
----------- -----------
$ 281,198 $ 4,477,349
=========== ===========
</TABLE>
6. INVESTMENT IN LIMITED PARTNERSHIP
The company has a non-controlling 50% equity interest in a partnership
which operates a motion simulation theatre at Pier 39 in San Francisco,
California, and accounts for its investment using the equity method of
accounting. The Company's share of the partnership income and (losses) amounting
to ($130,388), ($101,381) and $ 46,279 for the years ended June 30, 1994, 1995
and 1996, respectively, are reflected as cost of sales in the statements of
operations. The partnership began operations in August of 1992. The Company's
equity interest is included in other assets.
The following is summarized financial information regarding the partnership
as of and for the years ended June 30, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- ----------
<S> <C> <C> <C>
Current assets $ 93,444 $ 83,484 $ 42,686
Non-current assets 1,701,792 1,500,843 1,318,438
Current liabilities 442,095 163,868 74,100
Non-current liabilities 1,375,387 1,209,467 983,474
Partnership capital (deficit) (22,246) 210,992 303,550
Revenues 857,399 1,034,242 1,314,440
Operating costs 1,118,176 1,237,004 1,221,882
Net (loss) income (260,777) (202,762) 92,558
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment, at cost, are summarized as follows at June 30,
1995, and 1996:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Office equipment, furniture and fixtures $ 2,153,097 $ 2,076,166
Operating equipment 865,820 1,809,065
Film production equipment 2,095,062 2,106,401
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Demonstration theatres 3,041,363 2,473,843
Leasehold improvements 1,266,375 1,268,683
----------- -----------
Total 9,421,717 9,734,158
Less accumulated depreciation (4,537,515) (6,215,250)
----------- -----------
$ 4,884,202 $ 3,518,908
=========== ===========
</TABLE>
Certain transportation and computer equipment aggregating $710,518 and
$3,710,518 at June 30, 1995 and 1996, respectively, were recorded under capital
lease agreements. Accumulated depreciation on this equipment was $177,264 and
$566,360 at June 30, 1995 and 1996, respectively.
Depreciation expense amounted to $903,826, $2,476,803 and $ 1,677,735 for
the years ended June 30, 1994, 1995 and 1996, respectively, including amounts
related to assets under capital leases.
8. NOTES RECEIVABLE FROM AND PAYABLE TO RELATED PARTIES AND RELATED PARTY
TRANSACTIONS
At June 30, 1995 and 1996, notes payable to related parties consisted of
the following:
<TABLE>
<CAPTION>
1995 1996
---------- --------
<S> <C> <C>
Promissory notes due stockholders, net of
discount of $7,308 (1995) and $0 (1996):
interest at 10%; due semiannually over
5 years with remaining principal and
accrued interest on October 1, 1996;
collateralized by portable simulation
equipment $1,247,172 $874,699
Less current portion 423,638 874,699
---------- --------
$ 823,534 $ -
========== ========
</TABLE>
In connection with the promissory notes due stockholders at June 30, 1995
and 1996, the stockholders were granted 29,433 warrants at an exercise price of
$.01 per share that expire in 2002. The aggregate difference between the fair
market value and the exercise price of the warrants was $43,855 and such amount
was recorded as paid in capital.
During 1993, Itochu Corporation ("Itochu"), a stockholder, agreed to pay
the Company $5,000,000 primarily for the right to become the Company's exclusive
distributor for a three year term in Asia for its Cinetropolis concept. The
$5,000,000 was recorded in deferred revenue and has been amortized over the
three year exclusivity period. In addition, Itochu became a nonexclusive agent
for the Company's other products for seven years. Itochu earns sales commissions
on any theatre systems sold by Itochu or its agents. During the years ended June
30, 1995 and 1996, $268,000, and $267,000 respectively, was paid to Itochu in
connection with this arrangement. Further, Itochu may also receive a share of
film license revenues earned by the Company at any Cinetropolis site Itochu
sells. At June 30, 1995, there was one Cinetropolis site
<PAGE>
(closed in 1996), in which Itochu collected the film license revenues earned,
and remitted the Iwerks share to the Company.
Related party receivables amounting to $50,000 were due from two employees
at June 30,1995 and 1996, and included in other assets at June 30, 1995 and 1996
is $179,600 and $80,406, respectively, due from the estate trust of one of the
Company's principal stockholders. The receivable is non-interest bearing and is
partially collateralized by a security interest in a life insurance policy.
In May 1994, for $1,600,000 and the issuance of 115,000 shares of Company
common stock valued at $828,000, the Company purchased a 10% minority interest
in ITT from an employee, including amending a future bonus arrangement with that
employee. The cash payment of $1,600,000 was made in July 1994. Of the 115,000
shares of Company common stock to be issued, 23,014 shares became fully vested
on July 1, 1994, with the remainder vesting through December 31, 1995. Aggregate
purchase price of the minority interest in excess of the fair value of the
identifiable assets at the acquisition date was $2,428,000, of which $235,000
was attributable to the future bonus and was expensed in the fourth quarter of
1994 with the remaining balance being allocated to goodwill. In June 1995, for
$1,040,000 and the issuance of 200,000 shares of Company common stock valued at
$360,000, the Company purchased the remaining 5% minority interest in ITT from
the same employee. The cash payment of $1,040,000 was made in June 1995. Of the
200,000 shares of Company Common Stock issued, 6,666 shares became fully vested
on July 1, 1995, with the remainder vesting through December 31, 1995. The
aggregate purchase price of the minority interest was $l,400,000 which was
allocated to goodwill. The goodwill related to the acquisition of the minority
interest is being amortized over an estimated useful life of ten years.
By an agreement dated as of June 30, 1995, all shares were issued into an
escrow account and were subsequently released in fiscal 1996. These amounts are
reflected in the capital accounts of the Company.
A subsidiary leased manufacturing and office space from a principal
stockholder that expires at various dates through June of 1995. Rent expense in
connection with these leases in 1994, 1995 and 1996, respectively, was $20,489,
$163,484 and $0, respectively.
9. NOTES PAYABLE
On June 29, 1993 a subsidiary of the Company entered into a financing
arrangement whereby the subsidiary borrowed $2,185,526. The note is secured by
certain Company assets and bears interest at 9.48% per annum. Interest and
principal are payable in 36 consecutive monthly installments commencing August
1, 1993, and continuing until the note is fully paid. At June 30, 1995 and 1996
the note balances were $861,461 and $69,440, respectively.
<PAGE>
In April 1994, Omni entered into a revolving line of credit with a bank for
a maximum amount of $1,000,000. Interest was at the bank's prime rate plus 1%
and was payable monthly. At June 30, 1994, $600,000 was outstanding under this
line of credit. All amounts borrowed under this line of credit were due and paid
by April 7, 1995, whereupon it was allowed to expire.
