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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
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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, 1997
[ ] 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 October 3, 1997, there were outstanding, 12,160,600 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 ($4.125 per
share) of the Registrant's Common Stock on the NASDAQ National Market System was
$43,750,983. 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 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Annual Report.
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PART 1
BUSINESS OF IWERKS
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. The Company's products combine advanced theatre
systems with entertainment or educational software to create high-impact
"attractions" which immerse audiences in the action. The Company's products
include ride simulation, giant screen, 360 degree, 3-D, and various other
specialty attractions. In addition, the Company 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 the Company's 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 16 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 several joint ventures to own and operate multiple ride
simulation theatres in the United States and Australia. The Company continues to
evaluate new opportunities to participate in the operation of its fixed-based
attractions.
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OUTLOOK
This Report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Exchange Act and Section 27A of the
Securities Act. The words "expect", "estimate", "anticipate", "predict",
"believe" and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of
places in this filing and include statements regarding the intent, belief or
current expectations of Iwerks, its directors or officers with respect to, among
other things (a) trends affecting the financial condition or results of
operations of Iwerks and (b) the business and growth strategies of Iwerks.
The stockholders of Iwerks are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in this Report, for the reasons, among others, set forth under "Risk
Factors."
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Since inception in 1986 through August 15, 1997, the Company has installed in
excess of 230 fixed-base theatres and touring attractions in 28 countries. Of
these, 111 were ride simulation theatres, which the Company supports with a
library of 39 ride simulation films, the industry's largest ride simulation film
library. The Company's ride simulation film projects include: Super Speedway, A
thrill ride through seven North American race tracks hosted by Craig T. Nelson;
Superstition, a haunted scream park adventure hosted by Elvira-Mistress of the
Dark; Secrets of the Lost Temple, an explorer's adventure through a Mayan
temple; 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 reptiles; 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. The Company has the largest installed base of ride
simulation theatres and the largest library of ride simulation films in the
world.
The Company 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, London, England and Hong Kong.
Recent Developments
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On August 5, 1997 the Company and Showscan Entertainment, Inc. ("Showscan")
announced they signed a definitive agreement to merge. The transaction calls for
each share of Showscan Common Stock to be converted into 0.85 of a share of
Iwerks Common Stock. The Showscan Preferred Stock will be exchanged for Iwerks
Common Stock at the 0.85 ratio on an as converted basis. Iwerks expects to issue
approximately 5.62 million shares of Iwerks Common Stock in the Merger
(excluding shares issuable upon exercise of outstanding Showscan options and
warrants and the 8% Notes), resulting in an estimated transaction value of
approximately $27.4 million (based upon a closing price of Iwerks Common Stock
on the NASDAQ National Market on August 4, 1997 of $4.875 per share). The
transaction will be accounted for as a pooling of interests, after which
Showscan will become a wholly owned subsidiary of Iwerks.
The Company believes that the Merger will enhance Iwerks' position as a
leading provider of high-tech software-based theatre attractions and establish
the combined company as the premier company in that segment of the out-of-home
entertainment market. The combined company will have a larger installed base of
theatres, consisting of 160 simulation thrill ride screens in 28 counties (the
largest in the world), 16 Portable Reactor simulation thrill rides, and 76 giant
and large screen theatres. The combined company will have an expanded film
library including 68 ride simulation titles and 47 specialty films. The Company
also believes that the merger will provide the combined business with
significant opportunities to realize efficiencies and synergies by operating
with one corporate overhead and the economies of scale.
Consummation of the Merger is subject to approval by the stockholders of the
Company and Showscan, as well as other customary closing conditions. If
shareholder approval is not obtained or other closing conditions are not
satisfied or if the parties mutually agree to terminate or modify the terms of
the merger agreement, the transaction may not be consummated pursuant to the
existing terms of the merger agreement, or at all. The stockholders' meetings
are scheduled to take place in the fourth calendar quarter of 1997.
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 1997, a key strategy of the
Company 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 16 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.
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, and opened the first theatre 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. In fiscal 1997, the Company
opened 3 simulation theatres pursuant to this joint venture: Bethesda, MD,
Philadelphia, PA and Ontario, CA. These recent agreements supplement the
Company's existing partnership at PIER 39 San Francisco and its royalty
interests in the Company's theatre system at the Foxwoods Casino in Ledyard,
Connecticut.
IWERKS PRODUCTS
FIXED-BASE RIDE SIMULATION THEATRES. The Company's 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
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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 seat, row
and platform-based simulators in a variety of configurations and at multiple
price points. The Company derived approximately 40%, 44% and 41% of its revenues
from the sale of fixed-base ride simulation theatres in fiscal 1995, 1996 and
1997, respectively. 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 the
Company's ride simulation theatres typically range between three and five
minutes. The Iwerks TurboRide can be reprogrammed to create new adventures.
PORTABLE RIDE SIMULATION THEATRES. The Company 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 ride simulation technology as the Company's Turbo Ride and
can accommodate up to 18 people per show. The Reactors can be used to exhibit
the Company's 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. The Company
also seeks corporate sponsors for its touring Reactor units. The Company
derived approximately 18%, 20%, and 17% of its revenues in fiscal 1995, 1996
and 1997, respectively, from the operation and sponsorship of portable ride
simulation theatres.
GIANT SCREEN THEATRES. The Company's 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 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.
The Company's 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. The Company's 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. The Company also offers 3D systems which use dual
projectors to create a 3D image. The Company derived approximately 6%, 9% and
12% of its revenues from the sale of giant screen theatres in fiscal 1995, 1996
and 1997, respectively.
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. The Company 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.
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FILM SOFTWARE. The Company produces film and video software for the
Company's 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 the
Company to maintain creative and budgetary control of projects without incurring
substantial, continuing overhead expenses. The Company also provides executive
producer and postproduction services to third parties filming in the Company's
film or video projection formats.
The Company has a film library which includes, as of August 15, 1997, the
distribution rights to 39 ride simulation films, 4 giant screen films and seven
3D films. The Company's 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. The Company
derived approximately 18%, 11 % and 14% of its revenue in fiscal 1995, 1996 and
1997, respectively, from film license agreements and film production contracts.
The Company's recent ride simulation films include Mad Racers, Iwerks
first ride simulation 3D film; Secrets of the Lost Temple, based on an
explorer's adventure through a Mayan temple; 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. The dramatic new Iwerks TurboRide 3D! took First Place honors for
Best New Entertainment Technology at the November 1996 International Association
of Amusement Parks and Attractions (IAAPA) convention in New Orleans. The
Company also won the prestigious Image Award for Best Overall Presentation.
Secrets of the Lost Temple, premiered at IAAPA, also received an award in the
Best New Product category. Dino Island was rated the best new attraction at the
IAAPA convention, 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. When sold,
the customer pays all or most of the production cost; the Company attempts to
retain limited distribution rights beyond an exclusive exhibition territory
retained by the customer. When licensed, the Company typically licenses the
film for a one-year period for a flat fee which varies based upon the film. In
limited cases, the Company 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.
MARKETING AND CUSTOMERS
The Company 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 24 employees. A foreign sales office located in Hong Kong
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provides support to the Company's Japanese and Asian marketing programs and
assists in customer service. A satellite sales office was established in
London, England in May 1997 to support the European and Middle East
marketplaces. In addition, the Company has sales professionals located in
Burbank, California and Sarasota, Florida. The Company also has agreements with
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.
The Company 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 event venues. The
Company's 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 site
improvements to operate the theatre. The Company provides installation,
training, design, maintenance and other support services.
The primary market for the Company's 3D and 2D ride simulation theatres has
been the worldwide amusement and theme park industry. Continuing sales will
come from previously existing parks looking for new attractions, and parks under
development looking for an array of attractions and the expanding location-
based-entertainment industry. 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. The Company has also
developed customers in the family entertainment center, institutional and casino
markets as well as tourist, vacation, destination shopping and convention
locations for its ride simulation theatres. The Company 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.
The Company 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.
The primary markets for the Company's giant screen and 3D theatres have
been museums, visitor destination centers, world expositions and other
institutional exhibition facilities frequented by large numbers of visitors.
Increasingly, Cineplex operators are viewing giant screen theaters as a new
entertainment option for their guests. The Company sells its giant screen and
360 degree theatres at prices which are separately negotiated.
One of the Company's customers, AT&T, accounted for more than 10% of
Iwerks' revenues in fiscal 1995. No single customer accounted for more than
10% of revenues in fiscal 1996 and 1997.
The Company's 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, the Company's operations have not
historically been subject to risks related to currency fluctuations. During
fiscal 1995, 1996 and 1997, 55%, 49% and 55% of the Company's revenues,
respectively, were derived
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from sales outside the United States. The Company's sales contracts typically
provide for progress payments which are timed to match related expenditures by
the Company. The customer generally has the right to terminate the contract
before completion by paying Iwerks its nonrecoverable costs plus a termination
fee. The Company offers a warranty on sales of its products, generally for a
period of 12 months. The Company believes that its material contract terms are
consistent with industry practices.
ENABLING TECHNOLOGIES
With limited exceptions, the underlying technologies employed by the
Company are in the public domain and generally available in the marketplace.
However, the Company 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. The Company 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 8/70 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 and the
Quatro(TM) is now a patented proprietary projection technology.
The Company's 8/70 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 the Company's 8/70 a
brighter and sharper image without the flicker and stroboscopic effects common
with conventional 35- and 70-millimeter film systems. The Company's 8/70 is
used in the Company's array of ride simulation systems and destination theatres
common to museums and visitor centers where screen sizes smaller than 60' high
and 80' wide or dome screens of 75' or less in diameter are suitable.
The Company's 15/70 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. The Company's
15/70 is capable of achieving 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
8/70 and 15/70 are used in the Iwerks CineDome and Iwerks Theatres.
In fiscal 1997, the Company acquired Pioneer Technology Corporation and
the proprietary Linear-Loop Projection ("LLP") Technology to offer the
expanding giant screen market a genuine alternative to existing projection
techniques: The LLP gently pushes film through the projector on a column of
air unlike most projection systems that use levers to pull film through. The
LLP produces an image that is brighter and more stable than other projectors
available.
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The Company offers high resolution digital video imaging systems that
utilize a laser disc source and produce a high quality video image. This
imaging system is ideal for Iwerks Reactors and small ride simulation theatre
systems. In the Iwerks Video 360 theatre, the video imaging and show control
systems allow real-time manipulation of the projected image to allow a variety
of special effects.
MOTION BASES. The Company's 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 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 Transporter is a two- and four-
seat, six-axis motion base capable of producing the most realistic ride
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. The Company's 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
The Company manufactures and assembles its theatre systems at its
facilities in Burbank, California. A majority of the components for the
Company's theatre systems are purchased from outside vendors. The Company's
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.
The Company's manufacturing operations utilize a wide variety of electrical and
mechanical components, raw materials and other supplies and services. The
Company 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, the
Company has no reason to believe that any of the single-source vendors present a
serious risk. Consistent with industry practice, the Company 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.
The Company maintains an inventory of these items as it deems appropriate to
service forecasted demand. Research and development costs are
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incurred in the design, construction and testing of prototype systems and are
charged to expense as incurred. The research and development expenses were
$848,000 $358,000 and $726,000 for the years ended June 30, 1995, 1996 and 1997,
respectively. Of the expenses, 47%, 32% and 23% in 1995, 1996 and 1997,
respectively, were for improvements to existing products and the remainder was
for development of new products.
The Company recently acquired the technology and patents to produce the
Linear Loop Projector ("LLP") which is a new technology in film handling and
projection. The Company is currently building its first 25 LLP projectors and
will utilize them not only in its Large Format Theatres, but also as its
projector of choice in larger ride simulation installations. The LLP is
manufactured by the Company and is not an upgrade or rework of an existing
vendored product. The technology is unique, patented and a distinctive
advantage compared to "geneva" driven models that preceded it.
Ballantyne of Omaha, a leading manufacturer of professional motion picture
projectors, supplies the Company with its 8/70 projectors. The Company makes
substantial modifications to the projectors to make them suitable for the
Company's use. Lenses and lamphouses incorporated in the projection systems
are supplied to the Company by third parties. If the Ballantyne projectors were
for any reason to become unavailable, the Company believes that it would be able
to substitute other projectors.
