As filed with the Securities and Exchange Commission on March 23, 1998
Registration No. 333-________
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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IWERKS ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4439361
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4540 WEST VALERIO STREET, BURBANK, CALIFORNIA 91505 (818) 841-7766
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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CHARLES GOLDWATER
IWERKS ENTERTAINMENT, INC.
4540 WEST VALERIO STREET
BURBANK, CALIFORNIA 91505
(818) 841-7766
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
------------------
Copies to:
C.N. FRANKLIN REDDICK III, ESQ.
JULIE M. KAUFER, ESQ.
TROOP MEISINGER STEUBER & PASICH, LLP
10940 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(310) 824-7000
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If the only securities on this form are being offered pursuant to dividend
or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement for the same offering.
[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
==============================================================================
Proposed Proposed
Maximum Maximum
Title of Shares Amount to Be Aggregate Aggregate Amount Of
To Be Registered Registered Price Per Offering Registration
Unit(1) Price (1) Fee
- ------------------------------------------------------------------------------
Common Stock 299,101 $3.06 $915,249.06 $295.00
==============================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average high and low prices of
Registrant's Common Stock reported on the Nasdaq Stock Market's National Market
on March 18, 1998.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
IWERKS ENTERTAINMENT, INC.
CROSS-REFERENCE SHEET
FORM S-3 ITEM SECTION IN PROSPECTUS
- ----------------------------------- ---------------------------------------
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus Facing Page; this Cross-Reference Sheet;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus Inside Front and Outside Back Cover Pages
of Prospectus; Incorporation of Certain
Documents by Reference; Available
Information
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges Prospectus Summary; Risk Factors;
Incorporation of Certain Documents by
Reference
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price *
6. Dilution *
7. Selling Security Holders Selling Stockholders and Plan of
Distribution
8. Plan of Distribution Outside Front and Outside Back Cover
Pages of Prospectus; Selling Stockholders
and Plan of Distribution
9. Description of Securities
to be Registered *
10. Interests of Named Experts
and Counsel *
11. Material Changes *
12. Incorporation of Certain
Information by Reference Incorporation of Certain Documents by
Reference
13. Disclosure of Commission
Position on Indemnification
for Securities Act Liabilities Undertakings
14. Other Expenses of Issuance and
Distribution Other Expenses of Issuance and
Distribution
15. Indemnification of Directors
and Officers Indemnification of Directors and Officers
16. Exhibits Exhibits
17. Undertakings Undertakings
(a) Rule 415 Offering Undertakings
(b) Filings Incorporating
Subsequent Exchange Act
Documents by Reference Undertakings
(h) Request For Acceleration
of Effective Date Undertakings
- -----------------
* Omitted because the item is negative or inapplicable.
PAGE 2
<PAGE>
Subject to Completion, dated ___________, 1998
PROSPECTUS
IWERKS ENTERTAINMENT, INC.
299,101 SHARES OF COMMON STOCK
(par value $0.001 per share)
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This prospectus (this "Prospectus") relates to the sale of an aggregate of
299,101 shares (the "Shares") of the common stock, par value $.001 per share
(the "Iwerks Common Stock") of Iwerks Entertainment, Inc. (the "Company" or
"Iwerks") offered for the account of certain stockholders of the Company (the
"Selling Stockholders"). The Iwerks Common Stock offered by the Selling
Stockholders was acquired by the Selling Stockholders in exchange for the
capital stock of Pioneer Marketing Corporation ("Pioneer") and L. Ron Schmidt &
Associates, Inc. ("Associates") owned by the Selling Stockholders and acquired
by the Company in connection with the merger of a subsidiary of the Company
with Pioneer and Associates. See "Selling Stockholders and Plan of
Distribution." The Selling Stockholders may from time to time sell all or a
portion of the Iwerks Common Stock which may be offered by them under this
Prospectus in routine brokerage transactions in the over-the-counter market, at
prices and terms prevailing at the time of sale. The Selling Stockholders may
also make private sales directly or through brokers. The Selling Stockholders
may pay customary brokerage fees, commissions and expenses. The Company will
pay all other expenses of the offering. The Selling Stockholders and the
brokers executing selling orders on behalf of the Selling Stockholders may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), in which event commissions received by such
brokers may be deemed underwriting commissions under the Securities Act.
The Company will not receive any proceeds from the sale of the Iwerks
Common Stock offered by the Selling Stockholders hereby.
The Iwerks Common Stock is quoted on the Nasdaq Stock Market's National
Market ("Nasdaq National Market") under the symbol "IWRK." On March 18, 1998,
the closing sale price of the Iwerks Common Stock on the Nasdaq National Market
was $3.00.
THESE SHARES OF IWERKS COMMON STOCK HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 HEREOF FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF
THE SHARES.
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The date of this Prospectus is ___________, 1998
PAGE 1
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or its managers. This Prospectus does
not relate to any securities other than those described herein or constitute an
offer to sell, or the solicitation of an offer to buy, securities in any
jurisdiction where, or to any person to whom, it is unlawful to make such an
offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create an implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of the Company since such date.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement) under the Securities Act with respect to the Iwerks Common Stock
offered hereby. This Prospectus, which constitutes part of the Registration
Statement does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Iwerks Common Stock offered hereby, reference is
hereby made to such Registration Statement, and the exhibits and schedules
thereto which may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the fees prescribed by the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference.
Iwerks is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. These reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following regional offices of the Commission: Offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of the material can be obtained at
prescribed rates by writing to the Securities and Exchange Commission, Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The Iwerks Common
Stock is traded on the Nasdaq National Market and the Company's reports, proxy
or information statements, and other information filed with the Nasdaq National
Market may be inspected at the offices of Nasdaq at 1735 K Street, N.W.,
Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the
Commission pursuant to the Exchange Act, are incorporated by reference into
this Prospectus:
1. Iwerks' Annual Report on Form 10-K for the year ended June 30,
1997 (the "Iwerks 10-K");
2. Iwerks' Quarterly Reports on Form 10-Q for the fiscal quarters
ended September 30, 1997 and December 31, 1997;
3. Iwerks' Current Reports on Form 8-K filed August 7, 1997, with
respect to events occurring on July 15, 1997 and August 5, 1997, filed
December 30, 1997 with respect to events occurring on December 29, 1997,
filed February 2, 1998 with respect to events occurring on January 28,
1998 and filed February 12, 1998 with respect to events occurring on
February 10, 1998;
4. Iwerks' Definitive Proxy Statement for the 1997 Annual Meeting
of Stockholders;
5. The description of Iwerks Common Stock contained in the
Registration Statement on Form 8-A filed by Iwerks pursuant to Section 12
of the Exchange Act, and any amendment or report filed for the purpose of
updating such description; and
6. The description of the Series A Preferred Stock, par value
$0.001 per share of Iwerks contained in the Registration Statement on Form
8-A filed by Iwerks pursuant to Section 12 of the Exchange Act, and any
amendment or report filed for the purpose of updating such description.