On September 25, 1994, the Company entered into a financing arrangement
whereby the Company borrowed $1,264,519. The note is secured by certain Company
assets and bears interest at 10.53% per annum. Interest and principal are
payable in 35 consecutive monthly installments commencing September 1994, and
continuing until the note is fully paid. At June 30, 1995 and 1996, the note
balances were $952,166 and $539,474, respectively.
In November 1994, the Company entered into a loan agreement in the amount
of $574,750 to fund the Company's share of a new film. Interest and principal
was scheduled to be paid annually over a three-year period commencing in
November 1995, however, the loan was paid in full in fiscal 1996.
In June 1996 the Company entered into a revolving line of credit with a
bank for $5,000,000. Interest is at the bank's reference rate plus 1/4% and is
payable either monthly or at the end of the interest period as defined. Any
amounts borrowed in connection with the line of credit are to be repaid on or
before June 1, 1997. The Company has agreed to pay a commitment fee of 1/4% per
year. The line of credit has covenants that include maintenance of minimum net
worth and compliance with certain financial ratios. At June 30, 1996 no amounts
have been borrowed under this line of credit. The line of credit was secured by
all Company assets.
10. INCOME TAXES
Provision for income taxes for the year ended June 30 consists of:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ 46,749
State 12,742 7,200 24,836
Foreign 26,000 78,000 77,378
------- ------- --------
38,742 85,200 148,963
Deferred:
Federal - - -
State - - -
------- ------- --------
- - -
------- ------- --------
$38,742 $85,200 $148,963
======= ======= ========
</TABLE>
<PAGE>
The deferred tax asset at June 30 consists of:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net operating loss $ l,760,000 $ 7,512,000 $ 7,298,000
Reserves - 2,056,000 512,000
Deferred revenues 1,368,000 774,000 24,000
Film cost amortization 399,000 (595,000) 875,000
Other 275,000 (119,000) (30,000)
----------- ----------- -----------
3,802,000 9,628,000 8,679,000
Valuation allowance (3,802,000) (9,628,000) (8,679,000)
----------- ----------- -----------
$ - $ - $ -
=========== =========== ===========
Reconciliation of effective rate of income taxes:
Provision for income taxes at statutory
federal rate of 35% $(2,725,600) $(4,716,000) $ 1,136,691
State and local taxes 9,742 7,200 24,836
Foreign taxes 26,000 78,000 77,378
Nondeductible items and
nontaxable items 3,000 - 399,000
NOL benefit - - (1,488,942)
Benefit of net operating loss
not currently recognized 2,725,600 4,716,000
----------- ----------- -----------
$ 38,742 $ 85,200 $ 148,963
=========== =========== ===========
</TABLE>
At June 30, 1996, the Company had available federal and state tax net
operating loss carryforwards of approximately $18,093,000 and $8,240,000,
respectively, expiring through 2011.
11. STOCK OPTIONS AND WARRANTS
The Company has three stock incentive plans adopted in 1987, 1993, and
1994, respectively, (the "Plans") which provide for the granting to officers,
directors, employees and consultants options to purchase shares of the Company's
common stock. By shareholder approval in fiscal 1996, the 1994 Plan was modified
to increase the shares available under option by 1,000,000 shares. This resulted
in an aggregate of 3,250,000 shares of common stock reserved for issuance under
the Plans. In addition the Company has granted other options to purchase 199,500
shares of common stock to certain officers and directors outside of the Plans.
Options are generally exercisable over a four-year period and expire through
2003. Activity under the Plans and outside the Plans for the years ended June 30
is as follows:
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Outstanding at beginning of year 1,142,154 1,499,864 1,681,755
Granted 630,748 1,048,772 892,207
Exercised
$.10 - $5.21 per share in 1994,
$.10 - $6.06 in 1995, and
$.10 - $7.00 in 1996 (241,962) (281,895) (385,526)
Canceled or expired (31,076) (584,986) (367,365)
Outstanding at end of year 1,499,864 1,681,755 1,821,071
Exercisable at end of year 817,436 674,888 605,595
Price range at end of year $.74 - $25.50 $.10 - $21.25 $.10 - $9.75
</TABLE>
As of June 30, 1995, 105,435 shares were available for future grant under
the Plans and outside the Plans, and as of June 30, 1996, 580,593 shares were
available for future grant under the Plans and outside the Plans. At June 30,
1996, the Company has reserved 2,401,664 shares of its unissued common stock for
issuance upon exercise of options granted under the Plans and outside the Plans.
The aggregate difference between the fair value and exercise prices for
options for 243,000 shares issued in the year ended June 30, 1993 was $596,290.
This amount was amortized to expense in the years ended June 30, 1994, 1995 and
1996 as follows $131,495, $131,496 and $262,987, respectively.
At June 30, 1995 the Company had a total of 604,585 warrants outstanding to
purchase Company common stock at exercise prices ranging from $.01 to $7.35,
exercisable through 2003. In 1996, warrants were exercised for 575,791 shares of
common stock at exercise prices ranging from $1.00 to $7.30, leaving a remainder
of 28,794 warrants exerciseable at $.01 to $7.30 per share through 2003.
12. COMMITMENTS AND CONTINGENCIES
The Company leases facilities under operating leases that expire through
2001. Leases that expire are expected to be renewed or replaced. Rental expense
for the years ended June 30, 1994, 1995 and 1996 was approximately $552,501,
$868,834 and $617,333, respectively.
Future minimum lease payments under capital and operating leases at June
30, 1996 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ---------
<S> <C> <C>
1997 $967,892 $491,280
1998 983,700 496,341
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
leases leases
--------- ----------
<S> <C> <C>
1999 962,646 429,051
2000 867,060 240,868
2001 214,104 62,626
---------- ----------
Total minimum lease payments 3,995,402 $1,720,166
==========
Less amount representing interest (870,034)
----------
$3,125,368
==========
</TABLE>
The Company has also from time to time, provided standby letters of credit
to customers as performance bonds. The customers may draw on the letters of
credit should the Company fail to perform under the terms of the contracts.
There are currently 3 letters of credit outstanding totaling approximately
$657,000.
The Company has an agreement with a former joint venture partner to pay
them royalties on sales of certain hardware components and on revenues derived
from certain film rentals and licenses through January 2001. Such royalties
amounted to $639,907, $830,199 and $384,394 in 1994, 1995 and 1996,
respectively.
13. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
In 1996, the Company had no significant customers. In 1995, the Company
earned revenues from one significant customer of approximately $5,160,000 (12%).
In 1994, the Company earned revenues from two significant customers of
approximately $6,565,500 (18%) and $4,345,200 (12%).
Export revenues by geographic area for the years ended June 30 consist of:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Canada $ 1,384,340 $ 417,010 $ 1,131,420
Europe 399,593 1,185,475 4,408,428
Asia 13,830,312 23,028,889 17,311,176
----------- ----------- -----------
Total export revenues $15,614,245 $24,631,374 $22,851,024
=========== =========== ===========
</TABLE>
The Company derived approximately $16,115,000, $17,989,972 and $21,544,922,
respectively, of revenues from the sale of fixed-based ride simulation theatres
in fiscal 1994, 1995 and 1996.
14. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of fiscal 1994, the Company recorded a loss of
approximately $900,000 on two uncompleted contracts and reduced previously
recognized earnings by approximately $300,000 on another uncompleted contract
due to changes in cost estimates.
<PAGE>
Further, in fiscal year 1994 the Company recorded additional film amortization
of approximately $270,000 and a write-down of approximately $280,000 of the
Company's virtual adventures demonstration theatre due to changes in accounting
estimates.
15. STOCKHOLDERS RIGHTS PLAN
The Company has adopted a Stockholder Rights Plan (the "Agreement").
Pursuant to the Agreement each outstanding share of the Company's Common Stock
has received one Right as a dividend that becomes exercisable upon certain
triggering events related to an unsolicited takeover attempt of the Company.
16. LITIGATION
Iwerks was named as a defendant in two class actions which assert claims
under Section 11 of the Securities Exchange Act of 1933 and Section 10(b) of the
1934 Act, Kravits v. Iwerks Entertainment, Inc., et al., and Sobel v. Iwerks
--------------------------------------------- ---------------
Entertainment, Inc., et al. both in U.S. District Court, Central District of
- ---------------------------
California. The claims sought unspecified damages, were filed on behalf of a
purported class of persons who purchased or otherwise acquired the Company's
stock during the period from October 18, 1993 through May 16, 1995.
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 of 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 unclaimed amounts being returned by 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 unclaimed
stock and 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 has been set at $8.78 which is $2.00 below the average trading
price of the Company's stock during the 30 day period following May 3, 1996. To
date 75,000 shares and 150,000 warrants have been issued to counsel for the
plaintiffs leaving a balance of 175,000 shares and 350,000 warrants to be
claimed by the class. 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 of $1.7 million in the fourth quarter of fiscal 1995 to
reflect the anticipated costs of the settlement. Further, there can be no
assurance that others not included in the settlement will not file similar
claims in the future.
Fred Hollingsworth III, a former director of Iwerks Entertainment, Inc. and
former chief executive officer and founder of Omni Films International, Inc.,
filed suit on or about April 9, 1996 against the Company and seven of its
current or former officers and directors. The complaint seeks unspecified
damages arising from misconduct, including alleged misstatements and omissions,
in connection with the acquisition by Iwerks of Omni Films International, Inc.
in May 1994. The Company believes it has meritorious defenses regarding this
matter and, therefore, intends to vigorously defend against this action.
However, due to the uncertainties inherent in
<PAGE>
litigation, and because no discovery has yet been undertaken, the ultimate
outcome of this matter cannot be ascertained at this time.
The Company is party to various other actions arising in the ordinary
course of business which, in the opinion of management, will not have a material
adverse effect on the Company's financial condition, results of operations, or
cash flows.
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
- ------------------------------------------------------------------------------
DISCLOSURE.
- ----------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
- -------------------------------------------------------
At a meeting of the Board of Directors held on June 28, 1996, The Company
appointed new directors as follows: Gary J. Matus, Executive Vice President of
Bank of America and Terry E. Van Gorder, President and CEO of Knott's Berry
Farm.
The Company has also announced that Francis T. Phalen resigned his positions
as Executive Vice President, Chief Financial Officer, Secretary and as a
Director effective June 7, 1996.
Additional information regarding directors and executive officers of the
Company will appear in the Proxy Statement for the 1996 Annual Meeting of
Stockholders, and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
- -------------------------------
Information regarding executive compensation will appear in the Proxy
Statement for the 1996 Annual Meeting of Stockholders, and is incorporated
herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -----------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners and
management of the Company will appear in the Proxy Statement for the 1996 Annual
Meeting of Stockholders, and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------------------------------------------------------
Information regarding certain relationships and related transactions will
appear in the Proxy Statement for the 1996 Annual Meeting of Stockholders, and
is incorporated herein by this reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(a) FINANCIAL STATEMENTS:
Report of Independent Auditors
Consolidated Balance Sheets
June 30, 1995 and 1996
Consolidated Statements of Operations
Years Ended June 30, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1994, 1995 and 1996
Consolidated Statements of Cash Flows
Years Ended June 30, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts for the years ended June
30, 1994, 1995 and 1996.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(b) EXHIBITS: See Exhibit List attached to this Annual Report on Form 10-K.
(c) REPORTS ON FORM 8-K:
During the last quarter of the Registrant's fiscal year which ended on June
30, 1996, there were no reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 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.
IWERKS ENTERTAINMENT, INC.
(Registrant)
By: /s/ Roy A. Wright
----------------------
Roy A. Wright
Chief Executive Officer
Date: August 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- -----
<S> <C> <C>
/s/ Roy A. Wright Co-Chairman, President and CEO August 28, 1996
- -------------------------- (Principal Executive Officer)
Roy A. Wright
/s/ Guy L. Heyl Vice President Finance August 28, 1996
- -------------------------- Acting Chief Financial Officer
Guy L. Heyl (Principal Finance & Accounting
Officer)
/s/ Paula Douglass
- -------------------------- Co-Chairman of the Board August 28, 1996
Paula Douglass
/s/ Donald W. Iwerks Vice Chairman of the Board August 28, 1996
- --------------------------
Donald W. Iwerks
/s/ Dag Tellefsen
- -------------------------- Director August 28, 1996
Dag Tellefsen
/s/ Gary J. Matus Director August 28, 1996
- --------------------------
Gary J. Matus
/s/ Terry E. Van Gorder
- -------------------------- Director August 28, 1996
Terry E. Van Gorder
</TABLE>
<PAGE>
SCHEDULE II
IWERKS ENTERTAINMENT, INC.
Valuation and Qualifying Accounts
For the years ended June 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Balance at
beginning Balance at
Classification of year Additions Retirements end of year
- -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1994
Allowance for doubtful accounts $ 58,303 $ 346,197(1) $ 404,500
Accumulated film amortization 971,097 1,333,201 2,304,298
Accumulated amortization of goodwill 98,699 142,327 241,026
Accumulated amortization of patents
and covenant not to compete 60,177 24,324 84,501
FOR THE YEAR ENDED JUNE 30, 1995
Allowance for doubtful accounts $ 404,500 $ 527,755 $ 932,255
Accumulated film amortization 2,304,298 6,376,804 8,681,102
Accumulated amortization of goodwill 241,026 746,539 987,565
Accumulated amortization of patents
and covenant not to compete 84,501 70,158 154,659
FOR THE YEAR ENDED JUNE 30, 1996
Allowance for doubtful accounts $ 932,255 $639,265 $ 292,990
Accumulated film amortization 8,681,102 2,291,963 10,973,065
Accumulated amortization of goodwill 987,565 904,850 1,892,415
Accumulated amortization of patents 154,659 128,186 282,845
</TABLE>
(1) Included is $254,500 in connection with the acquisition of Omni.