The Company and Vickers Incorporated, a manufacturer of hydraulic
components, jointly developed the hydraulically actuated seats which are used in
the Turbo Tour ride simulation theatre. Under the agreement pursuant to which
the hydraulically actuated seats were developed, the Company owns all rights in
and to the seats. Vickers continues as the sole manufacturer of these motion
bases on behalf of the Company; however, the Company 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 produce within 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
INTEGRATION OF IWERKS AND SHOWSCAN; ANTICIPATED NET LOSS
Iwerks has entered into the Merger Agreement with Showscan with the
expectation that the transaction will result in beneficial synergies for the
combined business. Iwerks believes that the Merger will expand Iwerks'
leadership position in simulation, better position Iwerks to develop higher
quality software, bring Iwerks additional technologies at a lower cost than
initiating research and development efforts, strengthen Iwerks' geographic
presence worldwide, provide for access to new markets and increase recurring
revenues while allowing significant cost savings.
Achieving these anticipated business benefits will depend in part on
whether the operations of Showscan can be integrated with the operations of
Iwerks in an efficient, effective and timely manner. There can be no assurance
that this will occur. The combination of the companies will require, among other
things, integration of the companies' management staffs, coordination of the
companies sales and marketing efforts, integration and coordination of the
companies' film production and distribution efforts, acceptance by the
companies' respective theatre networks of film software originally produced in
the other company's format, and the identification and elimination of redundant
and/or unnecessary overhead. The success of this process will be significantly
influenced by the ability of the combined business to retain key management,
marketing and production personnel. There is no assurance that this integration
will be accomplished smoothly or successfully or that Iwerks will be successful
in retaining key members of management. The difficulties of such integration may
be increased by the necessity of coordinating theatre networks based on
differing projection technologies and distinct operating cultures. The
integration of operations of the companies following the Merger will require the
dedication of management resources, which may temporarily distract management's
attention from the day-to-day business of the combined business. The inability
of management to integrate successfully the operations of the companies could
have an adverse effect on the business and results of the combined business. In
addition, even if the operations of the companies are ultimately successfully
integrated, it is anticipated that the integration will be accomplished over
time and, in the interim, the combination may have an adverse effect on the
business, results of operations and financial condition of the combined
business. In particular, as a result of nonrecurring costs associated with the
Merger, a reduction in hardware contracts in fiscal 1997 and due to seasonal
factors, Iwerks anticipates that it will report a net loss for the first and
second quarters of fiscal 1998. The estimated non-recurring costs of $6.3
million to be incurred in the first and second quarter of fiscal 1998 include
investment banking, legal, accounting, printing, severance, expenses for
consolidation of facilities and other expenses, some of which will be incurred
even if the Merger is not consummated.
In addition, there can be no assurance that the present and potential
customers of Iwerks and Showscan will continue their current utilization
patterns without regard to the proposed merger. Any significant reduction in
utilization patterns by Iwerks and Showscan customers, could have an adverse
effect on the near-term business and results of operations of the combined
business.
ANTICIPATED EFFECTS OF THE MERGER
Iwerks currently is evaluating the operations of the business of Showscan
for purposes of developing a plan for the integration of the business to be
acquired with Iwerks' existing operations. Although this plan is not complete,
it is anticipated that a significant restructuring of the combined operations
will be required as a result of the Merger. As a consequence of this
restructuring and the consummation of the Merger, Iwerks anticipates that a
significant restructuring of the combined operations will be required as a
result of the Merger. As a consequence of this restructuring and the
consummation of the Merger, the Company anticipates incurring one-time
restructuring and related charges of $6.3 million in the first and second
quarters of fiscal 1998.
The Merger will be accounted for on a pooling of interests basis. Under
the pooling rules, the historical financial results of Iwerks will be restated
to reflect the combination, following certain adjustments. Following the
consummation of the Merger, the historical results of Iwerks will be restated to
reflect the historical profits and losses of Showscan. Showscan generated
profits in each of fiscal years ended 1995 and 1996 and incurred losses in the
fiscal year ended March 31, 1997 and in the first quarter of fiscal 1998 which
ended June 30, 1997. In addition, Showscan is expected to incur losses in its
second fiscal quarter of 1998. Further, under the pooling rules, the costs
incurred by Iwerks and Showscan in consummating the Merger will be expensed
during Iwerks' first and second fiscal quarters of 1998.
The combined effect of the restructuring and other charges discussed above
and the pooling accounting treatment in the Merger will have an adverse effect
on the results of operations of Iwerks in each of the first and second fiscal
quarters of 1998.
DEPENDENCE ON PRODUCTION OF FILM SOFTWARE; FINANCIAL RISKS OF FILM PRODUCTION
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 $2.6 million, $0.8
million and $2.5 million in film software during fiscal 1995, 1996 and 1997,
respectively.
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 generally is subject to substantial
financial risks relating to the production and development of new entertainment
and educational software. The Company
9
<PAGE>
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 Iwerks 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.
At June 30, 1997, the Company had recorded on its balance sheet $3.4 million,
in film library costs. 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 $3.5
million. While the current carrying value of the Company's film inventory
reflects management's belief that it will realize the net value recorded on its
balance sheet, there can be no assurance that it will be able to do so.
DEPENDENCE OF OWNED AND OPERATED OPERATIONS UPON SPONSORSHIP REVENUES
The Company derived $3.7 million, $7.4 million and $2.9 million of
revenues for fiscal 1995, 1996 and 1997 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 (AT&T Corp.) that has sponsored the Company's touring motion
simulators from March 1994 through September 1996. Revenues from AT&T Corp.
were 11.5%, 9.9% and 3.7% of total revenue for fiscal 1995, 1996 and 1997,
respectively. The AT&T Corp. contract expired in September 1996. In January
1996, the Company entered into a sponsorship contract with a foreign sponsor,
which expired in August 1996. The Company currently has limited sponsorship
contracts. There can be no assurance that the Company will be able to extend
or replace its existing sponsorship arrangements when they expire. The fourth
quarter of fiscal 1997 includes a non-cash charge of $5.6 million to record
the impact of the adoption of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." This charge
consisted primarily of a reduction in the carrying value of the portable
simulation business (touring) to the net present value of the future cash
flows expected from these assets. Of the charge, $1.8 million reduced
Goodwill, and the balance reduced Iwerks' fixed assets. The Company lost AT&T
as a major sponsor of the Reactor(TM) fleet in the first quarter of fiscal
1997. The loss of the major sponsor that utilized five of the Reactors
throughout fiscal 1996 resulted in excess capacity between early fall and late
spring of fiscal 1997. Since that time, and through the fourth quarter, the
Company has aggressively pursued new sponsorship opportunities and other
options to replace these revenues. The failure to consummate these
opportunities prior to the end of the fiscal year and the lack of sponsorship
backlog as of June 30, 1997 prompted the Company to take the charge under SFAS
121. 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.
The principal direct competition for customers comes from manufacturers of
competing movie-based attractions, and in the case of amusement and theme parks,
manufacturers of traditional amusement park attractions. In
10
<PAGE>
addition to direct competitors, there is also competition from systems
integrators and some amusement and theme parks developing and constructing their
own attractions. Many of the Company's competitors have better name recognition,
and substantially greater financial and other resources than the Company.
Imax Corporation ("Imax") and a number of smaller competitors are growing
competitors of the Company in the ride simulation business and have dedicated
substantial resources to entering this market. In the large screen, special
format motion picture business, Iwerks' main competitor is Imax. The 15
perforation 70 millimeter ("15/70") film format appears to be emerging as the
most popular large format due primarily to the large number of films available
in that format. Imax is by far the dominant company in this market.
Additionally, the out-of-home entertainment industry in general is undergoing
significant changes, primarily due to technological developments as well as
changing consumer tastes. Numerous companies are developing and are expected to
develop new entertainment products or concepts for the out-of-home entertainment
industry in response to these developments that are or may be directly
competitive with existing products. There is severe competition for financial,
creative and technological resources in the industry and there can be no
assurance that existing products will continue to compete effectively or that
products under development will ever be competitive. Further, the commercial
success of products is ultimately dependent upon audience reaction. Audience
reaction will to a large extent be influenced by the audience's perception of
how the Company's products compare with other available entertainment options
out of the home. There can be no assurance that new developments in out-of-home
entertainment will not result in changes in consumer tastes that will make the
Company's products less competitive.
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, 1997, the Company's accumulated deficit was
$29.7 million. For the fiscal years ended June 30, 1995, 1996 and 1997, the
Company's ratio of indebtedness to total capitalization was 4.2%, 4.8% and 3.8%,
respectively. For fiscal year ended June 30, 1995, the Company had a net
decrease in cash of $2.7 million primarily as a result of large cash investments
in the touring business and additions to film inventory partially offset by cash
provided by operating activities. For the fiscal year 1996, the Company had a
net increase in cash of $6.9 million due to the cash provided by operating
activities being only partially offset by the relatively low amounts of spending
on film inventory and other investing activities and an increase in cash
provided by financing activities. For the fiscal year 1997, the Company had a
net decrease in cash of $9.1 million primarily resulting from cash used in
investing activities including investments in joint ventures, purchase of
property and equipment, additions to film inventory, the purchase of Pioneer and
related patent and the investment in additional debt securities. The Company
has experienced quarterly fluctuations in operating results and anticipates that
these fluctuations will continue in future periods. The Company expects to
report a net loss for the first and second quarters of fiscal 1998. 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, sponsorships, the mix of theatre systems shipped, the completion of
custom film contracts, the existence of world expos, amount of revenues from
portable simulation theatre and film licensing agreements, the timing of sales
of ride simulation attractions, the timing of delivery and installation of such
sales (pursuant to percentage of completion accounting) and any delays therein
caused by permitting or construction delays at the customer's site, the size,
type and configuration of the attractions sold, the timing of film rental
payments
11
<PAGE>
from existing attractions and the performance of those attractions that pay film
rental based on a percentage of box office and the timing of sales and marketing
efforts and related expenditures. In particular, fluctuations in theatre system
sales and deliveries from quarter to quarter can materially affect quarterly and
periodic operating results, and theatre system contract signings can materially
affect quarterly or periodic cash flow. Accordingly, the Company's revenues and
earnings in any particular period may not be indicative of the results for any
future period.
The seasonal fluctuations in earnings also may cause volatility in the stock
prices of the Company. While a significant portion of the Company's' expense
levels are relatively fixed, the timing of 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 four 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. In the
fourth quarter of fiscal 1997, the Company took approximately $8.7 million in
charges, including a loss on impairment of assets, legal and dispute reserve,
additional film amortization expense and an increased bad debt reserve. See
"MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Comparison of Year Ended June 30, 1997 to Year Ended June 30,
1996" and Note 14 of Notes to Consolidated Financial Statements.
NEW PRODUCT DEVELOPMENT
The Company operates in a technology driven segment of the entertainment
business. As such the Company must continually improve its products to increase
their entertainment value while also facing pressure to continually reduce the
price of its products to respond to competitive pressures. The inability of the
Company to develop new products and to respond to technological developments of
its competitors could have a materially-adverse effect on its business,
operations and financial condition.
INTERNATIONAL OPERATIONS
A significant portion of the Company's sales and film licensing are made to
customers located outside of the United States, primarily, in the Far East,
Europe, South America and Canada. During fiscal 1995, 1996 and 1997, 55%, 49%
and 55% of the Company's revenues, respectively, were derived from sales outside
the United States. During fiscal 1997, the Chinese market was the only foreign
12
<PAGE>
market with revenues over 10% of the Company's revenues with 14%. The Company
expects a significant portion (between 45% and 65%) of the Company's sales in
fiscal 1998 and 1999 will be to customers outside of the United States, similar
to the percentage experienced in the past three years. The Company maintains one
office in Hong Kong to support sales in Asia and one office in London to support
sales in Europe. International operations and sales of the Company may be
subject to political and economic risks, including political instability,
currency controls, exchange rate fluctuations (which, in the event of a decrease
in value of foreign currency to the dollar can significantly affect the
affordability of the Company's products overseas), changes in import/export
regulations, tariff and freight rates, longer accounts receivable collection
patterns, changes in regional or worldwide economic or political conditions and
natural disasters. Specifically, in the first quarter of fiscal 1998, the
Company has entered into fewer hardware contracts in Asia than it anticipated.