PAGE 2
<PAGE>
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the securities covered by this Prospectus shall
be deemed to be incorporated by reference herein and to be part hereof from the
date of filing of such documents. Any statement contained herein or in a
document, all or a portion of which is incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the oral or written
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such
exhibits are expressly incorporated by reference into such documents). Written
requests for such copies should be directed to Bruce C. Hinckley, Chief
Financial Officer, Iwerks Entertainment, Inc., 4540 West Valerio Street,
Burbank, California 91505. Telephone inquiries may be directed to Iwerks
Entertainment, Inc. at (818) 841-7766.
PAGE 3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION CONTAINED HEREIN AND IN THE
CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL
REFERENCES HEREIN TO THE "COMPANY" AND "IWERKS" REFER TO IWERKS ENTERTAINMENT,
INC. AND ITS SUBSIDIARIES. THE DOCUMENTS INCORPORATED IN THIS PROSPECTUS
CONTAIN FORWARD LOOKING STATEMENTS, WHICH ARE INHERENTLY UNCERTAIN. ACTUAL
RESULTS MAY DIFFER FROM THOSE DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS FOR
THE REASONS, AMONG OTHERS, DISCUSSED IN "RISK FACTORS."
THE COMPANY
Iwerks was founded in 1986 and is a leading provider of high-tech
software-based theater attractions for the out-of-home entertainment market.
Iwerks' products combine advanced theater systems with entertainment or
educational software to create high-impact "attractions" which immerse
audiences in the action. Iwerks' products include ride simulations, giant
screen, 360 degree, 3-D films and attractions, and various other specialty
attractions. In addition, Iwerks owns and operates a fleet of touring ride
simulation theaters. Iwerks also produces film and video software for ride
simulators and special format theaters.
Since inception in 1986 and through February 12, 1998, Iwerks has
installed in excess of 250 fixed-base and touring attractions in 28 countries.
Of these, over 100 were ride simulation theaters, which Iwerks supports with a
library of 40 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.
Iwerks also owns and operates a fleet of 16 portable ride simulation
theaters 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 theaters in the United States and Australia. The Company
continues to evaluate new opportunities to participate in the operation of its
fixed-based attractions.
The primary markets for Iwerks' attractions are theme parks, museums,
various types of location-based-entertainment centers, visitor centers, world
expositions and special events. The popularity of entertainment attractions of
the type sold by the Company has led to their increasing use as the featured
attraction in these locations. In addition, high-profile retail sites and
casinos are expanding their entertainment offerings to broaden appeal and
stimulate repeat visits. The Company's attractions are well suited to meet
this demand because, in addition to their drawing power, they require
relatively little space and can be easily refreshed by changing the film or
other software.
RECENT DEVELOPMENTS
Iwerks has entered into that certain Agreement and Plan of Reorganization
(the "Original Merger Agreement") dated August 4, 1997 by and among Iwerks,
Showscan Entertainment Inc. ("Showscan") and IWK-1 Merger Corporation
("MergerCo") as amended by Amendment No. 1 to Agreement and Plan of
Reorganization (the "Amendment") dated December 29, 1997 (as amended, the
"Merger Agreement"). Pursuant to the Merger Agreement, MergerCo will merge
(the "Merger") with and into Showscan, Showscan will be the surviving
corporation and each share of common stock, par value $.001 per share, of
Showscan (the "Showscan Common Stock") will be converted into 0.62 shares of
Iwerks Common Stock. The preferred stock of Showscan (the "Showscan Preferred
Stock") will be exchanged for Iwerks Common Stock at the 0.62 ratio on an as
converted basis. Iwerks expects to issue approximately 4.1 million shares of
Iwerks Common Stock in the Merger in exchange for all outstanding shares of
Showscan Common Stock and Showscan Preferred Stock resulting in an aggregate
merger consideration payable to the holders of Showscan Common Stock and
Showscan Preferred Stock valued at approximately $10.0 million as of December
30, 1997, the date the changes to the Merger Agreement were announced. The
transaction will be
PAGE 4
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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 theater 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 theaters, consisting of 160 simulation thrill ride screens in 28 countries
(the largest in the world), 16 portable reactor simulation thrill rides, and 76
giant and large screen theaters. 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 record date for the
stockholder meetings of each of Iwerks and Showscan is February 12, 1998 and
the meetings of each company are scheduled to take place at 10:00 a.m. local
time on March 31, 1998.
The mailing address of Iwerks' principal executive offices is 4540 West
Valerio Street, Burbank, California 91505; its telephone number is (818) 841-
7766.
PAGE 5
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RISK FACTORS
IWERKS STOCKHOLDERS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, AS
WELL AS THE OTHER INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS 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 PROSPECTUS, FOR THE REASONS, AMONG OTHERS, SET FORTH BELOW.
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 theater networks of film software originally produced in
the other company's format, and the identification and elimination of redundant
and/or unnecessary overhead. The company resulting from the Merger will be
significantly larger than either Iwerks or Showscan as stand alone companies.
The Iwerks Board is evaluating the management resources of the combining
companies and considering whether to seek additional management personnel. The
initial integration plan is under development but is expected to include
changes to the companies' corporate organizational chart, duties and
responsibilities of existing management personnel, elimination of duplicate
management functions and management changes and additions. Effective February
23, 1998, Iwerks entered into an employment agreement with Charles Goldwater to
serve as Chairman of the Board, Chief Executive Officer and President of
Iwerks. Mr. Goldwater succeeds Mr. Roy A. Wright, who will continue to provide
consulting services to Iwerks during the transition period. Iwerks is
continuing to develop a long-term management staffing plan and, consequently,
there can be no assurance that there will not be other changes among current
management or additions thereto. Iwerks has agreed to use its commercially
reasonable efforts to retain the services of Dennis Pope and W. Tucker Lemon,
the President and Chief Executive Officer and Senior Vice President, General
Counsel and Secretary of Showscan, respectively, to assist in the integration
of the two companies for a period of up to six months following the
consummation of the Merger.