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of Iwerks.*
3.2 Bylaws of Iwerks.****
4.1 Specimen Certificate evidencing Common Stock of Iwerks.*
4.2 Warrant Agreement, dated January 29, 1991, by and between Iwerks
and Baccarat Development Partnership.*
4.3 Warrant Agreement, dated April 30, 1993, by and between Iwerks and
Richard King International.*
4.4 Warrant Agreement, dated November 12, 1992, by and between Iwerks
and Baccarat Development Partnership.*
4.5 Warrant Agreement, dated November 12, 1992, by and between Iwerks
and Douglas Broyles.*
10.1 Form of Indemnification Agreement and schedule of indemnified
parties.*
10.2 Dated January 23, 1991, by and between Iwerks and Ride and Show
Engineering, Inc.*
10.3 Amended and Restated 1987 Stock Option, Purchase and Appreciation
Rights Plan of Iwerks.*
10.4 Secured Promissory Note and Credit and Security Agreement, dated
June 30, 1993, by and among Iwerks, Iwerks Touring Technologies,
Inc. and Meriken Nominees Limited as nominee for Glenwood Ventures
IIA, L.P.*
10.5 Secured Promissory Note and Credit and Security Agreement, dated
July 23, 1993, by and among Iwerks, Iwerks Touring Technologies,
Inc., Doug Broyles and Baccarat Development Partnership.*
10.6 1993 Stock Incentive Plan of Iwerks.*
10.7 Lease for 4540 W. Valerio Street, Burbank, California 91505, dated
May 15, 1990, by and between Iwerks as lessee and Sheldon Plutsky
as lessor.*
10.8 Lease for 4520 Valerio Street, Burbank, California 91505, dated
September 1, 1992, and the Amendment thereto, dated September 22,
1992, by and between Iwerks as lessee and James E. McGraw as
lessor.*
10.9 Lease for 4535 W. Valerio Street, Burbank, California 91505, dated
September 11, 1992, by and between Iwerks as lessee and R.C.
Associates as lessor.*
10.10 Lease for 4525 W. Valerio Street, Burbank, California 91505, dated
March 24, 1994 by and between Iwerks as lessee and the Penney
Family Trust as lessor.
10.11 Financing Arrangement, dated June 29, 1993, by and among Iwerks,
Iwerks Touring Technologies, Inc. and Heller Financial, Inc.*
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.12 1994 Stock Incentive Plan of Iwerks Entertainment, Inc.****
10.13 Agreement, dated as of June 30, 1996, by and between Iwerks and
Donald Iwerks.
10.14 Line of Credit-Agreement with Imperial Bank
10.15 Lease Agreement - Matrix Funding Corporation
10.16 Settlement Agreement and Release with Paula Douglass
11.1 Earnings Per Share.
22.1 Subsidiary List.****
23.1 Consent of Independent Auditors - Ernst & Young LLP
27.1 Exhibit 27 - Schedule of Financial Information
</TABLE>
______________
* Incorporated by reference from Iwerks' Registration Statement on Form
S-1, SEC File No. 68022 declared effective on October 19, 1993.
** Incorporated by reference from Amendment No. 1 to Iwerks' Registration
Statement on Form S-4, SEC File No. 76984 which Amendment was filed on
April 12, 1994.
*** Incorporated by reference from Registrants Annual Report on Form
10-K for the year ended June 30, 1994.
**** Incorporated by reference from Registrants Annual Report on Form 10-K
for the year ended June 30, 1995.
<PAGE>
EXHIBIT 10.14
IMPERIAL BANK
Entertainment Industries Group
Subject: Credit Terms and Conditions
Gentlemen:
To induce you to make loans to the undersigned (herein called "Borrower"), and
in consideration of any loan or loans you ("Bank"), in your sole discretion, may
make to Borrower, Borrower warrants and agrees as follows:
A. Borrower represents and warrants that:
1. EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and
existing and in good standing under the laws of the State of Delaware,
without limit as to the duration of its existence and is authorized
and in good standing to do business in the State of California;
Borrower has powers and adequate authority, rights and franchises to
own its property and to carry on its business as now conducted, and is
duly qualified and in good standing in each State in which the
character of the properties owned by it therein or the conduct of its
business makes such qualification necessary; and Borrower has the
power and adequate authority to make and carry out this Agreement.
2. AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or
approval of any governmental body or other regulatory authority; are
not in contravention of or in conflict with any law or regulation or
any term or provision of Borrower's articles of incorporation, by-
laws, or Articles of Association, as the case may be, and this
Agreement is the valid, binding and legally enforceable obligation of
Borrower in accordance with its terms.
3. NO CONFLICT. The execution, delivery and performance of this Agreement
are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it
or any of its property may be bound or affected, and do not cause any
lien, charge or other encumbrance to be created or imposed upon any
such property by reason thereof.
4. LITIGATION. Borrower is aware of no litigation in excess of $50,000 or
other proceeding pending or threatened against or affecting Borrower,
and Borrower is not in default with respect to any order, writ,
injunction, decree or demand of any court or other governmental or
regulatory authority. Borrower also agrees to notify you in writing of
any future litigation threatened against or affecting Borrower that is
reasonably likely to result in damages or costs to Borrower in excess
of $500,000.
5. FINANCIAL CONDITION. The balance sheet of Borrower as of March 31,
1996, a copy of which has heretofore been delivered to you by
Borrower, and all other statements and data submitted in writing by
Borrower to you in connection with this request for credit are true
and correct in all material respects, and said balance sheet fairly
presents the financial condition of Borrower as of the date thereof,
and has been prepared in accordance with generally accepted accounting
principles on a basis consistently maintained. Since such date there
have been no material adverse changes in the ordinary course of
business. Borrower has no knowledge of any liabilities, contingent or
otherwise, at such date not reflected in said balance sheet, and
Borrower has not entered into any special commitments or substantial
contracts which are not reflected in said balance sheet, other than in
the ordinary and normal course of its business, which may have a
materially adverse effect upon its financial condition, operations or
business as now conducted.
<PAGE>
6. TITLE TO ASSETS. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those
permitted by Section C.2 hereof.
7. TAX STATUS. Borrower has no liability for any delinquent state, local
or federal taxes, and, if Borrower has contracted with any government
agency, Borrower has no liability for renegotiation of profits.
8. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights,
and licenses to conduct its business as now operated, without any
known conflict with the valid trademarks, trade names, copyrights,
patents and license rights of others.
B. Borrower agrees that so long as it is indebted to you, under borrowings, or
other indebtedness, it will, unless you shall otherwise consent in writing:
1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain
its properties, equipment and facilities in good order and repair;
conduct its business in an orderly manner without voluntary
interruption and, if a corporation or partnership, maintain and
preserve its existence.
2. INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property
against fire and other hazards with responsible insurance carriers to
the extent usually maintained by similar businesses and/or in the
exercise of good business judgment.