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 markets in which it
competes. There can be no assurance that these factors will not result in
customers of the Company defaulting on payments due to it, or in the reduction
of potential purchases of their products. The Company does not engage in any
hedging programs.
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 not able
to predict to what extent, or for what period, a recessionary climate would
adversely affect sales of its products.
DEPENDENCE ON SENIOR MANAGEMENT; RECENT CHANGES TO KEY PERSONNEL
Since January 1995, all of the Company's executive officers and all except two
members of the Company's Board have changed. Current executive officers are Roy
Wright, Chairman of the Board and Chief Executive Officer, Bruce C. Hinckley,
Executive Vice President, Chief Financial Officer and Secretary and Bill
Battison, Executive Vice President. The recruitment, retention and motivation
of skilled directors, executives, sales, technical and creative personnel and
other employees are important to the operations of the Company. The Company's
turnover in management personnel has placed, and could continue to place, a
significant strain on Iwerks' management and other resources. In addition,
there is competition for management and creative personnel in the industries in
which the Company operates. There can be no assurance that the combined company
will not encounter difficulties in recruiting and retaining qualified personnel
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.
13
<PAGE>
VOLATILITY OF STOCK PRICE
The Company's stock price has been, and could continue to be, highly volatile.
The market price of the Company's Common Stock has fluctuated substantially in
recent periods. During the 1997 fiscal year and through October 3, 1997, the
Company's market price has ranged from a low of $3 1/2, to a high of $10 3/8
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 Company's 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 Company's Common Stock.
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,
with which it has contractual relations, are similarly subject to such laws.
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board 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 the 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 Company's Common Stock,
and, as a result, the issuance thereof could have a material adverse effect on
the market value of the Company's Common Stock.
A number of provisions of the Company's' Certificate of Incorporation and By-
Laws and the Delaware General Corporation Law ("DGCL") and regulations relating
to matters of corporate governance, certain rights of Directors and the issuance
of preferred stock without stockholder approval,
14
<PAGE>
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
Iwerks' principal stockholders consider such a transaction to be in their best
interest.
In addition, the Company has adopted a Stockholder Rights Plan (the "Rights
Agreement"). Pursuant to the Rights Agreement each outstanding share of the
Company's Common Stock has received one right entitling the holder to purchase
1/100th of a share of Series A Preferred Stock of the Company's for each share
of the Company's Common Stock then held by such holder. Each right becomes
exercisable upon certain triggering events related to an unsolicited takeover
attempt of the Company.
PATENTS AND TRADEMARKS
The Company has several United States and selected other countries' patents on
various processes and elements related to film projection and ride simulation.
The Company has registered its principal trademarks in the United States and
selected other countries. While the Company's patents have not been challenged
and the Company believes that its patents are valid, third parties could still
challenge the patents and a court could determine that one or more of them are
invalid. Declarations of invalidity, particularly of key patents, could
adversely affect the marketability of the Company's products and services.
EMPLOYEES
At August 22, 1997, the Company employed 170 persons, of whom 37 were employed
in management, finance and administration, 24 were employed in sales and
marketing, and 109 were employed in operations. Although the Company has not
experienced difficulties in obtaining qualified personnel and anticipates that
it will be able to continue to recruit qualified personnel for its operations,
there can be no assurance that such personnel will be available when required.
None of the Company's employees are represented by a collective bargaining
agreement. The Company believes that its relations with its employees are good.
ITEM 2. PROPERTIES.
- -------------------
The Company 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, 1999 and September 30, 2001. The Company leases the space for an aggregate
lease payment of approximately $41,000 per month. The Company believes that its
current facilities are adequate to meet its needs for the immediate future. If
the Company's operations were to expand, the Company may require additional
office, warehouse and manufacturing facilities. The Company believes that
suitable facilities nearby the Company's principal facility in Burbank,
California are generally available.
15
<PAGE>
Item 3. Legal Proceedings.
- --------------------------
The Company is 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,
1997, no matter was submitted to a vote of the security holders of the
Registrant.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -----------------------------------------------------------------------------
The Company's Common Stock is listed for quotation on The NASDAQ National
Market. The table below sets forth, for the calendar quarters indicated, the
high and low closing sales prices per share as reported on The NASDAQ National
Market for the Iwerks Common Stock.
<TABLE>
<CAPTION>
High Low
Year Ended June 30, 1996 ---- ---
- -------------------------------------
<S> <C> <C>
First Quarter $ 6 3/8 $ 4
Second Quarter 6 7/8 4 5/8
Third Quarter 8 1/4 6 1/8
Fourth Quarter 12 6 15/16
Year Ended June 30, 1997
- -------------------------------------
First Quarter $10 3/8 $ 6 3/8
Second Quarter 7 1/4 4 5/8
Third Quarter 6 4 1/4
Fourth Quarter 5 1/4 3 11/16
Year Ended June 30, 1998
- -------------------------------------
First Quarter 5 5/8 3 1/2
</TABLE>
As of October 3, 1997, Iwerks had approximately 400 holders of record.
No dividends have been declared or paid since incorporation. Iwerks
currently intends to retain earnings for use in its business and does not
anticipate paying any cash dividends on it's common stock in the
foreseeable future.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------------------------------------
1993 1994 (1) 1995 (1) 1996 1997 (2)
------- ------- -------- ------- --------
(Dollars in Thousands Except Per Share Information)
OPERATIONS:
<S> <C> <C> <C> <C> <C>
Total revenue $32,239 $36,625 $ 44,975 $48,516 $ 39,584
Income from operations 1,412 (8,522) (13,893) 2,464 (10,573)
Net income (loss) $ 1,247 $(8,055) $(13,473) $ 3,099 $ (9,956)
Net income (loss) per share $ 0.18 $ (1.05) $ (1.32) $ 0.26 $ (0.84)
Weighted average shares outstanding 6,967 7,666 10,210 12,144 11,855
FINANCIAL POSITION (AT PERIOD END):
Cash, cash equivalents and short-term
investments $ 2,101 $26,526 $ 20,586 $25,281 $ 19,067
Total assets 25,386 81,235 71,626 72,926 64,529
Capital lease obligations and long-term
debt 2,757 3,349 2,130 2,732 1,827
Stockholders' equity 7,278 62,335 50,374 56,665 48,386
Total liabilities and stockholders' equity $25,386 $81,235 $ 71,626 $72,926 $ 64,529
PER SHARE DATA:
Net book value per common share $ 2.44 $ 6.25 $ 4.76 $ 4.89 $ 3.97
Common shares outstanding 2,985 9,968 10,592 11,588 12,160
</TABLE>
(1) Selected financial data includes Omni Films International, Inc. since the
acquisition date of May 18, 1994.
(2) Net loss for 1997 includes the write down of $5.6 million ($0.47 loss per
share) for the asset impairment of long lived assets for the portable ride
simulation business and other fixed assets.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------- --------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
General
- -------
The Company is engaged in the business of designing, engineering,
manufacturing, marketing and servicing specialty theatre systems which employ a
variety of projection, show control, ride simulation and software technologies.
The Company is currently in the business of: (a) selling and installing ride
simulation attractions in specialty theatres, (b) selling and installing giant
screen theatres (generally such theatres require projection technology which
utilizes film sizes ranging between five perforations per frame by 70
millimeters (5/70) and fifteen perforations per frame by 70 millimeter (15/70)),
(c) licensing and distributing the films in its library to ride simulation
theatres previously sold by the Company, (d) producing films in the 5/70, 8/70
and 15/70 film format for its film library as well as producing films in these
formats for third parties, (e) investing in joint ventures by contributing its
ride simulation technology, design and equipment and participating in the
theatres profits, and (f) operating a fleet of 16 mobile ride simulation
attractions which it owns. In addition, during March 1997, the Company
acquired the technology and patents for a state-of-the-art movie projector which
Iwerks uses to manufacture and sell projectors used primarily on theatres
systems designed by Iwerks. The selling and installation of both ride simulation
theatres and large screen theatres includes providing all or part of the design
of such theatres, sale of the projector screens, show control systems, motion
simulators and sound systems.
RECENT DEVELOPMENTS
- ------------------
On March 4, 1997 two newly formed wholly-owned subsidiaries of Iwerks
acquired all the stock of Pioneer in exchange for 299,101 shares of Iwerks
Common Stock. Concurrently, the Company purchased a patent from a partnership
related to Pioneer for approximately $1,114,000 in cash. These transactions were
accounted for as a purchase with an aggregate purchase price of approximately
$2,784,000 including acquisition costs. The aggregate purchase price of Pioneer
in excess of the fair value of the identifiable assets of Pioneer at the date of
acquisition was $1,536,000 which has been allocated to goodwill. The operations
of Pioneer have been consolidated with the operations of the Company from March
4, 1997.
On August 5, 1997 the Company and Showscan announced they signed a
definitive agreement to merge. The combined company, which will bring together
the two largest ride simulation companies, will be the largest provider of ride
simulation entertainment attractions and software in the world.
The transaction calls for each share of Showscan Common Stock to be
converted into 0.85 of a share of Iwerks Common Stock. The Showscan Preferred
Stock will be exchanged for Iwerks Common Stock at the 0.85 ratio on an as
converted basis. Iwerks expects to issue approximately 5.62 million shares of
Iwerks Common Stock in the Merger (excluding shares issuable upon exercise of
outstanding Showscan options and warrants and the 8% Notes), resulting in an
estimated transaction value of approximately $27.4 million (based upon a closing
price of Iwerks Common Stock on The NASDAQ National Market on August 4, 1997 of
$4.875 per share). The transaction will be accounted for as a pooling of
interests, after which Showscan will become a wholly owned subsidiary of Iwerks.
Consummation of the Merger is subject to approval by the stockholders of
the Company and Showscan, as well as other customary closing conditions. If
shareholder approval is not obtained or other closing conditions are not
satisfied or if the parties mutually agree to terminate or modify the terms of
the merger agreement, the transaction may not be consummated pursuant to the
existing terms of the merger agreement, or at all. The stockholders' meetings
are scheduled to take place in the fourth calendar quarter of 1997. The Company
anticipates incurring approximately $6.3 million of transaction expenses related
to the Merger in the first and second fiscal quarter of 1998. These include
investment banking, legal, accounting, printing, severance, expenses for
consolidation of facilities and other expenses, some of which will be incurred
even if the Merger is not consummated. These factors plus the seasonality of the
mobile simulation portion of the business and a reduction in hardware contracts
in fiscal 1997 are expected to result in the combined company having losses in
the first two quarters of fiscal 1998.
RESULTS OF OPERATIONS
- ---------------------
The Company 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 for the fiscal year ended June 30, 1995, 1996 and 1997 are analyzed in
the following table (in thousands):
19
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30
------------------------------------------------------------------------
1995 % 1996 % 1997 %
---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C>
Hardware sales & service $24,745 55% $27,998 58% $25,829 65%
Owned and operated 9,279 21% 13,469 28% 8,072 20%
Film licensing 4,096 9% 4,800 10% 5,358 14%
Film production and other 6,855 15% 2,249 4% 325 1%
------- --- ------- --- ------- ---
$44,975 100% $48,516 100% $39,584 100%
======= === ======= === ======= ===
</TABLE>
Revenues on sales of theatre systems are recognized on the percentage-of-
completion method over the life of the contract. 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 Iwerks'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. Revenues and related expenses are recognized at the beginning of the
license period at which time the customer is billed the license fee and film is
delivered to the customer.
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.
A significant portion of the Company's sales are made to customers located
outside of the United States, primarily in Asia, Canada, Europe and South
America. Revenues for the fiscal years ended June 30, 1995, 1996 and 1997
attributable to sales to these countries are analyzed in the following table (in
thousands):
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
1995 Total Revenue 1996 Total Revenue 1997 Total Revenue
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Asia $23,029 51.3% $17,311 35.7% $13,682 34.6%
South America 47 0.1% 972 2.0% 5,375 13.6%
(including Mexico)
Europe 1,185 2.6% 4,409 9.1% 2,085 5.3%
Canada 417 0.9% 1,131 2.3% 516 1.3%
------- ------------- ------- ------------- ------- -------------
Total Export Revenues $24,678 54.9% $23,823 49.1% $21,658 54.7%
</TABLE>
20
<PAGE>
Iwerks expects the percentage of international sales to total sales will not
likely fluctuate significantly in the next twelve months. The Company maintains
an office in Hong Kong to support sales to Asia. A sales office was opened in
London, England in May 1997 to support its European sales. South American sales
are supported out of the Sarasota, Florida office. 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 Iwerks' 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 Iwerks, 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 related to international sales.