The success of the integration process will be significantly influenced by
the ability of the combined business to retain key management, marketing and
production personnel and to augment these areas with qualified candidates, as
necessary. 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 or assembling a management team that will successfully
complete the integration process. The difficulties of such integration may be
increased by the necessity of coordinating theater 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, primarily as a result of Merger costs accrued during
the period, reduced sales in the Asia-Pacific region, a decline in its Touring
Division's revenue, and due to seasonal factors, Iwerks reported a net loss of
$506,000 for the first quarter of fiscal 1998. As a result of the continuing
impact of the foregoing factors (particularly the increased impact of declining
sales in the Asia-Pacific region reflecting the economic downturn generally
being experienced in that region) Iwerks reported a net loss of $3.5 million
for the second quarter of fiscal 1998. The economic trends in the Asia-Pacific
region are expected to continue to adversely impact Iwerks' results of
operations for the remainder of fiscal 1998. Consequently, there can be no
assurance that Iwerks will achieve profitability during the third quarter
PAGE 6
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of fiscal 1998 (even before Merger related costs are taken into account). The
third quarter is expected to be negatively impacted by the accrual of
approximately $5.7 million in non-recurring Merger related costs. The
estimated non-recurring Merger related costs of $6.9 million (which includes
amounts expected to be accrued in each of the fourth fiscal quarter of 1997 and
the first three fiscal quarters of 1998) include investment banking, legal,
accounting, printing, severance, the estimated cost to sublease the Showscan
facility, relocation costs and write offs associated with equipment which the
combined company will not utilize, 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
at the date of this Prospectus, 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 the combined companies will incur one-time
restructuring and related charges of $6.9 million in the fourth fiscal quarter
of 1997 and the first three fiscal quarters of 1998. Of this amount, $1.2
million was accrued in the fourth fiscal quarter of 1997 and the first and
second fiscal quarters of 1998 and the remainder is expected to be accrued
during the third fiscal quarter of 1998. Further, assuming the Merger is
consummated in the third quarter of fiscal 1998 and that the transaction costs
associated with the Merger after December 31, 1997 which affect cash which are
estimated to be approximately $4.5 million, are paid in that quarter, the
combined company expects to have a significant decline in its cash balances at
March 31, 1998 from the $17.4 million cash balance of Iwerks at December 31,
1997.
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, second and third quarters of
fiscal 1998. Further, under the pooling rules, the costs incurred by Iwerks
and Showscan in consummating the Merger will be expensed during Iwerks' fourth
fiscal quarter of 1997 and its first, second and third 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, second and third
fiscal quarters of 1998.
RISK THAT THE MERGER WILL NOT BE CONSUMMATED
Consummation of the Merger is subject to various conditions, including
approval of the Merger by the holders of a majority of the outstanding shares
of Showscan Preferred Stock and Showscan Common Stock, voting together as a
single class, the approval of the issuance of shares of Iwerks Common Stock in
exchange for shares of Showscan Capital Stock by the stockholders of Iwerks and
other customary closing conditions. Further, the Merger is the subject of
outstanding litigation and governmental review that could affect the closing.
See "-- Litigation." As a result of the forgoing, even if the requisite
stockholder approvals are obtained, there can be no assurance that the Merger
will be consummated. If the Merger is not consummated for any reason, each of
Iwerks and Showscan will be required to bear significant expenses incurred in
connection with the negotiation, execution and attempted consummation of the
Merger. A failure to consummate the Merger could have a material adverse
effect on the operations and business of each of Iwerks and Showscan.
DEPENDENCE ON PRODUCTION OF FILM SOFTWARE; FINANCIAL RISKS OF FILM PRODUCTION
Iwerks' 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 Iwerks' library of film software titles is a material factor in
competing for sales of Iwerks' attractions and developing Iwerks' base of
recurring revenue. Iwerks has invested $2.6 million, $ 0.8 million, $2.5
million and $2.5 million in film software during fiscal 1995, 1996, 1997 and
the six month period ended December 31, 1997, respectively. Showscan has
invested $0.9 million, $2.6 million, $2.7 million and $1.0 million in film
software in fiscal 1995, 1996, 1997 and the nine month period ended December
31, 1997, respectively. A key operating strategy of
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Iwerks in entering into the Merger Agreement and consummating the Merger is the
cross-marketing of Iwerks' and Showscan's film libraries to the other company's
theater network. The success of this strategy is dependent upon customer
acceptance of films originally produced in the other company's film format.
There can be no assurance that this strategy will be accepted by the market, or
if accepted, will be successful.
Iwerks 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 Iwerks may enter into participation, licensing or other
financing arrangements with third parties in order to minimize its financial
involvement in production, Iwerks generally is subject to substantial financial
risks relating to the production and development of new entertainment and
educational software. Iwerks 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 December 31, 1997, Iwerks and Showscan had recorded on their balance
sheets $5.0 million and $4.7 million, respectively, in film library costs.
Iwerks periodically reviews the net realizable value of its film inventory and
makes adjustments to its carrying value when appropriate. In fiscal 1995,
Iwerks reduced its film inventory by $3.5 million. While the current carrying
value of Iwerks' and Showscan's film inventory reflects the respective
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. Any
determination by Iwerks following the Merger to write down any material portion
of its film inventory will have a materially adverse impact on Iwerks' results
of operations.
DEPENDENCE OF OWNED AND OPERATED OPERATIONS UPON SPONSORSHIP REVENUES; LOSS OF
AT&T CORP. SPONSORSHIP
Iwerks derived $3.7 million, $7.4 million, $2.9 million and $0.7 million
of revenues for fiscal 1995, 1996, 1997 and the six month period ended December
31, 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 sponsored Iwerks' 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. In January 1996, Iwerks
entered into a sponsorship contract with a foreign sponsor, which contract
expired in August 1996. Iwerks currently has limited sponsorship contracts.
There can be no assurance that Iwerks 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 loss of AT&T Corp. which 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, Iwerks 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 Iwerks to take the charge under SFAS 121.
