<PAGE>
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SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
IWERKS ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
-------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
Iwerks Entertainment Inc.
4540 West Valerio Street
Burbank, California 91505-1046
March 4, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Annual Meeting") of Iwerks Entertainment, Inc. ("Iwerks") to be held at our
offices on March 31, 1998 at 4540 West Valerio Street in Burbank, California at
10:00 a.m. local time.
At this meeting you will be asked to consider and approve three items:
1. The issuance of shares of Iwerks' Common Stock related to the
Agreement and Plan of Reorganization, as amended, with Showscan
Entertainment Inc.;
2. The election of one Class III Director; and
3. Amendments to the 1994 Stock Incentive Plan to increase the number of
shares of Iwerks Common Stock reserved for issuance thereunder and to
provide a per employee limit on stock option grants in any one year.
IWERKS' BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER WITH
SHOWSCAN ENTERTAINMENT INC. ("SHOWSCAN") AND UNANIMOUSLY RECOMMENDS THAT YOU
VOTE FOR ALL OF THE ABOVE MENTIONED PROPOSALS, AS PRESENTED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
The proposed merger (the "Merger") with Showscan, our largest competitor in
the ride simulation business, was announced on August 5, 1997. Certain
modifications to the Merger were announced on December 30, 1997. The Merger
will bring together two of the largest and most accomplished companies in the
ride simulation business into what we believe will be a true market leader in
this segment of location based entertainment, world-wide. The attached Joint
Proxy Statement/Prospectus presents the details of this proposed strategic
combination.
Your Board believes that the Merger with Showscan will position the new
Iwerks as the ride simulation leader with over 160 simulation theater locations
in 28 countries and 75 ride simulation films and will make Iwerks the logical
choice for operators seeking to provide the best in new high technology
attractions. This Merger will provide the new Iwerks with critical technology,
content and distribution assets which will allow us to maintain and expand our
leadership position in the key ride simulation segment of the out-of-home
entertainment market. Additionally, Iwerks' Board of Directors and management
believe that this Merger will better position Iwerks to develop higher quality
software and will bring Iwerks additional technologies at a lower cost than
initiating research and development efforts. The Merger will also strengthen
Iwerks' geographic presence world-wide and will provide for access to new
markets both in terms of size and location. We believe that the Merger will
significantly increase your company's recurring revenue from film and software
distribution while allowing significant cost savings and synergy of combined
operations.
At the same time, by securing our position in ride simulation, this Merger
will allow us more flexibility in addressing the large format film market. This
market has been identified by management as one with potential for your
company's future expansion due to the potential for growth and the limited
number of qualified competitors.
For further information regarding the potential benefits of the Merger, I
urge that you read carefully the section "The Merger -- Iwerks' Reasons for the
Merger; Recommendations of the Iwerks Board" in the attached document.
BECAUSE OF THE IMPORTANCE OF THE ITEMS TO BE VOTED ON AT THIS MEETING, YOUR
PARTICIPATION IN PERSON, OR BY PROXY, IS IMPORTANT. EVEN IF YOU PLAN TO ATTEND
THE ANNUAL MEETING IN PERSON, PLEASE COMPLETE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE. IF YOU CHOOSE TO
ATTEND THE ANNUAL MEETING IN PERSON YOU MAY, IF YOU WISH, VOTE PERSONALLY ON ALL
MATTERS BROUGHT BEFORE THE ANNUAL MEETING, EVEN IF YOU HAVE PREVIOUSLY RETURNED
YOUR PROXY.
I look forward to seeing you at the Annual Meeting.
Sincerely,
/s/ Charles Goldwater
Charles Goldwater
Chairman of the Board and Chief Executive Officer
<PAGE>
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232
March 4, 1998
Dear Fellow Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Showscan Entertainment Inc. ("Showscan") to be held on
Tuesday, March 31, 1998, at 10:00 a.m. (local time), at 3939 Landmark Street,
Culver City, California 90232.
At the Special Meeting, you will be asked to approve the merger (the
"Merger") between Showscan and a subsidiary of Iwerks Entertainment, Inc.
("Iwerks"). As a result of the Merger, Showscan will become a wholly owned
subsidiary of Iwerks and each of us will become stockholders of Iwerks.