COMPARISON OF YEAR ENDED JUNE 30, 1997 TO YEAR ENDED JUNE 30, 1996
- -------------------------------------------------------------------
REVENUES
Revenue for the fiscal year ended June 30, 1997 decreased $8.9 million or 18%
from the fiscal year 1996 revenue. Owned and operated revenue decreased $5.4
million or 40%, primarily from the Company's 17 touring ride simulators
(Reactors), due primarily to the loss of a major sponsor (AT&T Corp.)in the
first quarter of fiscal 1997. In addition, fiscal 1996 revenue included a $2.5
million cancellation settlement for an event which was to be held at World Expo
in Tokyo, Japan and there were no such cancellation revenue in fiscal 1997.
During the remaining portion of the fiscal year the Company aggressively pursued
new sponsorship opportunities and looked at other options to replace these
revenues. The loss of the major sponsor, that utilized 5 of the Reactors
throughout fiscal 1996, resulted in excess capacity between early Fall and late
Spring of fiscal 1997. In June, 1997 one of the Reactors was sold to a customer
in Korea and the Company continues to actively seek alternatives to increase the
utilization of the remaining 16 Reactors. The $2.2 million reduction in
hardware sales and service resulted from a reduced number of hardware contracts
in fiscal 1997 compared with fiscal 1996. Film licensing revenue increased 12%
from fiscal 1996 to fiscal 1997 due primarily to an increase in the number of
theaters which license films. The decrease in film production and other was due
to no films produced in fiscal 1997 compared to two films produced in fiscal
1996.
COST OF SALES
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 over the lives of certain films and royalties paid to third
parties. The cost of sales associated with operating portable ride simulation
theatres include costs for personnel, depreciation and amortization, event fees,
fuel, insurance and maintenance. The Company's
21
<PAGE>
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 59% and 73% for the fiscal years
ended June 30, 1996 and 1997, respectively.
One of the primary reasons for the decrease in the gross margins between
fiscal 1997 and 1996 was due to $1.5 million of charges to cost of sales made in
the fourth quarter of fiscal 1997 due to changes in accounting estimates. These
included additional film amortization expense on films which have not achieved
their projected revenue ($746,000), additional reserve for disputes ($450,000),
increased warranty reserve ($147,000) due to increased work performance on a
contract, and a reduction of previously recognized earnings by $205,000 in
connection with the cancellation of a contract. In addition, the costs related
to the revenue received from the cancellation settlement of the Tokyo World Expo
in 1996 were nominal resulting in an unusually high margin in fiscal 1996 which
did not occur in fiscal 1997.
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 $17.4 million and $15.6
million, for the years ended June 30, 1996 and 1997, respectively.
The $1.8 million reduction in selling, general and administrative expenses
between fiscal 1997 and 1996 was due primarily to reduced employee related
compensation ($2.3 million), legal and accounting expenses ($0.6 million) and
travel and entertainment expenses ($0.6 million). These reductions were
partially offset by an increase in the provision for doubtful accounts ($0.8
million), increased research and development expenditures ($0.4 million),
increased accrued expenses related to a regulatory audit ($0.3 million) and
expenses related to the proposed Merger ($0.2 million). (See Note 14 of Notes
to Consolidated Financial Statements).
LOSS ON IMPAIRMENT OF ASSETS
Due to the Company being unable to replace the major sponsorship revenue from
AT&T Corp. for its portable simulation theatre business and the resulting
excess capacity this generated during the winter months as described above in
the "Revenue" section, the Company recognized a non-cash charge of $5.6 million
in fiscal 1997 primarily for its portable simulation theatres in accordance with
Financial Accounting Standards Board (FASB) release Number 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". The loss was calculated as the excess of the carrying value of the portable
simulation theatres assets over the estimated future discounted cash flow from
these theatres during the next six fiscal years. (See Note 14 of Notes to
Consolidated Financial Statements). The impairment occurred in the fourth
quarter of fiscal 1997 as a result of disappointing
22
<PAGE>
results and an underutilization of Reactors during the quarter, sponsorship and
general admission events below expectations, and the lack of significant
sponsorship backlog as of June 30, 1997.
INTEREST INCOME & EXPENSE
Interest income for fiscal 1996 and 1997 was $1.2 million and $1.1 million,
respectively. The slight decrease from 1996 to 1997 resulted primarily from
changes in the invested cash balances during the respective periods.
Interest expense for fiscal 1996 and 1997 of $380,000 and $391,000 resulted
primarily from financing costs on the portable ride simulation theatres.
INCOME TAXES
- ------------
The provisions to income taxes were $149,000 and $117,000 to the years ended
June 30, 1996 and 1997, respectively. As the Company has significant net
operating loss carry forwards, the income tax provisions are primarily for
foreign taxes and state taxes.
NET INCOME (LOSS)
- -----------------
The Company recorded net income of $3,099,000 in 1996, compared to a net loss of
$9,956,000 in 1997 due to the reasons mentioned above.
Comparison of Year Ended June 30, 1996 to Year Ended June 30, 1995
- ------------------------------------------------------------------
REVENUES
Revenue in fiscal 1996 increased compared with fiscal 1995 in all three
primary revenue sources with a 13% increase in hardware, a 45% increase in owned
and operated (especially from foreign sources) and a 17% increase in film and
other software licensing. The revenue increase was partially offset by a
decrease in film production. The Company had several custom film contracts in
fiscal 1995 with no similar contracts in fiscal 1996.
Owned and operated (O&O) revenues increased 45% from 1995 to 1996. In
fiscal 1996, these revenues include foreign source revenues from Taiwan, Puerto
Rico and Argentina. 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 fiscal year 1996 were primarily with one customer. Also, fiscal 1996
revenue included a $2.5 million cancellation settlement for an event as
mentioned previously. Film licensing revenues increased 17% from 1995 to 1996
because of the increase in the number of film license agreements.
Theatre hardware sales increased 13% from 1995 to 1996 on increased demand
for the Company's theatre systems. Other revenues have various sources
including exclusivity agreements, distribution rights, forfeited deposits and
settlements on canceled contracts.
23
<PAGE>
COST OF SALES
The gross profit margin improved in fiscal 1996 compared to fiscal 1995 from
26% 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 in 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 were $25.8 million and $17.4
million for the fiscal years ended June 30, 1995 and 1996. The 32% decrease in
Selling, General and Administrative expenses from 1995 to 1996 resulted
primarily from reduction in administrative costs associated with the closure of
the Sarasota, Florida facility ($2,900,000), and from the 1995 litigation costs
($2,600,000) and bad debt charges ($1,200,000), for which there were no
comparable charges in 1996.
INTEREST INCOME AND EXPENSE
Interest income for fiscal 1995 and 1996 was $1.0 million and $1.2 million,
respectively. This increase resulted primarily from changes in the invested
cash balances during the respective periods.
Interest expense for fiscal 1995 and 1996 was $537,000 and $380,000,
respectively. This decrease is directly related to the amount of outstanding
debt during the years then ended.
INCOME TAXES
- ------------
The provisions for income taxes were $85,000 and $149,000 for the years ended
June 30, 1995 and 1996, respectively. As the Company had significant net
operating loss carry forwards, the income tax provisions are primarily for
foreign taxes and state taxes.
NET INCOME (LOSS)
- -----------------
The Company recorded a net loss of $13,473,000 in 1995, compared to net income
of $3,099,000 in 1996 due to the reasons mentioned above.
SEASONALITY AND FLUCTUATING QUARTERLY RESULTS
- ---------------------------------------------
The following tables set forth unaudited data regarding operations for each
quarter of fiscal 1996 and 1997 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 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.
24
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1996
-----------------------------------------------------
First Second Third Fourth
(Dollars in thousands) Quarter Quarter Quarter Quarter
- ----------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $10,096 $13,207 $13,825 $11,388
Cost of sales 5,720 8,239 7,642 7,074
------- ------- ------- -------
Gross Margin 4,376 4,968 6,183 4,314
Selling, general and
administrative 4,331 4,648 5,031 3,366
Loss on impairment of assets -- -- -- --
Interest (income) expense, net (96) (284) (226) (177)
------- ------- ------- -------
Income (loss) before provision
for taxes 141 604 1,378 1,125
Provision for taxes -- -- -- 149
------- ------- ------- -------
Net income (loss) $ 141 $ $604 $ 1,378 $ 976
======= ======= ======== ========
<CAPTION>
Fiscal 1997
-----------------------------------------------------
First Second Third Fourth
(Dollars in thousands) Quarter Quarter Quarter Quarter
- ----------------------------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenue $ 9,594 $10,023 $11,042 $ 8,924
Cost of sales 6,236 6,955 7,335 8,422
------- ------- ------- --------
Gross Margin 3,358 3,068 3,707 502
Selling, general and
administrative 3,381 3,322 3,582 5,338
Loss on impairment of assets -- -- -- 5,586
Interest (income) expense, net (197) (197) (145) (195)
------- ------- ------- --------
Income (loss) before provision
for taxes 174 (57) 270 (10,226)
Provision for taxes -- -- -- 117
------- ------- ------- --------
Net income (loss) $ 174 $ (57) $ 270 $(10,343)
======= ======== ======= ========
</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 and fourth fiscal quarters generates the lower quarterly revenue due
to the seasonality of the portable simulation theater operations. 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 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 canceled 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 eighteen months. The
Company has little control over the timing of customer purchases. In fiscal
1997, the fourth quarter was impacted by the charge for the asset impairments of
$5.6 million as well as cost of sales expenses totaling $1.5 million for
additional film amortization expense on films which have not achieved their
projected revenue, additional reserve for disputes, increased warranty reserve
and a reduction of previously recognized earnings in connection with the
cancellation of a contract. Also Selling, General and Administrative expenses
increased in the fourth quarter due to an increase to bad debt reserve due to
accounts which were deemed uncollectible, a legal reserve that first arose in
the fourth quarter, increased accrual due to a regulatory audit and increased
expenses relating to the proposed merger. (See Note 14 of Notes to Consolidated
Financial Statements).
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 the Company's 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 during the three fiscal years ending June 30, 1996 and proceeds from the
financing of certain equipment purchases.
25
<PAGE>
The Company expects a significant portion (between 45% and 65%) of its
sales in fiscal 1998 and 1999 will be from customers outside the United States,
similar to the percentages of the past three fiscal years. Fluctuations in
foreign currency in comparison to the U.S. dollar will make the Company's
products either more or less costly to foreign customers than such sales have
been in the past.
In fiscal 1997, approximately $1.0 million was provided by operating
activities. The Company's major investing activities included investments in
joint ventures for $1.2 million, additions to film library of approximately $2.5
million, acquisition of Pioneer (see Note 3 of Notes to Consolidated Financial
Statements) and related patent for $1.09 million, and purchase of property and
equipment for $1.2 million. Financing activities included repayment of notes
payable of $2.1 million.
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. Iwerks'
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.
At June 30, 1997, the Company had cash and short-term investments of
approximately $19.0 million. In addition, the Company has a $5 million bank
line of credit, none of which was drawn down at June 30, 1997. The Company
anticipates that its acquisition activities, operating and investment activities
in fiscal 1997 and beyond, including expected investments in O & O joint
ventures will use cash and expects that its cash balance will decline. If the
merger is consummated, it is anticipated that the transaction fees associated
with the merger which effect cash would be approximately $5.3 million. In
addition, the Company entered into an agreement to purchase three camera systems
at a cost of $1.8 million. However, the Company believes that its existing cash
balances, the proceeds of the debt securities it owns as they mature, financing
available from the Company's $5 million unused line of credit, and cash flow
from operations will be sufficient to meet its cash requirements through fiscal
1998, after which time it may be required to raise additional cash through the
sale of equity or debt securities, lease financing or other borrowings. In
addition, to the extent Iwerks 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.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income. The Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Statement applies to all enterprises that provide a
full set of general purpose financial statements. The Statement becomes
effective for all financial statements for fiscal years beginning after December
15, 1997, with earlier application permitted. Further, in June 1997, the FASB
issued Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information. The Statement changes the way public companies report
segment information in annual financial statements and also requires those
companies to report selected segment information in interim financial reports to
shareholders. The proposal supersedes FASB Statement No. 14 on segments and
does not apply to nonpublic enterprises or to not-for-profit organizations.