If Iwerks 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 Iwerks from
its Owned and Operated attractions which would be mitigated, in part, by any
additional revenues derived by Iwerks from deployment of the touring units at
other venues.
INTENSE COMPETITION; UNPREDICTABILITY OF CONSUMER TASTES
Competition in each of the markets in which Iwerks and Showscan compete is
intense. The principal direct competition for customers comes from
manufacturers of competing movie-based attractions, and in the case of
amusement and theme parks, manufacturers of traditional amusement park
attractions. In addition to direct competitors, there is also competition from
systems integrators and some amusement and theme parks developing and
constructing their own attractions. Many of Iwerks' and Showscan's competitors
have better name recognition, and substantially greater financial and other
resources than Iwerks and Showscan, respectively.
Imax Corporation ("Imax") and a number of smaller competitors are growing
competitors of both Iwerks and Showscan in the ride simulation business and
have dedicated substantial resources to entering this market. In the large
screen, special format motion picture business, Showscan's and 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
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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 Iwerks' products and the products of the combined company
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 Iwerks' or the combined
company's products less competitive.
HISTORY OF OPERATING LOSSES; FLUCTUATING PERIODIC OPERATING RESULTS AND CASH
FLOW
Iwerks has sustained substantial losses in three of its last five fiscal
years. Further, Iwerks sustained a $4.0 million loss in the first six months
of fiscal 1998 and expects to sustain a loss in the third quarter of fiscal
1998. As of December 31, 1997, Iwerks' accumulated deficit was $33.7 million.
For the fiscal years ending March 31, Showscan had net profits of $79,000 in
fiscal 1995, $101,000 in fiscal 1996 and a net loss of $3.9 million in fiscal
1997. Further, Showscan sustained a loss of $5.9 million in the first nine
months of fiscal 1998 and expects to realize a profit in the fourth quarter of
fiscal 1998 and sustain a loss for the fiscal year ended March 31, 1998. At
December 31, 1997, Showscan had an accumulated deficit of $38.2 million. For
the fiscal year ended June 30, 1995, 1996 and 1997 and the six months ended
December 31, 1997, Iwerks' ratio of indebtedness to total capitalization was
7.3%, 6.9%, 5.5% and 5.0%, respectively. For the fiscal years ended March 31,
1995, 1996 and 1997 and the nine months ended December 31, 1997, Showscan's
ratio of indebtedness to total capitalization was 23.6%, 49.8%, 55.6% and
153.2%, respectively. For the fiscal year ended June 30, 1995, Iwerks 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 ended
June 30, 1996, Iwerks 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 financing
activities and an increase in cash provided by financing activities. For the
fiscal year ended June 30, 1997, Iwerks had a net decrease in cash of $9.1
million primarily resulting from cash used in financing activities including
investments in joint ventures, purchases of property and equipment, additions
to film inventory, the purchase of Pioneer Marketing Corporation and a related
patent and the investment in additional debt securities. For the six months
ended December 31, 1997, Iwerks had a net increase in cash of $54,000 primarily
due to an increase in cash due to operating activities of $2.9 million,
partially offset by investing activities of $2.4 million and financing
activities of $443,000. For the fiscal year ended March 31, 1995, Showscan had
a net increase in cash of $5.7 million which was largely attributable to the
completion of two financing transactions partially offset by cash used in
operating activities. For the fiscal year ended March 31, 1996, Showscan had a
net decrease in cash of $1.7 million which was attributable to the repayment of
a subordinated note, the investments in Showscan's film library and O & O
Theatres, and the purchase of short-term investments which were only partially
offset by cash provided by operating activities and the proceeds from
borrowings. For the fiscal year ended March 31, 1997, Showscan had a net
decrease in cash of $2.5 million which was primarily due to the financing of
the production of three new films, cash used in operating activities, and
expenditures in connection with the litigation with Imax Corporation offset by
the redemption of short-term investments. For the nine months ended December
31, 1997, Showscan had a net decrease in cash of $374,000 which was the result
of $1.2 million used in operating activities, $166,000 used in investing
activities, and $1.0 million provided by financing activities.
Iwerks and Showscan each has experienced quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in
future periods. Operating results and cash flow can fluctuate substantially
from quarter to quarter and periodically as a result of the timing of theatre
system deliveries, contract signings, 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 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, Iwerks' and Showscan'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 each of Iwerks and Showscan. While a significant portion of
Iwerks' expense levels are relatively fixed, the timing of increases in expense
levels is based in large part on Iwerks' 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 Iwerks' inability to adjust spending quickly
enough to
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compensate for the sales shortfall. Iwerks may also choose to reduce prices
or increase spending in response to market conditions, which may have a
material adverse effect on Iwerks' results of operations.
Over the last four years certain events have contributed to fluctuations
in Iwerks' results of operations and financial condition. In the fourth
quarter of fiscal 1994, Iwerks 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, Iwerks'
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 Iwerks' 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, Iwerks 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. The first six
months of fiscal 1998 were adversely impacted by Merger costs accrued during
the period, reduced sales in the Asia-Pacific region, a decline in its Touring
Division's revenue, and seasonal factors. The economic trends in the Asia-
Pacific region are expected to continue to adversely impact Iwerks results of
operations for the remainder of fiscal 1998. Consequently, there can be no
assurance that Iwerks will achieve profitability during the third quarter of
fiscal 1998 (even before Merger related costs are taken into account). The
third quarter is expected to be negatively impacted by the accrual of
approximately $5.7 million in non-recurring Merger related costs. Further,
assuming the Merger is consummated in the third quarter of fiscal 1998 and that
the transaction costs associated with the Merger after December 31, 1997 which
affect cash which are estimated to be approximately $4.5 million, are paid in
that quarter, the combined company expects to have a significant decline in
its cash balances at March 31, 1998 from the $17.4 million cash balance of
Iwerks at December 31, 1997. The estimated non-recurring Merger related costs
of $6.9 million (which includes amounts expected to be accrued in each of the
fourth fiscal quarter of 1997 and the first three fiscal quarters of 1998)
include investment banking, legal, accounting, printing, severance, the
estimated cost to sublease the Showscan facility, relocation costs and write
offs associated with equipment which the combined company will not utilize,
and other expenses, some of which will be incurred even if the Merger is not
consummated.