3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments
and governmental charges upon or against it or any of its properties,
and all its other liabilities at any time existing, except to the
extent and so long as:
a. The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
b. It shall have set aside on its books reserves (aggregated to the
extent required by generally accepted accounting practice) deemed
by it adequate with respect thereto.
4. FINANCIAL COVENANTS. (a) Borrower shall maintain tangible net worth
(meaning the excess of all assets, excluding any value for goodwill,
trademarks, patents, copyrights, organization expense, all amounts due
from affiliates, officers, directors, stockholders and affiliated
entities, and other similar intangible items, over its liabilities
excluding subordinated debt) of not less than $29,000,000; (b)
maintain debt to tangible net worth ratio, defined as total
liabilities excluding subordinated debt, divided by tangible net worth
(as defined above) of not more than 1.0 to 1.0; (c) maintain a quick
ratio (defined as the sum of cash & cash equivalents, marketable
securities and accounts receivable to current liabilities) of not less
than 1.0 to 1.0; and (d) maintain a fixed charge ratio (meaning the
ratio for the proceeding four quarters whose numerator is the sum of
(i) net income of the Borrower and its subsidiaries after deducting,
without duplication, all operating expenses, provisions for all taxes
and reserves, and all other proper deductions, (ii) interest expense,
and (iii) depreciation and amortization; and whose denominator is the
sum of (a) interest expense and (b) the current portion of long term
debt and capitalized leases) of not less than 1.25 to 1.0 beginning
June 30, 1996; all as computed quarterly and determined in accordance
with generally accepted accounting principles on a consolidated basis,
after elimination of inter company items, and as consistently
maintained by Borrower.
<PAGE>
5. OUT OF DEBT REQUIREMENT. Borrower to maintain no indebtedness under
the $5,000,000 revolving line of credit (the "Line") for thirty (30)
consecutive days per fiscal year. For purposes of this section B.5,
"indebtedness" shall include advances under the Line but shall exclude
commercial and standby letters of credit issued under the Line.
6. RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles
on a basis consistently maintained; permit your representatives to
have access to, and to examine its properties, books and records at
all reasonable times during normal business hours; and furnish you:
a. As soon as available, and in any event within forty-five (45)
days after the close of each quarter of each fiscal year of
Borrower, commencing with the quarter next ending, a balance
sheet, profit and loss statement and reconciliation of Borrower's
capital accounts as of the close of such period and covering
operations for the portion of Borrower's fiscal year ending on
the last day of such period, all in reasonable detail, prepared
in accordance with generally accepted accounting principles on a
basis consistently maintained by Borrower and certified by an
appropriate officer of Borrower, subject, however, to year-end
audit adjustments.
b. As soon as available, and in any event within ninety (90) days
after the close of each fiscal year of Borrower, a report of
audit of Company as of the close of and for such fiscal year, all
in reasonable detail, with the unqualified opinion of accountants
satisfactory to you.
c. As soon as available, and in any event within fifteen (15) days
after the close of each month a liquidity report in form
satisfactory to Bank listing cash, cash equivalents, and
permitted investments in debt securities.
d. Within forty-five (45) days after the end of each quarter and
within ninety (90) days after the end of fiscal year of Borrower,
a certificate of chief financial officer of Borrower, stating
that Borrower has performed and observed each and every covenant
contained in this Letter to be performed by it and that no event
has occurred and no condition then exists which constitutes an
event of default hereunder or would constitute such an event of
default upon the lapse of time or upon the giving of notice and
the lapse of time specified herein; or, if any such event has
occurred or any such condition exists, specifying the nature
thereof;
e. Such other information relating to the affairs of Borrower as you
reasonably may request from time to time.
7. NOTICE OF DEFAULT. Promptly notify Bank in writing of the occurrence
of any event of default hereunder or which would be such an event upon
notice and lapse of time.
C. Borrower agrees that so long as it is indebted to you, it will not, without
your written consent, which will not be unreasonably withheld:
1. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from you except
obligations now existing as shown in the financial statement dated
December 31, 1995, and excluding those obligations being refinanced by
your bank; or sell or transfer, either with or without recourse, any
accounts or notes receivable or any moneys due or to become due.
2. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge,
encumbrance, lien or charge of any kind upon any asset now owned,
other than liens for taxes not delinquent and liens in your favor
except for those already existing as of December 31, 1995.
<PAGE>
3. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances
other than in the ordinary and normal course of its business as now
conducted or make any investment in the securities of any person or
other entity other than the United States Government, with the
exception of investments in commercial paper of a rating not lower
than "P-2" or "A-2" as rated by Standard & Poor's and Moody's,
respectively, and mutual funds deemed acceptable by Bank, or guarantee
or otherwise become liable upon the obligation of any person or other
entity, except by endorsement of negotiable instruments for deposit or
collection in the ordinary and normal course of its business.
4. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity
for an amount in excess of $500,000; or liquidate, dissolve, merge or
consolidate, or commence any proceedings therefor; or sell any assets
except in the ordinary and normal course of its business as now
conducted; or sell, lease, assign, or transfer any substantial part of
its business or fixed assets, or any property or other assets
necessary for the continuance of its business as now conducted,
including without limitation the selling of any property or other
asset accompanied by the leasing back of the same.
D. The occurrence of any of the following events of default (individually, an
"Event of Default") shall, at your option, terminate your commitment to
lend and make all sums of principal and interest then remaining unpaid on
all Borrower's indebtedness to you immediately due and payable, all without
demand, presentment or notice, all of which are hereby expressly waived:
1. FAILURE TO PAY NOTE. Failure to pay any installment of principal of or
interest on any indebtedness of Borrower to you, ten (10) days after
its due date.
2. BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this letter binding upon Borrower, where such breach has
a material financial consequence, that could reasonably result in a
material adverse affect on the financial condition of the Borrower.
3. BREACH OF WARRANTY. Any of Borrower's material representations or
material warranties made herein or any statement or certificate at any
time given in writing pursuant hereto or in connection herewith shall
be false or misleading in any material respect, that could reasonably
result in a material adverse affect on the financial condition of
Borrower.
4. INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent as
defined by the Bankruptcy Code; or admit its inability to pay its
debts as they mature; or make an assignment for the benefit of
creditors; or apply for or consent to the appointment of a receiver or
trustee for it or for a substantial part of its property or business.
5. JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against
Borrower or any of its assets and shall remain unvacated, unbonded or
unstayed for a period later than five days prior to the date of any
proposed sale thereunder, for an amount in excess of $500,000, that
could reasonably result in a material adverse affect on the financial
condition of the Borrower.
6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against
Borrower and, if instituted against it, shall be consented to.
7. FINANCIAL COVENANTS. Failure to maintain minimum financial covenants
as stated.
<PAGE>
8. CROSS DEFAULT. Any default occurs under any other agreement involving
the borrowing of money, the extension of credit, or the lease of
equipment under which Borrower may be obligated as borrower,
guarantor, installment purchaser, or lessee if such default to the
holder of the obligation concerned gives the right to accelerate the
obligation.