The Statement becomes effective for all financial statements for fiscal years
beginning after December 15, 1997, with earlier adoption permitted. The Company
has reviewed those Statements and does not believe that they will have a
material impact on its financial statements and related disclosures.
OUTLOOK AND RISK FACTORS
- ------------------------
26
<PAGE>
With the exception of the historical information, the matters discussed above
include forward-looking statements that involve risks and uncertainties. Among
the important factors that could cause actual results to differ from those
indicated in the forward-looking statements are revenue, costs of sales and the
ability of the Company to maintain pricing at a level to maintain gross profit
margins, the level of selling, general and administrative costs, the performance
by the Company under its existing purchase contracts and the ability to obtain
new contracts, the success of the Company's owned and operating strategy, the
ability of the Company to find additional sponsors for its Reactors or
alternative sources of revenue, the ability of the Company to identify and
successfully negotiate arrangements with joint venture and other strategic
partners, the success of the Company's film software, the effects of
competition, general economic conditions and acts of God and other events
outside the control of the Company.
27
<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, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997. Our audits also included the
financial statements listed in the Index at Item 14(a). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 1996 and 1997 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1997, 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 material respects the information set forth therein.
Los Angeles, California Ernst & Young LLP
August 5, 1997
28
<PAGE>
Iwerks Entertainment, Inc.
Consolidated Balance Sheets
Assets
(in Thousands)
<TABLE>
<CAPTION>
June 30,
--------------------------
1996 1997
------- -------
Current assets:
<S> <C> <C>
Cash and cash equivalents $12,674 $3,608
Short-term investments (Note 4) 6,782 15,459
Trade accounts receivable, net of allowance for doubtful 4,808 5,447
accounts (Note 1)
Costs and estimated earnings in excess of billings on 5,583 6,339
uncompleted contracts (Note 5)
Inventories 2,798 3,835
Other current assets 432 567
------- -------
Total current assets 33,077 35,255
Investment in debt securities, excluding current portion 5,826 -
Portable simulation theatres at cost, net of 9,084 4,018
accumulated depreciation
Property and equipment at cost, net of 3,519 2,920
accumulated depreciation and amortization (Note 7)
Film inventory at cost, net of amortization (Note 1) 3,372 3,439
Goodwill, net amortization (Notes 1 and 3) 17,360 15,367
Other assets 688 3,530
------- -------
Total assets $72,926 $64,529
======= =======
</TABLE>
See accompanying notes.
29
<PAGE>
Iwerks Entertainment, Inc.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
June 30,
---------------------------
1996 1997
-------- --------
Current liabilities:
<S> <C> <C>
Accounts payable $ 2,815 $ 3,435
Accrued expenses 7,486 8,793
Notes payable to related parties, (Note 8) 875 -
Notes payable, current portion (Note 9) 571 81
Billings in excess of costs and estimated 1,106 990
earnings on uncompleted contracts (Note 5)
Deferred revenue 61 278
Capital leases, current portion (Note 12) 615 739
-------- --------
Total current liabilities 13,529 14,316
Notes payable, excluding current portion (Note 9) 81 -
Capital lease obligations, excluding 2,651 1,827
current portion (Note 12)
-------- --------
Total liabilities 16,261 16,143
Commitments and contingencies (Note 12)
Stockholders equity (Note 11):
Preferred stock, $0.01 par value, 1,000,000 authorized - -
none issued and outstanding
Common stock, $.001 par value, 20,000,000 shares 56 57
authorized; 11,588,048 (1996) and 12,160,102 (1997)
issued and outstanding
Paid-in capital 76,340 78,016
Deficit (19,731) (29,687)
-------- --------
Total stockholders' equity 56,665 48,386
-------- --------
Total liabilities and stockholders' equity $ 72,926 $ 64,529
======== ========
</TABLE>
See accompanying notes.
30
<PAGE>
Iwerks Entertainment, Inc.
Consolidated Statements of Operations
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years ended
June 30,
---------------------------------------------------------------------
1995 1996 1997
-------- ------- --------
<S> <C> <C> <C>
Revenue $ 44,975 $48,516 $ 39,584
Cost of sales 33,081 28,675 28,948
-------- ------- --------
Gross margin 11,894 19,841 10,636
Selling, general and administrative expenses 25,788 17,377 15,623
Loss on impairment of assets - - 5,586
-------- ------- --------
(Loss) income from operations (13,894) 2,464 (10,573)
Interest income 1,043 1,164 1,125
Interest expense (537) (380) (391)
-------- ------- --------
(Loss) income before provision for income taxes (13,388) 3,248 (9,839)
Provision for income taxes (Note 10) 85 149 117
-------- ------- --------
Net (loss) income $(13,473) $ 3,099 $ (9,956)
======== ======= ========
Net (loss) income per common share
$ (1.32) $ .26 $ (.84)
======== ======= ========
Weighted average shares outstanding 10,210 12,144 11,855
======== ======= ========
</TABLE>
See accompanying notes.
31
<PAGE>
IWERKS ENTERTAINMENT, INC.
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Common Stock Retained
-------------- Paid-in Unearned stock Earnings
Shares Amount capital compensation (deficit) Total
------ ------ --------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 9,968 $55 $72,031 $(395) $ (9,357) $ 62,334
Common stock options exercised (Note 11) 309 - 192 - - 192
Issuance of common stock in connection with the - - -
minority interest acquisition of Iwerks
Touring Technologies, Inc. (Note 8) 315 - 1,188 - - 1,188
Amortization of unearned stock compensation - - - 132 - 132
Net (loss) - - - - (13,473) (13,473)
------ --- ------- ----- -------- --------
Balance at June 30, 1995 10,592 55 73,411 (263) (22,830) 50,373
------ --- ------- ----- -------- --------
Issuance of common stock in connection with the 75 - 1,600 - - 1,600
class action settlement (Note 16)
Common stock options and warrants exercised (Note 11) 961 1 1,579 - - 1,580
Retirement of common stock (40) - (250) - - (250)
Amortization of unearned stock compensation - - - 263 - 263
Net income - - - - 3,099 3,099
------ --- ------- ----- -------- --------
Balance at June 30, 1996 11,588 56 76,340 - (19,731) 56,665
------ --- ------- ----- -------- --------
Common stock issued in connection with the Purchase of 299 1 1,200 1,201
Pioneer (Note 3)
Common stock options and warrants exercised (Note 11) 273 - 476 476
Net (loss) (9,956) (9,956)
------ --- ------- ----- -------- --------
Balance at June 30, 1997 12,160 $57 $78,016 $ $(29,687) $ 48,386
====== === ======= ===== ======== ========
</TABLE>
See accompanying notes.
32
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1995 1996 1997
-------- ------- -------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net (loss) income $(13,473) $ 3,099 $(9,956)
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Loss (income) from limited partnership 101 (46) (21)
Depreciation and amortization 6,033 6,438 6,279
Write-down of assets to net realizable value 2,492 - 5,587
Write-down of film inventory to net realizable value 3,507 - -
Changes in operating assets and liabilities:
Trade accounts receivable, net (1,530) 1,282 (639)
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,201 (2,772) (637)
Inventories 862 (656) (1,012)
Other current assets 675 458 (131)
Accounts payable and accrued expenses 6,470 (775) 1,389
Billings in excess of costs and estimated
earnings on uncompleted contracts 29 (1,424) (116)
Deferred revenue (1,486) (1,873) 217
-------- ------- -------
Net cash provided by operating activities 4,881 3,731 960
INVESTING ACTIVITIES
Investment in limited partnership and joint ventures (218) - (1,162)
Investment in portable simulation theatres and patents (3,628) (184) (108)
Purchases of property and equipment (1,223) (312) (1,247)
Additions to film inventory (2,624) (790) (2,548)
Investment in debt securities 3,214 2,247 (2,851)
Purchase of minority interest in ITT, net of common stock issued (2,646) - -
Purchase of Pioneer and acquisition of related patent
net of cash acquired and stock issued - - (1,088)
Proceeds from sale of portable simulation unit - - 1,184
-------- ------- -------
Net cash (used in) provided by investing activities (7,125) 961 (7,820)
FINANCING ACTIVITIES
Proceeds from issuance of debt 1,365 - -
Proceeds from captial lease - 3,000 -
Repayment of Notes payable to related parties (399) (372) (875)
Repayment of Notes payable (1,651) (1,819) (571)
Payments on capital leases (121) (129) (700)
Exercise of stock options and warrants 192 1,580 476
Retirement of common stock - (250) -
Other 131 241 (536)
-------- ------- -------
Net cash provided by (used in) financing activities (483) 2,251 (2,206)
-------- ------- -------
Net increase (decrease) in cash (2,727) 6,943 (9,066)
Cash and cash equivalents at beginning of year 8,458 5,731 12,674
-------- ------- -------
Cash and cash equivalents at end of year $ 5,731 $12,674 $ 3,608
======== ======= =======
</TABLE>
33
<PAGE>
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest, net of amount capitalized $ 386 $ 419 $ 411
===== ===== =====
Income taxes $ 78 $ 61 $ 65
===== ===== =====
</TABLE>
Supplemental disclosures of non-cash investing and financing activities -
In 1997, the Company purchased patents, other assets and all the outstanding
common stock of the Pioneer related entities for cash and Iwerks common stock.
The Common Stock issued was valued at $1.2 million (see Note 3).
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 $3,000,000, in 1996, due to the purchase
of portable simulation theatres.
In 1995, the Company increased film inventory by $574,750 with a corresponding
increase in notes payable.
In 1995, the Company acquired the minority interest of Iwerks Touring
Technologies, Inc. for $1,400,000, in exchange for Company Common Stock valued
at $360,000 and cash.
(See accompanying notes)
34
<PAGE>
IWERKS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION - Iwerks is a Delaware
corporation. Iwerks designs, manufactures, installs and services high
resolution, proprietary motion picture theatre attractions. Iwerks'
attractions are built around a variety of theatre systems, including fixed and
portable simulators, giant screen theaters, and 3D theatres and the licensing
of the related software.
Iwerks operates in one business segment, the manufacture, distribution
and operation of entertainment and educational hardware and software.
The financial statements consolidate the accounts of Iwerks and its
wholly owned subsidiaries. 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, 1996 and 1995 in order to conform to the fiscal 1997
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 eighteen months in duration.
Iwerks also earns revenues for the production of films for outside
parties. Iwerks 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 customers are in accordance with the
terms of the contract and generally follow a payment schedule.
Iwerks provides a warranty for contracts generally for a period of twelve
months. Such warranty costs are included in cost of sales. The warranty
accrual as of June 30, 1996 and 1997 was $1,113,000, and $1,205,000,
respectively, and are included in accrued expenses in the accompanying
consolidated balance sheet.
Iwerks 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.
Iwerks 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
35
<PAGE>
the terms of the license agreement.
TRADE ACCOUNTS RECEIVABLE primarily consists of amounts due on contracts.
Allowance for doubtful accounts was $293,000 in 1996 and $1,111,000 in 1997.
INVENTORIES consist primarily of simulation system equipment components
and are stated at the lower of cost or market on an average cost 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 (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------------------
1996 1997
-------- --------
<S> <C> <C>
Films released $ 13,623 $ 15,204
Films in process and development 722 1,639
-------- --------
Total 14,345 16,843
Less accumulated amortization (10,973) (13,404)
-------- --------
$ 3,372 $ 3,439
======== ========
</TABLE>
Iwerks estimates that all of its unamortized released film cost will be
amortized over the next three years.
PORTABLE SIMULATION THEATRES - Sixteen portable simulation theatres are in
operation at June 30, 1997. 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 $3,070,000 in 1996 and $4,327,000 in 1997 (see Note 14).