After careful consideration, the Board of Directors of Showscan has
unanimously determined that the terms of the proposed Merger are fair to, and in
the best interests of, Showscan and its stockholders. Your Board of Directors
has carefully reviewed and considered the terms and conditions of the Agreement
and Plan of Reorganization dated as of August 4, 1997, as amended by that
certain Amendment No. 1 to Agreement and Plan of Reorganization dated December
29, 1997 (as amended, the "Merger Agreement"), by and among Showscan, Iwerks and
IWK-1 Merger Corporation, a wholly owned subsidiary of Iwerks, and the opinion
of Allen & Company Incorporated, Showscan's financial advisor, stating that, as
of the date of such opinion, the consideration to be received by the Showscan
stockholders was fair from a financial point of view to such holders.
ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER, AND UNANIMOUSLY RECOMMENDS THAT ALL STOCKHOLDERS VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
The Merger will create the undisputed ride simulation leader with over 160
simulation theatres in 28 countries and 75 ridefilms. The combined company will
be the logical choice for operators seeking to provide the best in high tech
attractions to the out-of-home entertainment market since it will have the
largest and highest quality film library. As new Iwerks stockholders
representing a quarter of the company, we will have the opportunity to continue
our participation in this exciting field. We are seeking to create the
strongest possible company as an ongoing source of long-term stockholder value.
We believe that this transaction is the best avenue and comes at the best time
to create such stockholder value.
Under the terms of the Merger Agreement, (a) each share of Common Stock, par
value $.001 per share, of Showscan ("Showscan Common Stock") which is
outstanding immediately prior to the Merger will be converted into the right to
receive 0.62 shares of common stock, par value $.001 per share, of Iwerks
("Iwerks Common Stock") and (b) each share of Series C Convertible Preferred
Stock, par value $.001 per share, of Showscan ("Showscan Preferred Stock") which
is outstanding immediately prior to the Merger will be converted into the right
to receive shares of Iwerks Common Stock in an amount equal to the number of
shares of Showscan Common Stock into which such share of Showscan Preferred
Stock is convertible immediately prior to the Merger multiplied by 0.62.
Detailed information concerning the proposed Merger is set forth in the
accompanying Joint Proxy Statement/Prospectus, which you are urged to read
carefully.
The affirmative vote of the holders of not less than a majority of the
outstanding shares of Showscan Common Stock and Showscan Preferred Stock, voting
together as a single class, will be necessary for approval and adoption of the
Merger Agreement and the Merger. Pursuant to separate agreements, certain
stockholders of Showscan have agreed, subject to certain conditions, to vote in
favor of approval and adoption of the Merger Agreement and the Merger. As of
February 12, 1998, such stockholders beneficially owned in the aggregate 237,280
shares of Showscan Common Stock and 49,000 shares of Showscan Preferred Stock,
or approximately 18.3% of the then outstanding shares entitled to vote at the
Special Meeting.
Because of the significance to Showscan of the Merger, your participation in
the Special Meeting, in person or by proxy, is important. In order to ensure
that your interests are represented at the Special Meeting, please complete,
sign, date and return the accompanying Proxy in the enclosed envelope, whether
or not you plan to attend the Special Meeting. If you attend the Special
Meeting in person you may, if you wish, vote personally on all matters brought
before the Special Meeting even if you have previously returned your Proxy.