E. Miscellaneous Provisions.
1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
Bank or any holder of Notes issued hereunder, in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other
right, power or privilege. All rights and remedies existing under this
agreement or any note issued in connection with a loan that Bank may
make hereunder, are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
2. ATTORNEY'S FEES. Borrower will pay promptly to Bank without demand
after notice, with interest thereon from the date of expenditure at
the rate applicable to the Loan, reasonable attorneys' fees and all
costs and expenses paid or incurred by Bank in collecting or
compromising the Loan after the occurrence of an event of default,
whether or not suit is filed. If suit is brought to enforce any
provision of this Agreement, the prevailing party shall be entitled to
recover its reasonable attorneys' fees and court costs in addition to
any other remedy or recovery awarded by the court.
3. ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in
addition to all rights, powers and remedies given to Bank by law
against Borrower or any other person, including but not limited to
Bank's rights of setoff or banker's lien.
4. INUREMENTS. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and
assigns of Borrower.
5. APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed
by and construed according to the laws of the State of California, to
the jurisdiction of whose courts the parties hereby agree to submit.
6. OFFSET. In addition to and not in limitation of all rights of offset
that Bank or other holder of the Loan may have under applicable law,
Bank or other holder of the Notes shall, upon the occurrence of any
Event of Default or any event which with the passage of time or notice
would constitute such an Event of Default, have the right to
appropriate and apply to the payment of the Loan any and all balances,
credits, deposits, accounts or monies of Borrower then or thereafter
with Bank or other holder, within ten (10) days after the Event of
Default, and notice of the occurrence of any Event of Default by Bank
to Borrower.
7. SEVERABILITY. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions
nevertheless shall be effective.
8. ACCOUNTING. All accounting terms shall have the meanings applied under
generally accepted accounting principles unless otherwise specified.
<PAGE>
9. This agreement may be modified only by a writing signed by both
parties hereto.
Iwerks Entertainment, Inc.
By:
/s/ Roy A. Wright 6/24/96
-------------------------- -------------------
Date
/s/ Guy L. Heyl 6/24/96
--------------------------- -------------------
Date
<PAGE>
EXHIBIT 10.15
EQUIPMENT SCHEDULE
MATRIX FUNDING CORPORATION
6925 Union Park Center, Suite 250
Midvale, Utah 84047
LEASE NO. R0556
EQUIPMENT SCHEDULE NO. 1
SCHEDULE DATE: June 14, 1996
To Master Lease Agreement dated June 14, 1996 between MATRIX FUNDING
CORPORATION, as Lessor and IWERKS ENTERTAINMENT, INC., as Lessee. This
Equipment Schedule incorporates by reference the terms and conditions of the
Master Lease and constitutes a separate lease between Lessor and Lessee.
1. Equipment: Per the attached Schedule A of ________pages, which by
reference to is made a part hereof.
2. Equipment Location: Per the attach schedule A of _______pages, which by
reference to is made part hereof.
3. Acceptance Date: As specified in the Acceptance Certificate.
4. Initial Period: 48 months form Commencement Date
5. Monthly Rental: $69,594.00 (plus applicable sales tax)
6. Deposit: $69,594.00 applied to the last Monthly Rental (plus applicable
sales tax)
7. Total Cost not to Exceed: $3,000,000.00
8. Base Lease Rate Factor: .023198
9. Base Lease Rate Factor Adjustment Provision: As of the Acceptance Date of
the Lease, the Base Lease Rate Factor as shown in Section 8 above shall increase
.00029578 for every five (05) basis point increase in forty-eight (48) month
U.S. Treasury Note Yields ("Revised Lease Rate Factor".) The Revised Lease
Rate Factor shall then be multiplied by the Total Cost not to Exceed as shown in
Section 7, above with the result becoming the revised Monthly Rental, excluding
applicable sale s tax, for this Schedule No. 1. The forty-eight (48) month U.S.
Treasury Note Yields used for the derivation of the Base Lease Rate Factor is
6.10%.
10. Additional Events of Default. For purposes of this Equipment Schedule
----------------------------
only, the occurrence of any of the following events shall constitute an
additional Event of Default (as defined in the Master Lease Agreement) under
this Equipment Schedule:
a. The occurrence of an event of default or Event of Default under any
promissory note or other agreement or covenant signed or made by Lessee in favor
of Imperial Bank.
b. Lessee's breach of any of the following financial covenants: (i)
Lessee's Tangible Net Worth falls below $29,000,000.00; (ii) Lessee's Debt to
Tangible Net worth ratio is greater than 1.00:1; (iii) Lessee's Debt Coverage
Ratio (defined as EBITDA to Debt Service) is less than 1.25:1; or (iv) Lessee's
Quick Ratio (includes long term portion of marketable securities) is less than
1.00:l.
<PAGE>
11. Representation of Lessee: Lessor and Lessee agree that this Equipment
Schedule constitute as "finance lease" under the Utah Uniform Commercial Code -
Leases, in that (a) Lessee has selected the Equipment in its sole discretion,
(b) Lessor has acquired the Equipment solely for purposes of leasing such
Equipment under this Equipment Schedule, or (c) Lessee has received a copy of
the contract evidencing Lessor's purchase of the Equipment.
LESSOR: LESSEE:
MATRIX FUNDING CORPORATION IWERKS ENTERTAINMENT, INC.
BY: ________________________ BY: /s/ Guy Heyl
______________________
TITLE: _____________________ TITLE: Acting CFO
___________________
<PAGE>
Form Copy
July 15, 1996
Iwerks Entertainment, Inc.
4540 West Valerio Street
Burbank, Ca 91505-1046
Re: Master Lease Agreement No. R0556 dated June 14, 1996 and Equipment
Schedule No. 1 thereto (the "Agreement") between Matrix Funding Corporation as
Lessor (the "Lessor") and Iwerks Entertainment, Inc. as Lessee (the "Lessee").
Initial Period: 48 Months Monthly Rental: $72,244.00
Ladies/Gentlemen:
Notice is hereby given that the Lessor has granted a security interest in and
made an assignment of the Agreement and the Equipment to Imperial Bank (the
"Lender").
Monies from time to time payable under the Lease to the Lessor shall be paid as
follows:
to the Lender at 9777 Wilshire Blvd., Fourth Floor, Beverly Hills, CA 90212
Forty-seven (47) consecutive monthly payments of Sixty-nine Thousand Five
Hundred Ninety-four and 00/100 Dollars ($69,594.00) commencing on October 1,
1996 through and including the payment due on August 1, 2000;
and to Lessor at 6925 Union Park Center, Suite 250, Midvale, UT 84047 One
(1) Interim Rent payment of Thirty-six Thousand One Hundred Twenty-seven and
50/100 Dollars ($36,127.50) for the period July 15, 1996 through and including
July 31, 1996 followed by Two (2) consecutive interim Rent Payments of Seventy-
two Thousand Two Hundred Fifty-five and 50/100 Dollars ($72,255.50) commencing
August 1, 1996 followed by Forty-seven (47) consecutive monthly payments of Two
Thousand Six Hundred Sixty-one and 00/100 Dollars ($2,661.00) commencing on
October 1, 1996 through and including the payment due on August 1, 2000.