The performance of each of Iwerks and Showscan depends primarily upon the
number of ride simulation attractions that it can sell and install. This
dependence has been decreasing for Showscan as the percentage of Showscan's
revenues derived from recurring film licensing revenues has increased though
there can be no assurance that this trend will necessarily continue for
Showscan or for the combined company following the Merger. The results of each
of Iwerks and Showscan have followed a seasonal pattern, with revenues tending
to be stronger in the first and third calendar quarters, reflecting the buying
patterns of their customers for new ride simulation attractions.
From time to time Iwerks considers the acquisition of businesses, products
or technologies complementary to its current business although it has no
current agreements relating to any such acquisitions. If Iwerks does effect an
acquisition, it may finance such acquisition by any one or a combination of
cash, stock or notes. If cash or debt is used to effect an acquisition, such
financing would have an impact on cash flow during future periods.
AMENDMENT TO MERGER CONSIDERATION
Following the public announcement of the Merger, there was adverse
stockholder reaction and inquiries from certain institutional investors of
Iwerks with respect to the consideration to be issued by Iwerks pursuant to the
Original Merger Agreement. As a result, the Iwerks Board retained Resource
Financial Corporation ("Resource Financial"), another financial advisor, to
review the terms of the Merger. Resource Financial conducted a diligence
investigation and financial review of Showscan in late October and November
1997. Following its review, Resource Financial advised Iwerks that, based upon
the results of its relative contribution analysis and economic value analysis
completed with financial information available in November 1997 the exchange
ratio was excessive and accordingly if requested to issue a fairness opinion
with respect to the consideration to be paid to the Showscan stockholders
pursuant to the Original Merger Agreement, it would be unable to do so. The
report by Resource Financial prompted discussions between representatives of
Iwerks and Showscan with respect to potential modifications to the Original
Merger Agreement and on December 29, 1997, Iwerks and Showscan entered into the
Amendment to the Original Merger Agreement pursuant to which, among other
things, the exchange ratio was reduced from 0.85 to 0.62.
NEW PRODUCT DEVELOPMENT
Showscan and Iwerks each operates in a technology driven segment of the
entertainment business. As such each 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 combined 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.
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INTERNATIONAL OPERATIONS
A significant portion of Iwerks' and Showscan'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, 1997 and
the six month period ended December 31, 1997, 55%, 49%, 55% and 47% of Iwerks'
revenues, respectively, were derived from sales outside the United States.
During fiscal 1995, 1996 and 1997, 69%, 61% and 62% of Showscan's revenues,
respectively, were derived from sales outside the United States. During fiscal
1997, the Asia and South America markets were the only foreign markets with
revenues over 10% of Iwerks's revenues with 35% and 14%, respectively, and the
Japanese market was the only foreign market with over 10% of Showscan's
revenues with 17.6%. Iwerks maintains one office in Hong Kong to support sales
to Asia and one office in London to support sales in Europe. International
operations and sales of Iwerks and the combined 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 Iwerks' and Showscan'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 and second
quarters of fiscal 1998, Iwerks has experienced significantly weakened sales in
the Asia-Pacific region. As a result, revenues from sales to this region were
$5.4 million less for the first six months of fiscal 1998 than the comparable
six month period in fiscal 1997. The economic trends in the Asia-Pacific
region are expected to continue to adversely impact Iwerks' results of
operations for the remainder of fiscal 1998. 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 Iwerks' and the
combined company's international operations. Political and economic factors
have been identified by Iwerks with respect to certain of the markets in which
it competes. There can be no assurance that these factors will not result in
customers of Iwerks or Showscan defaulting on payments due to it, or in the
reduction of potential purchases of their products. Neither Iwerks nor
Showscan have engaged in any currency hedging programs.
CURRENT TRENDS IN THE GLOBAL ECONOMY
Iwerks' and Showscan's revenues and profitability are dependent on the
strength of the national and international economies. In a recessionary
environment, sales of Iwerks' and Showscan'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 Iwerks in order to maintain sales
activity. Iwerks has experienced significantly weakened sales in the Asia-
Pacific region which it believes is primarily due to the decline in value of
the Asian currency compared to the dollar. Although neither company has
experienced a reduction in unit sales of its products to date in the United
States, certain of its competitors have reported that the recent recession in
the United States has had an adverse impact on their sales activity.
Consequently, neither Iwerks nor Showscan is 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 except two members of the Iwerks Board have
changed and Iwerks has had substantial changes in its management personnel.
Effective February 23, 1998, Iwerks announced the appointment of Charles
Goldwater as Chairman of the Board, Chief Executive Officer and President of
Iwerks. The Iwerks Board is continuing to evaluate the management resources of
the combining companies and considering whether to seek additional management
personnel. The initial integration plan is under development but is expected
to include other changes to the companies' corporate organizational chart,
duties and responsibilities of management personnel, elimination of duplicate
management functions and management changes and additions. Consequently, there
can be no assurance that there will not be other changes among current
management or additions thereto. Iwerks has agreed to use its commercially
reasonable efforts to retain the services of Dennis Pope and W. Tucker Lemon,
the President and Chief Executive Officer and Senior Vice President, General
Counsel and Secretary, of Showscan, respectively, to assist in the integration
of the two companies for a period of up to six months following the
consummation of the Merger.
Iwerks' turnover in management personnel has placed, and could continue to
place, a significant strain on Iwerks' management, the combined company and
other resources. Iwerks' ability to recruit, retain and motivate skilled
directors, executives, sales, technical and creative personnel and other
employees is and will continue to be important to the operations of Iwerks and
the combined business. In addition, there is competition for management and
creative personnel in the industries in which Iwerks and Showscan operate.
There can be no assurance that the combined company will not encounter
difficulties in recruiting and retaining qualified personnel in connection with
the integration
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process and in the future. Should any key executive officer cease to be
affiliated with Iwerks before a qualified replacement is found, Iwerks' and
the combined company's business could be materially adversely affected.
VOLATILITY OF STOCK PRICE AND MERGER CONSIDERATION
Iwerks' stock price and Showscan's stock price has been, and could
continue to be, highly volatile. The market price of the Iwerks Common Stock
and the Showscan Common Stock has fluctuated substantially in recent periods.