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. The
remaining goodwill relates to the acquisition of Pioneer Marketing Corporation
and a related company (collectively referred to as "Pioneer") and prior
36
<PAGE>
acquisitions and is being amortized over 16 to 25 years (see Note 3).
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. (See Note 14). Accumulated amortization was $1,892,000 in 1996
and $2,737,000 in 1997.
OTHER ASSETS - Patents are stated at cost, and are being amortized using the
straight line method between 10 and 25 years. Iwerks acquired a patent in
fiscal 1997 in connection with the Pioneer acquisition in the amount of
$1,094,000, and a covenant not to compete in the amount of $50,000 (see Note
3). Accumulated amortization was $283,000 in 1996 and $329,000 in 1997. The
Company has entered into joint venture arrangements whereby the Company
contributes ride simulation theater equipment and the joint venture partner
contributes site improvements. The Company receives film licensing fees and
cash flow income is split between the joint venture partners. The Company's
investment in the joint ventures is depreciated over 5 years.
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, 1996 and 1997 was $1,074,000 and $1,683,000,
respectively, and the royalty accrual as of June 30, 1996 and 1997 was
$871,000 and $2,285,000, respectively. These amounts are included in accrued
expenses in the accompanying consolidated balance sheets.
The Company had legal accruals as of June 30, 1996 and 1997 in the
amounts of $209,000 and $671,000, respectively. The Company also had
compensation accruals in the amount of $950,000 and $250,000 as of June 30,
1996 and 1997, respectively. These amounts are included in accrued expenses
in the accompanying consolidated balance sheets.
DEFERRED REVENUE represents advance payments received for rental of portable
theatre systems and theater service contracts and are recognized as revenue
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. The
research and development expenses amounted to $848,000, $358,000 and $726,000
for the years ended June 30, 1995, 1996 and 1997, respectively.
INCOME TAXES - 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.
CONCENTRATION OF CREDIT 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 a Defined Contribution 401k Plan
("Plan") for all of its eligible employees. Under the Plan, each employee who
has attained the age of eighteen and who
37
<PAGE>
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. Effective July 1997, the Company
began making matching contributions not to exceed 3% of participants salaries
to the Plan.
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.
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.
2. RESTRUCTURING CHARGES
During the third quarter of fiscal 1995 Iwerks approved a restructuring
plan for the closure of its Sarasota, Florida ("Sarasota") manufacturing
facility. The restructuring plan consolidated the manufacturing operations
into one facility at Iwerks' 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 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 Iwerks' 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.
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
38
<PAGE>
consolidation was completed in November 1995.
3. ACQUISITION OF PIONEER
On March 4, 1997 two newly formed wholly-owned subsidiaries of the
Company acquired all the stock of Pioneer in exchange for 299,101 shares of
Iwerks Common Stock. Concurrently, the Company purchased a patent from a
partnership related to Pioneer for approximately $1,114,000 in cash. These
transactions were accounted for as a purchase with an aggregate purchase price
of approximately $2,784,000 including acquisition costs. The aggregate
purchase price of Pioneer in excess of the fair value of the identifiable
assets of Pioneer at the date of acquisition was $1,536,000 which has been
allocated to goodwill. The operations of Pioneer have been consolidated with
the operations of the Company from March 4, 1997.
Unaudited pro forma combined statements of operations for the years ended
June 30, 1997 and 1996, which would combine the results of operations of the
Company and Pioneer are not presented herein as such information is not
material to the combined results of operations.
Pioneer is in the business of designing and manufacturing motion picture
projectors.
4. SHORT-TERM INVESTMENTS
The carrying amounts of the Company's investments in debt securities at
June 30, 1996 and 1997 (maturing from 1-6 months) are as follows (in
thousands):
<TABLE>
<CAPTION>
Carrying Amount
------------------------
Security 1996 1997
- -------- ------- -------
<S> <C> <C>
U.S. Treasury Notes $11,076 $ 8,542
FNMA Discount Notes 1,532 1,532
Banker's Acceptances - 5,385
------- -------
Total 12,608 15,459
Less current portion 6,782 -
------- -------
$ 5,826 $15,459
======= =======
</TABLE>
The principal amount, cost and fair value are not materially different than
the carrying amount as shown above. Realized gains or losses from debt
securities sold during the year ended June 30, 1996 and 1997 were not
material. The proceeds from sales of available for sale securities for the
years ended 1996 and 1997 was $24,518,000 and $5,369,000 respectively. The
basis on which cost was determined on calculating gains and losses was the
specific identification method.
In fiscal 1996, in accordance with the Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities
(Special Report - November 1995), Iwerks reassessed the classification of its
investments in debt securities under Statement 115. In light of this
reassessment, Iwerks 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. Investments in debt
securities at June 30, 1996 and 1997 are classified as available-for-sale, and
the unrealized gains and losses, net of tax, were not material for any year
presented.
39
<PAGE>
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, 1996 and 1997 consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
------------- --------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 14,156 $ 17,684
Estimated earnings 13,912 15,513
------------- --------------
28,068 33,197
(23,591) (27,848)
------------- --------------
Less billings to date $ 4,477 $ 5,349
============= ==============
</TABLE>
Such costs are included in the accompanying balance sheets at June 30,
1996 and 1997 under the following captions (in thousands):
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Costs and estimated earnings in excess of $ 5,583 $6,339
billings on umcompleted contracts
Billings in excess of costs and estimated (1,106) (990)
earnings on uncompleted contracts
------------- -------------
$ 4,477 $5,349
============= =============
</TABLE>
6. NET (LOSS) INCOME PER COMMON SHARE
The net (loss) income per share for the years presented are based on the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consisting of outstanding stock
options and warrants have been included in the calculation to the extent they
are dilutive. Fully diluted amounts do not materially differ from the amounts
presented herein.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings Per Share, which is effective for annual and
interim financial statements issued for periods ending after December 15, 1997
and early adoption is not permitted. When adopted, the statement requires
restatement of prior years' earnings loss per share ("EPS"). SFAS No. 128 was
issued to simplify the standards for calculating EPS previously found in APB
No. 15, Earnings Per Share. SFAS 128 replaces the presentation of primary EPS
with a presentation of basic EPS. The new rules also require dual
presentation of basic and diluted EPS on the face of the statement of
operations for companies with a complex capital structure. For the Company,
basic EPS will exclude the dilutive effects of stock options and warrants.
Diluted EPS for Iwerks will reflect all potential dilutive securities. Under
the provisions of FAS 128, basic EPS would have been ($1.32), $.28, and ($.84)
for the years ended June 30 1995, 1996 and 1997 respectively. Diluted EPS
would have been the same as the reported amounts.
7. PROPERTY AND EQUIPMENT
Property and equipment, at cost, are summarized as follows at June 30,
1996, and 1997 (in thousands):
40
<PAGE>
1996 1997
------- -------
Office equipment, furniture and fixtures $ 2,076 $ 2,120
Operating equipment 1,809 1,417
Film production equipment 2,106 2,346
Demonstration theatres 2,474 2,878
Leasehold improvements 1,269 1,279
------- -------
Total 9,734 10,040
Less accumulated depreciation (6,215) (7,120)
------- -------
$ 3,519 $ 2,920
======= =======
Certain transportation and computer equipment aggregating $3,711,000 at
June 30, 1996 and 1997 were recorded under capital lease agreements.
Accumulated depreciation on this equipment was $566,000 and $ 1,018,000 at
June 30, 1996 and 1997, respectively.
Depreciation expense amounted to $3,368,000, $3,113,000 and $3,038,000
for the years ended June 30, 1995, 1996 and 1997, respectively, including
amounts related to assets under capital leases.
8. NOTES TO RELATED PARTIES AND RELATED PARTY TRANSACTIONS
At June 30, 1996, notes payable to related parties consisted of
promissory notes due stockholders, interest at 10%, due semiannually over 5
years with remaining principal and accrued interest on October 1, 1996;
collateralized by portable simulation equipment. The balance as of June 30,
1996 was $875,000. The Company had no notes payable to related parties at
June 30, 1997.
In connection with the promissory notes due stockholders at June 30,
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 $44,000 and such
amount was recorded as paid in capital.
During 1993, Itochu Corporation ("Itochu"), a stockholder, agreed to pay
the Company $5 million primarily for the right to become the Company's
exclusive distributor for a three year term in Asia for its Cinetropolis
concept. Cinetropolis is a location based entertainment attraction utilizing
multiple Iwerks products combined with food and beverage, retail and other
entertainment in a stand-alone 35,000 to 60,000 square foot facility. The $5
million was recorded in deferred revenue and has been amortized over the three
year exclusivity period. In addition, Itochu became a nonexclusive agent for
Iwerks' other products for seven years. Itochu earns sales commissions on
collections from customers on any theatre systems and related software sold by
Itochu or its agents. During the years ended June 30, 1995, 1996 and 1997,
$281,000, $610,000, and $489,000, respectively, was paid to Itochu in
connection with this arrangement.
In May 1994, for $1,600,000 and the issuance of 115,000 shares of Iwerks
Common Stock valued at $828,000, the Company purchased a 10% minority interest
in Iwerks Touring Technologies (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 Iwerks Common Stock issued,
23,014 shares became fully vested on July 1, 1994, with the remainder vested
through December 31, 1995. Aggregate purchase price of the minority interest
in
41
<PAGE>
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 Iwerks 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 Iwerks Common Stock issued, 6,666 shares became fully vested on July 1,
1995, and the remainder vested through December 31, 1995. The aggregate
purchase price of the minority interest was $1,400,000 which was allocated to
goodwill. The goodwill related to the acquisition of the minority interest
was written off in 1997 (see Note 14).
9. BANK LINE OF CREDIT
During fiscal 1997, the Company maintained a $5 million bank line of
credit which it did not draw upon during the fiscal year. Subsequent to June
30, 1997, the Company entered into a new revolving line of credit with a bank
for $5 million which expires on October 30, 1998. Interest is at the bank's
prime rate plus 1/4% or 3% in excess of the bank's LIBOR rate and is payable
on or before October 30, 1998. The Company has agreed to pay a bank
commitment fee of $10,000. The line of credit has covenants that include
maintenance of minimum net worth and compliance with certain financial ratios.
At August 5, 1997 no amounts have been borrowed under this line of credit.
The line of credit is secured by all of the Company's assets.
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10. INCOME TAXES
Provision for income taxes for the three years ended June 30 consists of
(in thousands):
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ - $ 47 $ 40
State 7 25 24
Foreign 78 77 53
------- ------- -------
85 149 117
Deferred:
Federal - - -
State - - -
------- ------- -------
$ 85 $ 149 $ 117
======= ======= =======
The deferred tax asset at June 30 consists of (in thousands):
1995 1996 1997
------- ------- -------
Net operating loss $ 7,512 $ 7,298 $ 7,461
Reserves 2,056 512 (405)
Asset impairment reserve - - (1,507)
Deferred revenues 774 24 (62)
Film cost amortization (595) 875 785
Other (119) (30 ) 8
------- ------- -------
9,628 8,679 6,280
Valuation allowance (9,628) (8,679) (6,280)
------- ------- -------
$ - $ - $ -
======= ======= =======
Reconciliation of effective rate of income taxes:
1995 1996 1997
------- ------- -------
Provision for income taxes at statutory
federal rate of 35% $(4,716) $ 1,137 $(3,444)
State and local taxes 7 25 24
Foreign taxes 78 77 53
Nondeductible items and
nontaxable items - 399 1,019
NOL benefit - (1,489) -
Benefit of net operating loss
not currently recognized 4,716 - 2,465
------- ------- -------
$ 85 $ 149 $ 117
======= ======= =======
</TABLE>
At June 30, 1997, Iwerks had available federal and state tax net
operating loss carryforwards of approximately $18,650,000 and $7,720,000,
respectively, expiring through 2012.