Lessee, by signature below, acknowledges and agrees that: Lessee's obligations
to make Payments under the Agreement and the rights of Lender in and to such
amounts, shall be absolute and unconditional and shall not be subject to any
abatement, reduction, setoff, defense, counterclaim or recoupment whatsoever;
Lessee will not modify or consent to any modification of the terms of the
Agreement or enter into any sublease of the equipment without the prior written
consent f the Lender and the Lessor; the lease represents the sole agreement
between Lessor and Lessee respecting the lease, equipment, the rentals, and all
other payments due under the Agreement; the Lender shall not have any
affirmative obligation under the Agreement except to take no action to impair
Lessee's quiet enjoyment and use of the equipment so long as the Lessee is not
in default under the terms of the Agreement.
By agreement between Lessor and Lender, until further notice, all billings for
rental payments and applicable sales taxes due under the Agreement shall be
submitted to Lessee by Lessor in advance of the Payment due date.
Very truly yours,
<PAGE>
MATRIX FUNDING CORPORATION
By: /s/ Sherrie Copier
------------------------------
Title: Assistant Vice President
Acknowledged by:
IWERKS ENTERTAINMENT, INC.
By: /s/ Guy Heyl
-------------------------------
Title: Vice President Finance
Date: 7/30/96
------------------------------
<PAGE>
EXHIBIT 10.16
SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement and Release (this "Agreement") is made and
entered into as of the 30th day of April 1996, by and between IWERKS
Entertainment, Inc., a Delaware corporation (the "Company"), and Paula T.
Douglass ("Douglass").
R E C I T A L S
- - - - - - - -
A. Douglass was appointed Chairman of the Board of Directors of the Company
on November 14, 1995.
B. As originally contemplated, it was expected that the office of Chairman
of the Board be a management position and compensated accordingly.
C. At its meeting held on March 8, 1996, the Board of Directors of the
Company determined that the office of Chairman of the Board would not be a
management position and consequently would not be separately compensated. At
that same meeting, the Board of Directors of the Company appointed Roy A. Wright
as Co-Chairman of the Board of Directors.
D. Recognizing the valuable and significant service provided by Douglass
since joining the Board of Directors of the Company, and desirous of securing
her continued service as a Director and Co-Chairman of the Board, the Board of
Directors of the Company has determined it to be appropriate and in the best
interests of the Company to enter into this Agreement with Douglass providing
for the consideration set forth herein as a complete payment and settlement for
services rendered by her prior as Chairman of the Board and for any claims she
might have arising out of her original appointment and the subsequent change in
the services to be provided in that capacity.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, on the basis of the foregoing facts and mutual agreements
contained in this Agreement, the Company and Douglass hereby agree as follows:
1. CASH PAYMENT. In consideration of services previously rendered by
Douglass and for the release provided for herein, concurrently with the
execution of this Agreement, the Company shall pay Douglass the sum of Sixty-
Five Thousand Dollars ($65,000) by Company check.
2. STOCK OPTIONS. In further consideration of services previously rendered
by Douglass and for the release provided for herein, concurrently with the
execution hereof, the Company shall grant Douglass an option (the "Option") to
purchase 14,185 shares of the Common Stock of the Company for an exercise price
of $5.875 (the fair market value of the Common Stock of the Company on November
14, 1995, the date the Board of Directors appointed Douglass Chairman of the
Board). The Option shall be granted pursuant to the Company's 1994 Stock
Incentive Plan (the "Plan"), shall be exercisable for 10 years from November 14,
1995 (subject to early termination as provided in the Plan) and shall be fully
vested.
3. EXPENSE REIMBURSEMENT. The Company shall reimburse Douglass for all
reasonable business expenses incurred by Douglass in connection with the
exercise by her of her duties as
<PAGE>
Chairman of the Board and (after March 8, 1996) Co-Chairman of the Board in
accordance with the Company's policy with respect to reimbursement of business
expenses incurred by executive officers of the Company.
4. SUCCESS FEE. If during the period during which Douglass is a Director of
the Company, Douglass introduces to the Company a business opportunity which the
Company is not otherwise pursuing through its sales staff or other personnel,
and the Company subsequently completes a business transaction (whether in the
form of a sale of equipment, joint venture or other business transaction) (the
"Transaction") resulting from such introduction, then the Company shall pay to
Douglass upon the closing of the Transaction a Success Fee (as defined below).
Douglass shall provide written notice to the Company as soon as reasonably
practicable following the introduction of a business opportunity which Douglass
believes to be subject to the provisions of this paragraph. Upon the receipt of
any such notice, the Company shall within a reasonable time thereafter,
acknowledge to Douglass in writing that the business opportunity is subject to
the provisions of this paragraph or notify Douglass in writing the reasons that
the Company believes that the business opportunity is not subject to the
provisions hereof. It is hereby acknowledged that Douglass has previously
introduced to the Company a possible joint venture or merger transaction with
Sheldon Gordon and The Gordon Company and a possible joint venture with Pacific
Western/Gale Hurd, each of which is subject to the terms of this paragraph. For
purposes of this paragraph, the Success Fee payable hereunder shall be (i) in
the case of a sale of equipment, 5% of the sales price of the equipment (less
crating, installation and shipping), and (ii) in the case of a financing or
other transaction not involving a sale of equipment, a fee to be determined by
mutual agreement at the time Douglass notifies the Company that the business
opportunity is subject to this paragraph, which fee shall be computed and paid
taking into account the specific structure, scope and financing of the
Transaction. Where the sale of equipment is effected pursuant to a Transaction
involving a joint venture with a third party or other business arrangement where
the Company participates in the ownership and operation of the equipment, and
the Company effects the sale by either contributing it to the joint venture or
selling it at a price below the Company's ordinary list price, then the Success
Fee shall be computed on the basis of the Company's ordinary list price for the
equipment and not the actual sales price in the Transaction.
5. OTHER MATTERS. In her capacity as a Director of the Corporation,
pursuant to the terms of the Plan, Douglass was automatically granted on
November 14, 1995 an option to purchase 8,511 shares of the Common Stock of the
Company for an exercise price of $5.875 per share. Such options are exercisable
for 10 years from November 14, 1995 and vest over a four year period (subject to
early termination as provided in the Plan), all as provided in the Plan. In
addition, at its March 8, 1996 meeting, the Board of Directors authorized a
payment to Douglass of $5,000 and the grant of an option to purchase an
additional 10,000 shares of the Common Stock of the Company for an exercise
price of $5.125 (the closing sale price on September 1, 1995), all in
recognition of the services previously rendered by Douglass during 1995 in
connection with certain class action securities litigation then pending against
the Company. These latter options shall be issued pursuant to the Plan, shall be
exercisable for 10 years from March 8, 1996 (subject to early termination as
provided in the Plan) and shall be fully vested. Further, it is hereby
acknowledged and agreed that Douglass shall, from and after February 1, 1996,
(i) be compensated as an "independent" director with respect to her service as a
Director of the Company, and (ii) be entitled to an additional cash payment of
$1,000 per month to defray the additional costs associated with her service as
Co-Chairman of the Board of Directors of the Company.