During the 12 months prior to February 12, 1998, Iwerks' and Showscan's market
price has ranged from a low of $1.875 and $1.00 per share, respectively, to a
high of $6.00 and $5.125 per share, respectively. Future announcements
concerning Iwerks or its competitors, quarterly variations in operating
results, introduction of new products or changes in product pricing policies by
Iwerks or its competitors and acquisition or loss of significant customers may
affect or be perceived to affect Iwerks' operations, or changes in earnings
estimates by analysts, among other factors, could cause the market price of the
Iwerks 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 Iwerks Common Stock. In addition, the
number of shares of Iwerks Common Stock to be received for shares of Showscan
Common Stock and Showscan Preferred Stock is fixed at 0.62. The Merger
Agreement may not be terminated as a result of a decline in the value of the
Iwerks Common Stock. Accordingly, the value of the merger consideration to be
received by Showscan's stockholders is subject to volatility resulting from
fluctuations in the market price of the Iwerks Common Stock.
LITIGATION
On or about February 5, 1998, Iwerks received notice of a complaint filed
by Ridefilm Corporation, a subsidiary of Imax Corporation, alleging that the
Merger is in violation of the Sherman and Clayton Anti-Trust Acts. Ridefilm
has informed Iwerks and the court that it intends to move to preliminarily
enjoin the Merger prior to the Company's Annual Meeting of Stockholders
scheduled to take place on March 31, 1998. Ridefilm filed its motion on
Friday, March 13, 1998 and the motion will be heard on March 27, 1998.
Each of Iwerks and Showscan believes that the suit is without merit and
Iwerks intends to vigorously defend itself.
The Staff of the Federal Trade Commission is conducting an initial phase
review of the Merger. The Staff has made no allegation of wrongdoing on the
part of Iwerks or Showscan and has not initiated a formal investigation.
Acquisitions such as the Merger may be subject to pre or post merger review by
governmental authorities for antitrust and other legal compliance. Adverse
regulatory action could negatively affect Iwerks' operations through the
assessment of fines or penalties, an injunction prohibiting the consummation of
a pending acquisition or the possible requirement of divestiture of one or more
of Iwerks' operations.
There are no other material legal proceedings to which either of Iwerks or
Showscan is a defendant other than ordinary routine litigation arising in the
ordinary course of business which, in the opinion of management, will not have
a material adverse impact on the financial condition of Iwerks or Showscan;
however, there can be no assurance that Iwerks or the combined company will not
become a party to other lawsuits in the future, and such lawsuits could
potentially have a material adverse effect on their respective financial
condition and results of operations.
ENVIRONMENTAL MATTERS AND OTHER GOVERNMENTAL REGULATIONS
Under various Federal, state and local environmental laws and regulations,
a current or previous owner or occupant of real property may become liable for
the costs of removal or remediation of hazardous substances at such real
property. Such laws and regulations often impose liability without regard to
fault. Each of Iwerks and Showscan lease their respective corporate
headquarters and Iwerks leases its manufacturing facilities and sales offices.
Iwerks and/or Showscan 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 neither Iwerks nor Showscan has
been notified of, nor is otherwise aware of, any current environmental
liability, claim or non-compliance, there can be no assurance that Iwerks
and/or Showscan will not be required to incur remediation or other costs in the
future in connection with these leased properties. In addition, Iwerks' and
Showscan's subcontractors and other third parties, with which it has
contractual relations, are similarly subject to such laws. Each of Iwerks and
Showscan believes it is in compliance with all applicable Federal, state and
local environmental laws and regulations.
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Iwerks 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 Iwerks' stockholders.
The
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rights of the holders of the Iwerks Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of preferred stock.
While Iwerks 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 Iwerks and entrenching existing
management. In addition, such preferred stock may have other rights, including
economic rights senior to the Iwerks Common Stock, and, as a result, the
issuance thereof could have a material adverse effect on the market value of
the Iwerks Common Stock.
A number of provisions of Iwerks' Certificate of Incorporation and By-Laws
and the Delaware General Corporation Law and regulations relating to matters of
corporate governance, certain rights of Directors and the issuance of preferred
stock without stockholder approval, may be deemed to have and may have the
effect of making more difficult, and thereby discouraging, a merger, tender
offer, proxy contest or assumption of control and change of incumbent
management, even when stockholders other than Iwerks' principal stockholders
consider such a transaction to be in their best interest.
In addition, Iwerks has adopted a Stockholder Rights Plan (the "Rights
Agreement"). Pursuant to the Rights 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.
PATENTS AND TRADEMARKS
Each of Iwerks and Showscan has several United States and selected other
countries' patents on various processes and elements related to film projection
and ride simulation. Iwerks has registered its principal trademarks in the
United States and selected other countries. The most important of each of
Iwerks' and Showscan's patents expire in October 2001. While neither Iwerks'
nor Showscan's patents have been challenged and each 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 each company's key patents, could adversely affect
the marketability of the combined company's products and services. In
addition, Iwerks and Showscan always face the risk that new technologies could
be discovered that are superior to their respective patents.
EMPLOYEES
At February 12, 1998, Iwerks employed 134 persons, of whom 20 were
employed in management, finance and administration, 21 were employed in sales
and marketing, and 93 were employed in operations. As of February 12, 1998,
Showscan had 37 employees, six of whom were employed in management, two in
sales and marketing, twelve in engineering, assembly and installation, and
seven in production, film licensing and distribution. The remaining full time
employees of Showscan are administrative and support staff. Although neither
Iwerks nor Showscan has experienced difficulties in obtaining qualified
personnel and anticipates that each will be able to continue to recruit
qualified personnel for its operations, there can be no assurance that such
personnel will be available when required. None of Iwerks' or Showscan's
employees are represented by a collective bargaining agreement.
BUSINESS DISRUPTION
The corporate headquarters of each of Iwerks and Showscan, including its
research and development operations, are located in Los Angeles County,
California, a region known for seismic activity. Operating results could be
materially affected by a significant earthquake or other natural disaster.
DEPENDENCE ON MAJOR CUSTOMERS
Showscan's motion simulation business has two significant concentrations.