43
<PAGE>
11. STOCK OPTIONS AND WARRANTS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of Iwerks's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
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 Iwerks
Common Stock. In aggregate, 3,250,000 shares of Iwerks Common Stock are
reserved for issuance under the Plans. In addition the Company has granted
other options to purchase 100,000 shares of Iwerks Common Stock to certain
officers and directors outside of the Plans. Options generally vest over a
four-year period and expire in ten years.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for fiscal year 1996 and 1997, respectively: risk-free
interest rates of 5.74% and 6.36%; weighted-average expected life of the
option of 4.64 years and 4.19 years; zero dividend yields; and a volatility
factor of the expected market price of Iwerks' Common Stock of 51%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Given this
method of amortization, the initial impact of applying FAS 123 on pro forma
net income (loss) and pro forma earnings (loss) per share is not
representative of the potential impact on pro forma amounts in future years
when the effect of amortization from multiple awards would be reflected. The
Company's pro forma information follows (in thousands except for per share
information):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Pro forma net income (loss) $2,717 $(10,685)
Pro forma net income (loss) per share $ 0.23 $ (0.90)
</TABLE>
A summary of the Company's stock option activities and related
information for the years
44
<PAGE>
ended June 30 are as follows:
<TABLE>
<CAPTION>
Number of Shares Weighted Average
(in thousands) Exercise Price
----------------- ----------------
<S> <C> <C>
Options outstanding July 1, 1994 1,522 $ 5.26
Options granted 1,049 4.45
Options exercised (309) .73
Options terminated (554) 11.54
Options exercisable at June 30, 1995 651 $ 2.08
Options outstanding July 1, 1995 1,708 $ 3.54
Options granted 877 5.23
Options exercised (385) 1.64
Options terminated (274) 6.46
Options exercisable at June 30, 1996 604 $ 3.07
Options outstanding July 1, 1996 1,926 $ 4.26
Options granted 660 5.54
Options exercised (260) 1.82
Options terminated (425) $ 4.96
Options outstanding June 30, 1997 1,901 $ 4.88
</TABLE>
The weighted-average fair value of options granted was $2.64 in fiscal year 1997
and $ 2.57 in fiscal year 1996.
The following table summarizes information about stock options outstanding at
June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Average Number
--------------------------------------------------------------- ------------------------------------
Weighted Average
Number Outstanding at Remaining Exercisable at
Range of June 30, 1997 in Contractual Life Weighted Average June 30, 1997 Weighted Average
Exercise Prices Thousands in Years Exercise Price in Thousands Exercise Prices
- --------------- --------- -------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$ .10-.74 91 4.3 $ .43 91 $ .43
$3.00-3.69 102 8.1 $3.03 48 $3.00
$4.00-5.88 1,518 8.5 $4.96 525 $4.87
$6.63-7.56 160 7.8 $6.95 24 $7.50
$9.00-9.75 30 8.0 $9.37 8 $9.37
----- ---
1,901 696
</TABLE>
As of June 30, 1996, 580,593 shares were available for future grants under
the Plans and outside the Plans, and as of June 30, 1997, 364,582 shares were
available for future grants under the Plans and outside the Plans. As of June
30, 1997 Iwerks has reserved 2,265,751 shares of unissued Iwerks Common Stock
for issuance upon exercise of options granted under the Plans and outside the
Plans.
At June 30, 1996 Iwerks had a total of 20,794 warrants outstanding to
purchase Iwerks Common Stock at exercise prices ranging from $.01 to $7.30,
exercisable through 2003. In 1997,
45
<PAGE>
warrants were exercised for 12,794 shares of Iwerks Common Stock at exercise
prices ranging from $.01 to $1.25, leaving a remainder of 8,000 warrants
exercisable at $7.30 per share through 2003. Additional warrants are expected
to be issued in connection with the settlement of the class action law suits.
(See Note 16.)
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, 1995, 1996 and 1997 was approximately
$869,000, $617,000 and $641,000, respectively.
Future minimum lease payments under capital and operating leases at June
30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
<S> <C> <C>
1998 $ 984 $ 539
1999 963 427
2000 867 240
2001 236 60
2002 - -
------ ------
Total minimum lease payments 3,050 $1,266
======
Less amount representing interest (484)
------
$2,566
======
</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 Iwerks fail to perform under the terms of the
contracts. There is currently one letter of credit outstanding totaling
approximately $110,000.
The Company entered into an agreement dated May 29, 1997 to design and
manufacture three camera systems at a cost of $1.8 million.
13. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
In 1996 and 1997, Iwerks had no customers who accounted for more than 10%
of consolidated revenue. In 1995, the Company earned revenues from one
significant customer of approximately $5,160,000 (11%).
Export revenue by geographic area for the years ended June 30 consist of
(in thousands):
46
<PAGE>
1995 1996 1997
------- ------- -------
Canada $ 417 $ 1,131 $ 516
Europe 1,185 4,409 2,085
Asia 23,029 17,311 13,682
South America 47 972 5,375
------- ------- -------
Total export revenue $24,678 $23,823 $21,658
======= ======= =======
14. Asset Impairment and Fourth Quarter Adjustments
The fourth quarter of fiscal 1997 includes a non-cash charge of $5.6
million to record the impact of the adoption of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of." This charge consisted primarily of a reduction in the carrying value of
the portable simulation business (touring) to the net present value of the
future cash flows expected from these assets. Of the charge, $1.8 million
reduced Goodwill, and the balance reduced Iwerks' fixed assets. The Company
lost AT&T as a major sponsor of the Reactor fleet in the first quarter of
fiscal 1997. The loss of the major sponsor that utilized five of the Reactors
throughout fiscal 1996 resulted in excess capacity between early fall and late
spring of fiscal 1997. Since that time, and through the fourth quarter, the
Company has aggressively pursued new sponsorship opportunities and other
options to replace these revenues. The failure to consummate these
opportunities prior to the end of the fiscal year and the lack of sponsorship
backlog as of June 30, 1997 prompted the Company to take the charge under SFAS
121.
Further, in the fourth quarter of fiscal 1997, certain events occurred
which resulted in changes in accounting estimates. These include additional
film amortization of $746,000 due to changes in revenue estimates; increased
bad debt reserve by $557,000 due to an account which was deemed uncollectible,
established a legal and dispute reserve of $850,000 for disputes that first
arose in the fourth quarter; increased the warranty reserve by $147,000 due to
increased work performed on a contract, increased accrued expenses by $320,000
due to a regulatory audit, reduced previously recognized earnings by $205,000
in connection with the cancellation of a contract, and incurred $250,000 of
expenses relating to the proposed merger.
15. STOCKHOLDERS RIGHTS PLAN
The Company has adopted a Stockholder Rights Plan (the "Agreement").
Pursuant to the Agreement each outstanding share of Iwerks' Common Stock has
received one right entitling the holder to purchase 1/100th of a share of
Series A Preferred Stock of Iwerks for each share of Iwerks Common Stock then
held by such holder. Each right becomes exercisable upon certain triggering
events related to an unsolicited takeover attempt of Iwerks.
16. LITIGATION
In the fourth quarter of fiscal year ended 1996, the Company reached an
agreement with the plaintiffs to settle all pending shareholder class action
suits against the Company and certain of its
47
<PAGE>
officers and directors in the United States District Court of the Central
District of California. The principal terms of the agreement called 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
to the carrier); and (2) 250,000 shares of Iwerks' Common Stock and 500,000
warrants to purchase Iwerks' Common Stock, to be issued by the Company (with
unclaimed stock and warrants being returned to the Company). The warrants will
be exercisable through July 2, 1999, and the exercise price has been set at
$8.78 which is $2.00 below the average trading price of Iwerks' stock during
the 30 day period following May 3, 1996. As of August 5, 1997, 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 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 the Company and former chief
executive officer and founder of Omni Films International, Inc., filed suit in
1996 against the Company and seven of its current or former officers and
directors. In February, 1997 the Company and Mr. Hollingsworth reached an out-
of-court settlement. The Company made a cash payment to Mr. Hollingsworth
which the Company was reimbursed by its insurance carrier in the quarter ended
June 30, 1997.
There are no material legal proceedings to which the Company is a party
other than ordinary routine litigation in the course of business. In the
opinion of management, resolution of these matters will not have a material
adverse impact on the Company's financial position or results of operations.
17. SUBSEQUENT EVENTS
On August 5, 1997, Iwerks and Showscan announced that they signed a
definitive agreement to merge. The combined company will bring together the
two largest ride simulation companies and will be the largest provider of ride
simulation entertainment attractions and software in the world.
The transaction calls for each share of Showscan Common Stock to be
converted into 0.85 of a share of Iwerks' Common Stock. Outstanding Showscan
Preferred Stock will be exchanged for Iwerks' Common Stock at the 0.85 ratio
on an as converted basis. Iwerks expects to issue approximately 5.62 million
shares of Iwerks' Common Stock in the merger (plus shares issuable upon
exercise of outstanding Showscan options, warrants and 8% Notes) resulting in
an estimated transaction value of approximately $27.4 million (based upon a
closing price of Iwerks' Common Stock on The NASDAQ National Market on August
4, 1997 of $4.875 per share). The transaction will be accounted for as a
pooling of interests, after which Showscan will become a wholly owned
subsidiary of the Company.
Completion of the Merger is subject to approval by the stockholders of
the Company and Showscan, as well as other customary closing conditions. If
shareholder approval is not obtained or other closing conditions are not
satisfied or if the parties mutually agree to terminate or modify the terms of
the merger agreement, the transaction may not be consummated pursuant to the
existing terms of the merger agreement, or at all. The stockholders' meetings
are scheduled to take place in the second fiscal quarter ending December 31,
1997.
48
<PAGE>
In August, 1997 the Company amended its Certificate of Incorporation to increase
its authorized shares of Common Stock from 20,000,000 to 50,000,000.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
- -------------------------------------------------------------------------------
Disclosure.
- ----------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
- --------------------------------------------------------
Information regarding directors and executive officers of the Company will
appear in the Proxy Statement for the 1997 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 1997 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 1997 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 1997 Annual Meeting of Stockholders, and
is incorporated herein by this reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
(a) FINANCIAL STATEMENTS: PAGE NUMBER
-----------
<S> <C> <C>
Report of Independent Auditors 28
Consolidated Balance Sheets 29-30
June 30, 1996 and 1997
Consolidated Statements of Operations 31
Years Ended June 30, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity 32
Years Ended June 30, 1995, 1996 and 1997
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C>
Consolidated Statements of Cash Flows 33-34
Years Ended June 30, 1995, 1996 and 1997
Notes to Consolidated Financial Statements 35-49
</TABLE>
FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts for the years ended June
30, 1995, 1996 and 1997.
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, 1997, there were no reports on Form 8-K.
50
<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:
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 Chairman, President and CEO October 7, 1997
- ------------------------------- (Principal Executive Officer)
Roy A. Wright
/s/ Bruce C. Hinckley Executive Vice President October 7, 1997
- ------------------------------- Chief Financial Officer
Bruce C. Hinckley (Principal Finance Officer)
/s/ Jeffrey M. Dahl Vice President /Controller October 7, 1997
- ------------------------------- (Principal Accounting Officer)
Jeffrey M. Dahl
/s/ Donald W. Iwerks Vice Chairman of the Board October 7, 1997
- -------------------------------
Donald W. Iwerks
/s/ Dag Tellefsen Director October 7, 1997
- -------------------------------
Dag Tellefsen
/s/ Gary J. Matus Director October 7, 1997
- -------------------------------
Gary J. Matus
</TABLE>
51
<PAGE>
SCHEDULE II
IWERKS ENTERTAINMENT, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<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, 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 84,501 70,158 - 154,659
and covenant not to compete
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
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
and covenant not to compete
FOR THE YEAR ENDED JUNE 30, 1997
Allowance for doubtful accounts $ 292,990 $ 843,495 $ 25,171 $ 1,111,315
Accumulated film amortization 10,973,065 2,431,138 - 13,404,203
Accumulated amortization of goodwill 1,892,415 937,022 92,570 2,736,867
Accumulated amortization of patents 282,845 46,454 - 329,299
and covenant not to compete
</TABLE>
52
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
3.1 Certificate of Amendment of Certificate of Incorporation dated August
1, 1997.
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.*****
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
10.11 Financing Arrangement, dated June 29, 1993, by and among Iwerks,
Iwerks Touring Technologies, Inc. and Heller Financial, Inc.*
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 27.1 - 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.