<PAGE>
6. RELEASE; WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE.
Douglass hereby releases the Company from any and all claims (the "Claims") she
may have for compensation or otherwise arising out of her appointment as
Chairman of the Board of the Company on November 14, 1995 and the changes made
to the scope of the duties of that office and compensation payable with respect
thereto effected subsequent to her appointment up to and including the actions
taken by the Board of Directors of the Company at its meeting on March 8, 1996.
In furtherance of the foregoing, Douglass expressly waives all rights under
Section 1542 of the Civil Code of the State of California which provides as
follows:
A general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him may have materially affected his settlement with the debtor.
It is the intention of the Company and Douglass, through this Agreement, fully,
finally, and forever to settle and release all of the Claims. In furtherance of
such intention, the release herein given shall be, and remain in effect as, a
full and complete release of the Claims notwithstanding the discovery of the
existence of any additional claims or facts relating thereto.
7. NO KNOWN CLAIMS. The Company hereby represents to Douglass that it is
not currently aware of any claim that it may have against Douglass arising out
of her appointment as Chairman of the Board or services she performed in that
capacity from November 14, 1995 through March 8, 1996.
<PAGE>
8. MISCELLANEOUS.
(a) Notices. All notices, requests and other communications
-------
(collectively, "Notices") given pursuant to this Agreement shall be in writing,
and shall be delivered by personal service, facsimile transmission, or by United
States first class, registered or certified mail (return receipt requested),
postage prepaid, addressed to the party at the address set forth below:
If to Company:
IWERKS Entertainment, Inc.
4540 West Valerio Street
Burbank, CA 91505-1056
Attn: Chief Executive Officer
Fax: (818) 840-6110
If to Douglass:
Paula T. Douglass
Equus
The America Tower
2929 Allen Parkway, 25th Floor
Houston, Texas 77019
Fax: (713) 529-9545
Any Notice shall be deemed duly given when received by the addressee thereof,
provided that any Notice sent by registered or certified mail shall be deemed to
have been duly given three days from date of deposit in the United States mails,
unless sooner received. Either party may from time to time change its address
for further Notices hereunder by giving notice to the other party in the manner
prescribed in this section.
(b) Entire Agreement. This Agreement contains the sole and entire
----------------
agreement and understanding of the parties with respect to the entire subject
matter of this Agreement, and any and all prior discussions, negotiations,
commitments and understandings, whether oral or otherwise, related to the
subject matter of this Agreement are hereby merged herein. No representations,
oral or otherwise, express or implied, other than those contained in this
Agreement have been relied upon by any party to this Agreement.
(c) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS
OF LAW PRINCIPLES THEREOF.
(d) Captions. The various captions of this Agreement are for reference
--------
only and shall not be considered or referred to in resolving questions of
interpretation of this Agreement.
(e) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
(f) Amendments and Waivers. No amendment or waiver of any term or
----------------------
provision of this Agreement shall be effective unless made in writing. Any
written amendment or waiver shall
<PAGE>
be effective only in the instance given and then only with respect to the
specific term or provision (or portion thereof) of this Agreement to which it
expressly relates, and shall not be deemed or construed to constitute a waiver
of any other term or provision (or portion thereof) waived in any other
instance.
In witness whereof, the parties have executed this Agreement as of the date
first set forth above.
Company: Douglass:
IWERKS Entertainment, Inc.
By: /s/ Roy A. Wright By: /s/ Paula T. Douglass
------------------------- --------------------------
Roy A. Wright Paula T. Douglass
Chief Executive Officer
<PAGE>
EXHIBIT 11.1
IWERKS ENTERTAINMENT, INC.
Earnings Per Share
For the years ended June 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding 6,930,809 10,209,663 10,945,499
Common equivalent shares:
Options and warrants - - 1,198,800
Incremental effect for the period
prior to the initial public
offering of convertible preferred
stock (Series A to E) 734,832 - -
----------- ------------ -----------
7,665,641 10,209,663 12,144,299
=========== ============ ===========
Net income (loss) $(8,055,094) $(13,473,193) $ 3,098,726
=========== ============ ===========
Net income (loss) per share $ (1.05) $ (1.32) $ .26
=========== ============ ===========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-77816) pertaining to the Employees' incentive stock options and other
stock option and warrant agreements of Iwerks Entertainment, Inc. of our report
dated August 2, 1996, with respect to the consolidated financial statements and
schedule of Iwerks Entertainment, Inc. included in the Annual Report (Form 10-K)
for the year ended June 30, 1996.
Los Angeles, California /s/ Ernst & Young LLP
August 29, 1996
<TABLE> <S> <C>
<PAGE>
<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> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 12,674,206
<SECURITIES> 12,607,295<F1>
<RECEIVABLES> 5,469,216
<ALLOWANCES> (292,990)
<INVENTORY> 2,798,244
<CURRENT-ASSETS> 33,077,641<F2>
<PP&E> 36,233,039<F3>
<DEPRECIATION> (20,258,003)<F4>
<TOTAL-ASSETS> 72,926,176
<CURRENT-LIABILITIES> 13,528,531
<BONDS> 2,732,299<F5>
0
0
<COMMON> 76,395,967
<OTHER-SE> (19,730,621)<F6>
<TOTAL-LIABILITY-AND-EQUITY> 72,926,176
<SALES> 48,516,010
<TOTAL-REVENUES> 49,679,778<F7>
<CGS> 28,674,960
<TOTAL-COSTS> 28,674,960
<OTHER-EXPENSES> 17,376,647<F8>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 380,482
<INCOME-PRETAX> 3,247,689
<INCOME-TAX> 148,963
<INCOME-CONTINUING> 3,098,726
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,098,726
<EPS-PRIMARY> .26
<EPS-DILUTED> .25
<FN>
<F1>Includes non-current portion of marketable securities of $5,825,747.
<F2>Includes Costs and estimated earnings in excess of billings on uncompleted
contracts of $5,583,368 and Related party receivable and other of $64,049.
<F3>Includes portable simulation theaters of $12,153,484 and film inventory of
$14,345,397.
<F4>Includes portable simulation theaters of $3,069,688 and film inventory of
$10,973,065.
<F5>Includes the non-current portions of notes payable, notes payable to related
parties and capital leases.
<F6>Accumulated deficit
<F7>Includes interest income of $1,163,768.
<F8>Consists of selling, general and administrative expenses of $17,018,553 and
research and development of $358,094.
</FN>
</TABLE>