The first concentration involves ongoing film licenses and is located in Japan
where a single customer, Imagine Japan, presently operates or is otherwise
responsible for fifteen simulation attractions. The second concentration
relates to Showscan's sales backlog where United Artists Theatre Circuit, Inc.
and King's Entertainment Co., Ltd. individually and collectively represent a
substantial portion of the outstanding equipment orders to be delivered in the
next few years. Showscan's agreement with United Artists Theatre Circuit, Inc.
calls for a build out period extending through August 1999 while that with Apex
Science and Technology Corp. (assignee of King's Entertainment Co., Ltd.)
extends through May 2002. Each site opened under each agreement shall have an
initial film license period of at least three years. In the fiscal year ended
March 31, 1997, Showscan earned revenues from Imagine Japan and United Artists
Theatre Circuit, Inc. in the amounts of $3,117,000 and $5,405,000,
respectively. Showscan's (and, following the Merger, the combined company's)
short and long term performance could be adversely impacted if disruptions were
to occur in any of these areas of concentration such as order cancellations,
license terminations or payment problems.
PAGE 13
<PAGE>
ABILITY TO PRODUCE ADDITIONAL FILMS
One of the primary factors considered by potential purchasers of ride
simulation attractions is the quality and extent of films available to be shown
at the attraction. Iwerks and Showscan each believes that a large portion of
their competitive advantage resides in their popular and extensive library of
ride films. To maintain this competitive edge they must produce or acquire the
distribution rights to several new films each year. Film production is
expensive and requires the investments of funds (to the extent that investors
cannot be located) with no assurance that the films produced will be popular.
Certain competitors have indicated that they are devoting substantial portions
of their assets to the production of new ride simulation films. Both the short
and long term financial performance of the combined company will be adversely
affected if the perceived quality and popularity of its film library declines
either alone or in comparison to the films of its competitors.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities
offered by the Selling Stockholders hereunder.
PAGE 14
<PAGE>
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
The Shares were issued by the Company on February 28, 1997 in a private
placement pursuant to Regulation D under the Securities Act. The purpose of
this Registration Statement is to register the Shares. The following table
sets forth certain information regarding the beneficial ownership of the Iwerks
Common Stock by the selling stockholders listed below (the "Selling
Stockholders") as of March 18, 1998, and as adjusted to reflect the sale of
299,101 shares by the Selling Stockholders. Prior to March 4, 1997, the
Selling Stockholders had never held any position or office with or been
employed by the Company or any of its affiliates. Since March 4, 1997, the
Selling Stockholders have been full-time employees of the Company. The Selling
Stockholders have the sole voting and investment power with respect to the
shares owned, subject to applicable community property laws. It is the
intention of the Company that this Registration Statement shall remain
effective until February 28, 1999. As of March 18, 1998, the Company had
outstanding 12,161,250 shares of Iwerks Common Stock, par value $.001 per
share, the only outstanding voting security of the Company. The address of
each Selling Stockholder is c/o Iwerks Entertainment, Inc., 4540 West Valerio
Street, Burbank, California 91505.
Common Stock Owned
Common Stocked Owned Prior to After the
Offering (1) Offering (1)(2)
------------------------------- -------------------
Number of Percent Number of Number of Percent
Shares of Class Shares to Shares of Class
be Sold
______ ______ ______ ______ ______
L. Ron Schmidt
199,401 1.6% 199,401 0 *
Donald E. Stults
99,700 * 99,700 0 *
- -----------------------
* Less than one percent.
(1) Assumes no purchase of additional shares of the Iwerks Common Stock.
(2) Assumes that all of the Shares will be sold in the offering.
The Selling Stockholders may sell all or a portion of the shares of Iwerks
Common Stock offered hereby from time to time in brokerage transactions in the
over-the-counter market at prices and terms prevailing at the times of such
sales. The Selling Stockholders may also make private sales directly or through
brokers. The Selling Stockholders may individually pay customary brokerage
commissions and expenses. In connection with any sales, the Selling
Stockholders and any brokers participating in such sales may be deemed to be
underwriters within the meaning of the Securities Act, in which event
commissions received by such brokers may be deemed underwriting commissions
under such Act.
Under the Exchange Act and the regulations thereunder, any person engaged
in a distribution of the shares of Iwerks Common Stock offered by this
Prospectus may not simultaneously engage in market making activities with
respect to the shares of Iwerks Common Stock during the applicable"cooling off"
periods prior to the commencement of such distribution. In addition, and
without limiting the foregoing, the Selling Stockholders will need to comply
with applicable provisions of the Exchange Act and the rules and regulations
thereunder including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of shares of Iwerks Common Stock by the
Selling Stockholders. Regulation M contains certain limitations and
prohibitions intended to prevent issuers and selling security holders and other
participants in a distribution of securities from conditioning the market
through manipulative or deceptive devices to facilitate the distribution.
PAGE 15
<PAGE>
LEGAL MATTERS
The validity of the Iwerks Common Stock offered hereby will be passed upon
for the Company by Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California.
EXPERTS
The consolidated financial statements of Iwerks appearing in Iwerks'
Annual Report (Form 10-K) for the year ended June 30, 1997, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information for the three-month periods ended September 30, 1997 and
September 30, 1996 and for the three and six month periods ended December 31,
1997 and December 31, 1996, incorporated by reference in this Prospectus,
Ernst & Young LLP have reported that they have applied limited procedures in
accordance with professional standards for a review of such information.
However, their separate report, included in Iwerks Entertainment, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and
December 31, 1997, and incorporated herein by reference, states that they did
not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their report on such
information should be restricted considering the limited nature of the review
procedures applied. The independent auditors are not subject to the
liability provisions of Section 11 of the Securities Act for their report on
the unaudited interim financial information because that report is not a
"report" or a "part" of the Registration Statement prepared or certified by
the auditors within the meaning of Sections 7 and 11 of the Act.