***** Incorporated by reference from Registrants Annual Report on Form 10-K for
the year ended June 30, 1996.
54
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
IWERKS Entertainment, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware.
DOES HEREBY CERTIFY:
FIRST: That by unanimous vote of the Board of Directors of Iwerks
Entertainment, Inc. (the "Corporation") on August 10, 1995, resolutions were
duly adopted setting forth a proposed amendment of the Amended and Restated
Certificate of Incorporation of Iwerks Entertainment, Inc. (the "Certificate")
declaring such amendment to be in the best interest of the Corporation and its
stockholders and authorizing the submission of such amendment to the
stockholders of the Corporation for approval at the 1995 Annual Meeting of
Stockholders. The resolutions setting forth the proposed amendment are as
follows:
RESOLVED FURTHER, that the first sentence of Article Fourth of
the Certificate be, and it hereby is amended to read in full as
follows:
FOURTH: The total number of shares which the Corporation shall
------
have authority to issue is 51,000,000, consisting of 50,000,000
shares of common stock, par value $0.001 per share (the "Common
Stock") and 1,000,000 shares of preferred stock, par value $0.001
per share (the "Preferred Stock").
RESOLVED FURTHER, that the forgoing amendment to the Certificate
shall be submitted to the stockholders of the Corporation for approval
at the Annual Meeting of Stockholders scheduled to be held on November
14, 1995, or on such date as the Annual Meeting is held or a special
meeting of Stockholders is called for a vote upon this matter.
RESOLVED FURTHER, that upon approval of the forgoing amendment to
the Certificate by the stockholders of the Corporation, the officers
of the Corporation be, and each of them, is hereby authorized,
directed and empowered to prepare, execute and file with the Secretary
of State of the State of Delaware a Certificate of Amendment of the
Certificate effecting the forgoing amendment to the Certificate.
SECOND: That pursuant to resolution of the Board of Directors of the
Corporation, the Annual Meeting of Stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
55
<PAGE>
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, IWERKS Entertainment, Inc. has caused this
certificate to be signed by Roy A. Wright, its Chief Executive Officer
and President the 1st day of August 1997.
By: _____________________________
Roy A. Wright
Chief Executive Officer and
Chairman of the Board
<PAGE>
EXHIBIT 10.14
[[LOGO] HERE]
ENTERTAINMENT INDUSTRIES GROUP DATE: JULY 18, 1997
9777 WILSHIRE BOULEVARD, FOURTH FLOOR -------------
BEVERLY HILLS, CA 90212 BORROWER: IWERKS ENTERTAINMENT INC.
SUBJECT: CREDIT TERMS AND CONDITIONS ("AGREEMENT")
Gentlepersons:
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. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that:
1. EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and
existing 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 June 30, 1997, 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
Iwerks Entertainment, Inc.
Credit Terms and Conditions dated July 18, 1997
Page 1 of 9
<PAGE>
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 financial
condition or business of Borrower. 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.
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.
9. REGULATION U. The proceeds of this loan shall not be used to purchase or
carry margin stock (as defined within Regulation U of the Board of
Governors of the Federal Reserve system).
B. AFFIRMATIVE COVENANTS. 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.
Iwerks Entertainment, Inc.
Credit Terms and Conditions dated July 18, 1997
Page 2 of 9
<PAGE>
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; all as computed quarterly, beginning March
31, 1997, 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.
5. 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,
including the fiscal year end of each fiscal year, 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. Bank will waive this
reporting requirement as long as a minimum of $10,000,000 of
Borrower's aggregate cash, cash equivalents, and permitted
investments in debt securities are invested through the Bank's
Investment Department.
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;
Iwerks Entertainment, Inc.
Credit Terms and Conditions dated July 18, 1997
Page 3 of 9
<PAGE>
e. Within forty-five days (45) days after the end of each fiscal
quarter, a schedule of new and/or amended copyrights and patents
filed and intellectual properties acquired or developed in form
satisfactory to Bank.
f. Such other information relating to the affairs of Borrower as you
reasonably may request from time to time.
6. 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. NEGATIVE COVENANTS. 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. TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the
character of its business; or make any material change in its executive
management.
2. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys for any amount in excess of $200,000,
other than loans from you except obligations now existing as shown in
the financial statement dated June 30, 1997, 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.
3. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge,
encumbrance, lien or charge of any kind upon any asset now owned in
excess of $200,000, other than liens for taxes not delinquent and liens
in your favor except for those already existing as of June 30, 1997.
4. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances
for any amount in excess of $200,000, 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.
5. 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. EVENTS OF DEFAULT. 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
Iwerks Entertainment, Inc.
Credit Terms and Conditions dated July 18, 1997
Page 4 of 9
<PAGE>
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.
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. LOAN PROVISIONS.
1. REVOLVING CREDIT FACILITY. The Bank agrees to lend to Borrower in the
form of advances by way of a revolving credit facility (the "Facility")
in the aggregate sum owing hereunder of up to $5,000,000 (the
"Commitment") from time to time, and expiring October 30, 1998. The
Facility may be utilized to issue standby letters of credit, at the
request of Borrower, with final expirations of the letters of credit no
later than April 30, 1999. At no time shall the aggregate of advances
under the Facility plus any amount outstanding in the form of a standby
letter of credit exceed the Commitment. Subject to the terms and
conditions of this Agreement, Borrower may borrow, repay and reborrow
amounts constituting the Commitment.
Iwerks Entertainment, Inc.
Credit Terms and Conditions dated July 18, 1997
Page 5 of 9
<PAGE>
2. INTEREST RATE. Interest on the Facility will be payable monthly in
arrears at the Bank's Prime Rate, as publicly announced from time to
time, plus one quarter percent (0.25%) per year of three hundred sixty
(360) days or based on the LIBOR rate as set forth on the addendum to
the Note evidencing the Facility.
3. LOAN FEES. Borrower shall pay to Bank upon execution of this Agreement,
a non-refundable loan fee equal to ten thousand dollars ($10,000).
4. COLLATERAL. Bank shall have first priority perfected security interest
in all assets (including copyrights and other intellectual properties)
of Borrower as specified in a General Security Agreement perfected by a
filed UCC-1 Financing Statement in the appropriate states' UCC Records
Office and the U.S. Patent, Trademark and or Copyright Offices.
F. 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.
Iwerks Entertainment, Inc.
Credit Terms and Conditions dated July 18, 1997
Page 6 of 9
<PAGE>
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.
9. TIME IS OF THE ESSENCE. This agreement may be modified only by a
writing signed by both parties hereto.
G. REFERENCE PROVISIONS.
1. Other than (i) non-judicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii)
the appointment of a receiver, or the exercise of other provisional remedies
(any and all of which may be initiated pursuant to applicable law), each
controversy, dispute or claim between the parties arising out of or relating to
this Note ("Agreement"), which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "Claim Date" (defined as the date on
which a party subject to the Agreement gives written notice to all other parties
that a controversy, dispute or claim exists), will be settled by a reference
proceeding in California in accordance with the provisions of Section 638 et
--
seq. of the California Code of Civil Procedure, or their successor section
- ---
("CCP"), which shall constitute the exclusive remedy for the settlement of any
controversy, dispute or claim concerning this Agreement, including whether such
controversy, dispute or claim is subject to the reference proceeding and except
as set forth above, the parties waive their rights to initiate any legal
proceedings against each other in any court or jurisdiction other than the
Superior Court in the County where the real property securing this Agreement, if
any, is located or Los Angeles County if none (the "Court"). The referee shall
be a retired Judge of the Court selected by mutual agreement of the parties, and
if they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers of a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP (S)170.6. The
referee shall (a) be requested to set the matter for hearing within sixty (60)
days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP (S)644 in any court
in the State of California having jurisdiction. Any party may apply for a
reference proceeding at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a
petition for a hearing and/or trial. All discovery permitted by this Agreement
shall be completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of a
party's refusal to provide requested discovery for any person whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending
Iwerks Entertainment, Inc.
Credit Terms and Conditions dated July 18, 1997
Page 7 or 9
<PAGE>
appointment of the referee as provided herein, the Superior Court is
empowered to issue temporary and/or provisional remedies, as
appropriate.
2. Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation
of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings
conducted before the referee, except for trial, shall be conducted
without a court reporter, except that when any party so requests, a
court reporter will be used at any hearing conducted before the referee.
The party making such a request shall have the obligation to arrange for
and pay for the court reporter. The costs of the court reporter at the
trial shall be borne equally by the parties.
3. The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of
California will be applicable to the reference proceeding. The referee
shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable
orders that will be binding upon the parties. The referee shall issue a
single judgment at the close of the reference proceeding which shall
dispose of all of the claims of the parties that are the subject of the
reference. The parties hereto expressly reserve the right to contest or
appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve
the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
4. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be resolved
and determined by arbitration. The arbitration will be conducted by a
retired judge of the Court, in accordance with the California
Arbitration Act, (S)1280 through (S)1294.2 of the CCP as amended from
time to time. The limitations with respect to discovery as set forth
herein above shall apply to any such arbitration proceeding."
IWERKS ENTERTAINMENT, INC., as Borrower
Executive VP/
By: Chief Financial Officer 8/26/97 /s/ Bruce C. Hinckley
-------------------------------- --------------------
Title: Date:
VP/Controller 8/26/97 /s/ J.M. Dale
-------------------------------- --------------------
Title: Date:
IMPERIAL BANK, as Bank
By: --------------------------------
Title: Date:
Iwerks Entertainment, Inc.
Credit Terms and Conditions dated July 18, 1997
Page 8 of 9
<PAGE>
IWERKS ENTERTAINMENT, INC.
EXHIBIT 11.1
EARNINGS PER SHARE
(Net income (loss) in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average shares outstanding 10,209,663 10,945,499 11,855,478
Common equivalent shares:
Options and warrants (1) 1,198,800 (1)
----------- ----------- -----------
10,209,663 12,144,299 11,855,478
=========== =========== ===========
Net income (loss) $ (13,473) $ 3,099 $ (9,956)
=========== =========== ===========
Net income (loss) per share $ (1.32) $ 0.26 $ (0.84)
=========== =========== ===========
</TABLE>
(1) These common equivalent shares were antidilutive.
<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 5, 1997, 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, 1997.
Los Angeles, California
October 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE ACCOMPANYING
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. (AMOUNTS IN THOUSANDS)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 3,608
<SECURITIES> 15,459
<RECEIVABLES> 6,558
<ALLOWANCES> (1,111)
<INVENTORY> 3,835
<CURRENT-ASSETS> 35,255<F1>
<PP&E> 35,228<F2>
<DEPRECIATION> (24,851)<F3>
<TOTAL-ASSETS> 64,529
<CURRENT-LIABILITIES> 14,316
<BONDS> 1,827<F4>
0
0
<COMMON> 78,073
<OTHER-SE> (29,687)<F5>
<TOTAL-LIABILITY-AND-EQUITY> 64,529
<SALES> 39,584
<TOTAL-REVENUES> 40,709<F6>
<CGS> 28,946
<TOTAL-COSTS> 28,946
<OTHER-EXPENSES> 21,209<F7>
<LOSS-PROVISION> 834
<INTEREST-EXPENSE> 391
<INCOME-PRETAX> (9,839)
<INCOME-TAX> 117
<INCOME-CONTINUING> (9,956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,956)
<EPS-PRIMARY> (0.84)
<EPS-DILUTED> (0.84)
<FN>
<F1>INCLUDES COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS OF $6,339 AND OTHER CURRENT ASSETS OF $567.
<F2>INCLUDES PORTABLE SIMULATION THEATERS OF $6,345 AND FILM INVENTORY OF $16,843.
<F3>INCLUDES PORTABLE SIMULATION THEATERS OF $4,327 AND FILM INVENTORY OF $13,404.
<F4>INCLUDES THE NON-CURRENT PORTIONS OF CAPITAL LEASES.
<F5>ACCUMULATED DEFICIT.
<F6>INCLUDES INTEREST INCOME OF $1,125.
<F7>CONSISTS OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES OF $14,897,
RESEARCH AND DEVELOPMENT OF $726, AND LOSS ON IMPAIRMENT OF ASSETS OF $5,586.
</FN>
</TABLE>