PAGE 16
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering are as follows:
Amount
------------
Registration Fee Under Securities Act of 1933 $ 295
NASD Filing Fee $ 5,983
Blue Sky Fees and Expenses $ *
Printing and Engraving Certificates $ *
Legal Fees and Expenses $ 2,000
Accounting Fees and Expense $ 10,000
Registrar and Transfer Agent Fees $ *
Miscellaneous Expenses $ *
------------
TOTAL $ 18,278
============
- ---------------
* Not applicable or none.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Iwerks' Certificate of Incorporation provides that to the fullest extent
permitted by the DGCL, no director of Iwerks shall be personally liable to
Iwerks or its stockholders for monetary damages for any breach of fiduciary
duty as a director. Under the current DGCL, liability of a director may not be
limited (a) for any breach of the director's duty of loyalty to Iwerks or its
stockholders, (b) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (c) in respect of certain
unlawful dividend payments or stock redemptions or repurchases and (d) for any
transaction from which the director derives an improper personal benefit. The
effect of such provision in Iwerks' Certificate of Incorporation is to
eliminate the rights of Iwerks and its stockholders (through stockholders'
derivative suits on behalf of Iwerks) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior), except in the
situations described in clauses (a) through (d) above. This provision does not
limit or eliminate the rights of Iwerks or any stockholder to seek nonmonetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. In addition, Iwerks' Certificate of Incorporation
provides that Iwerks shall indemnify its directors, officers, employees and
agents against losses incurred by any such person by reason of the fact that
such person was acting in such capacity or serving, at the request of Iwerks,
any other corporation, plan or other entity in any capacity. The limitations
on liability above do not eliminate monetary liability of directors under
Federal Securities Laws.
In addition, Iwerks has entered into agreements (the "Indemnification
Agreements") with each of the directors and officers of Iwerks pursuant to
which Iwerks has agreed to indemnify such director or officer from claims,
liabilities, damages, expenses, losses, costs, penalties or amounts paid in
settlement incurred by such director or officer in or arising out of his or her
capacity as a director, officer, employee and/or agent of Iwerks or any other
corporation of which he or she is a director or officer at the request of
Iwerks to the maximum extent provided by applicable law.
PAGE 17
<PAGE>
In addition, such director or officer is entitled to an advance of expenses to
the maximum extent authorized or permitted by law.
To the extent that the Iwerks Board of Directors or the stockholders of
Iwerks may in the future wish to limit or repeal the ability of Iwerks to
provide indemnification as set forth in Iwerks' Certificate of Incorporation,
such repeal or limitation will not have any effect on the liability of any
director for acts or omissions occurring prior to such repeal or limitation.
Moreover, any such repeal or limitation may not be effective as to directors
and officers who are currently parties to the Indemnification Agreements,
because their rights to full protection would be contractually assured by the
Indemnification Agreements. It is anticipated that similar contracts may be
entered into, from time to time, with future directors of Iwerks.
Additionally, Iwerks' Bylaws, similar to its Certificate of Incorporation,
provide for the indemnification of Iwerks' directors, officers, employees and
agents to the full extent permitted by the DGCL.
ITEM 16. EXHIBITS.
See the Exhibit Index of this Registration Statement.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any material
information with respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of the
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
PAGE 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on March 19, 1998.
IWERKS ENTERTAINMENT, INC.
(Registrant)
By: /s/ Bruce Hinckley
-----------------------
Bruce C. Hinckley
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles Goldwater and Bruce C. Hinckley, or any
one of them, his attorney-in-fact and agent, with full power of substitution,
for him in any and all capacities, to sign any amendments to this Registration
Statement on Form S-3, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact, or their
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Charles Goldwater President, Chief Executive Officer March 19, 1998
- ------------------- and Chairman of the Board (Principal
Charles Goldwater Executive Officer and Director)
/s/Donald Iwerks Vice Chairman and Director March 19, 1998
- -------------------
Donald W. Iwerks
/s/Bruce Hinckley Executive Vice President, Chief March 19, 1998
- ------------------- Financial Officer and Secretary
Bruce C. Hinckley
- ------------------- Director March __, 1998
Gary J. Matus
- ------------------- Director March __, 1998
Dag Tellefsen
/s/Roy Wright Director March 19, 1998
- -------------------
Roy A. Wright
<PAGE>
EXHIBIT INDEX
No. Item Page
- --- ---- ----
5.1 Opinion of Troop Meisinger Steuber & Pasich, LLP
15.1 Letter from Ernst & Young LLP regarding Interim
Financial Statements
23.1 Consent of Ernst & Young LLP
23.2 Consent of Troop Meisinger Steuber & Pasich, LLP
(included as part of Exhibit 5.1)
PAGE 20
<PAGE>
LETTERHEAD OF TROOP MEISINGER STEUBER AND PASICH, LLP
March 18, 1998
Iwerks Entertainment, Inc.
4540 West Valerio Street
Burbank, CA 91505
Ladies/Gentlemen:
At your request, we have examined the Registration Statement on Form S-3
(the "Registration Statement") to which this letter is attached as Exhibit 5.1
filed by Iwerks Entertainment, Inc., a Delaware corporation (the "Company"), in
order to register under the Securities Act of 1933, as amended (the "Act"),
299,101 shares of Common Stock of the Company and any additional shares of
Common Stock of the Company which may be registered pursuant to Rule 462(b)
under the Act (the "Shares").
We are of the opinion that the Shares have been duly authorized and upon
issuance and sale in conformity with and pursuant to the Registration
Statement, and receipt of the purchase price therefor as specified in the
Registration Statement, the Shares will be legally and validly issued, fully
paid and non-assessable.
We consent to the use of this opinion as an Exhibit to the Registration
Statement and to use of our name in the Prospectus constituting a part thereof.
Respectfully submitted,
/s/ Troop Meisinger Steuber & Pasich, LLP
TROOP MEISINGER STEUBER & PASICH, LLP
<PAGE>
ERNST & YOUNG LLP Suite 2100 Phone 310.551.550
1999 Avenue of the Stars
Los Angeles, California 90067
March 18, 1998
The Board of Directors
Iwerks Entertainment, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-3 No. 333- ) of Iwerks Entertainment, Inc. for the registration of
299,101 shares of its common stock of our reports dated October 29, 1997 and
February 10, 1998, except for Note 8 as to which the date is February 20, 1998,
relating to the unaudited condensed consolidated interim financial statements
of Iwerks Entertainment, Inc. that are included in its Forms 10-Q for the
quarters ended September 30, 1997 and December 31, 1997.
/s/ Ernst & Young LLP
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (From S-3 No. 333-________) and related Prospectus
of Iwerks Entertainment, Inc. for the registration of 299,101 shares of its
common stock and to the incorporation by reference therein of our report
dated August 5, 1997, with respect to the consolidated financial statements
and schedule of Iwerks Entertainment, Inc. included in its Annual Report
(Form 10-K) for the year ended June 30, 1997 filed with the Securities
Exchange Commission.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Los Angeles, California
March 18, 1998
<PAGE>