Sincerely,
/s/ Dennis Pope
Dennis Pope
President and Chief Executive Officer
<PAGE>
IWERKS ENTERTAINMENT, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held March 31, 1998
TO THE STOCKHOLDERS OF IWERKS ENTERTAINMENT, INC.:
Notice is hereby given that the 1997 Annual Meeting of Stockholders (the
"Iwerks Annual Meeting") of Iwerks Entertainment, Inc. ("Iwerks") will be held
at 4540 West Valerio Street, Burbank, California 91505, on March 31, 1998, at
10:00 a.m., local time, for the following purposes:
1. To approve the issuance of shares of Common Stock, par value $.001 per
share, of Iwerks (the "Iwerks Common Stock"), pursuant to the Agreement and Plan
of Reorganization, dated as of August 4, 1997, as amended by that certain
Amendment No. 1 to Agreement and Plan of Reorganization dated December 29, 1997,
by and among Iwerks, IWK-1 Merger Corporation, a Delaware corporation and a
wholly owned subsidiary of Iwerks ("Merger Corp."), and Showscan Entertainment
Inc. ("Showscan"), pursuant to which, among other things, (a) Merger Corp. will
be merged with and into Showscan, which will be the surviving corporation, and
Showscan will become a wholly owned subsidiary of Iwerks (the "Merger"), (b)
each outstanding share of Common Stock, par value $.001 per share, of Showscan
(the "Showscan Common Stock") which is outstanding immediately prior to the
Merger will be converted into the right to receive 0.62 shares of Iwerks Common
Stock; and (c) each outstanding share of Series C Convertible Preferred Stock,
par value $.001 per share, of Showscan (the "Showscan Preferred Stock") which is
outstanding immediately prior to the Merger (other than shares as to which
appraisal rights have been perfected, and not withdrawn or lost, under the
Delaware General Corporation Law) will be converted into the right to receive
that number of shares of Iwerks Common Stock equal to the number of shares of
Showscan Common Stock into which such share of Showscan Preferred Stock is
convertible multiplied by 0.62;
2. To elect one Class III Director to the Board of Directors of Iwerks, to
hold office for three years and until his successor is elected;
3. To amend the 1994 Stock Incentive Plan to increase the shares of Iwerks
Common Stock reserved for issuance thereunder from 1,750,000 to 2,500,000 and to
provide a per employee limit on stock option grants in any one year; and
4. To transact such other business as may properly come before the meeting
and any adjournment(s) or postponement(s) thereof.
The Board of Directors of Iwerks has fixed the close of business on February
12, 1998 as the record date for the determination of stockholders entitled to
notice of and to vote at the Iwerks Annual Meeting and any adjournments or
postponements thereof, and only stockholders of record at such time will be
entitled to notice of and to vote at the Iwerks Annual Meeting and any
adjournments or postponements thereof.
All stockholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to mark,
sign and return the enclosed Proxy as promptly as possible in the postage-
prepaid envelope enclosed for the purpose. Any stockholder attending the
meeting may vote in person, even though he or she has returned a Proxy.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
APPROVAL AND ADOPTION OF THE ABOVE PROPOSALS.
By Order of the Board of Directors
/s/ Bruce C. Hinckley
Bruce C. Hinckley
Secretary
4540 West Valerio Street
Burbank, California 91505-1046
March 4, 1998
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED TO
COMPLETE, DATE, AND SIGN THE ACCOMPANYING PROXY AS PROMPTLY AS POSSIBLE AND
RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE>
SHOWSCAN ENTERTAINMENT INC.
3939 Landmark Street
Culver City, California 90232
____________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on March 31, 1998
____________________
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Showscan Entertainment Inc., a Delaware corporation ("Showscan"),
will be held on Tuesday, March 31, 1998, at 10:00 a.m. (local time), at 3939
Landmark Street, Culver City, California 90232.
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Reorganization dated as of August 4, 1997, as amended by that
certain Amendment No. 1 to Agreement and Plan of Reorganization dated December
29, 1997, (as amended, the "Merger Agreement"), by and among Showscan, Iwerks
Entertainment, Inc., a Delaware corporation ("Iwerks"), and IWK-1 Merger
Corporation, a Delaware corporation and a wholly owned subsidiary of Iwerks
("Merger Corp."), and the merger of Merger Corp. with and into Showscan upon the
terms and subject to the conditions thereof (the "Merger"), pursuant to which,
among other things, (a) each share of Common Stock, par value $.001 per share,
of Showscan ("Showscan Common Stock") which is outstanding immediately prior to
the Merger will be converted into the right to receive 0.62 shares of common
stock, par value $.001 per share, of Iwerks ("Iwerks Common Stock") and (b) each
share of Series C Convertible Preferred Stock, par value $.001 per share, of
Showscan ("Showscan Preferred Stock") which is outstanding immediately prior to
the Merger (other than shares as to which appraisal rights have been perfected,
and not withdrawn or lost, under the Delaware General Corporation Law) will be
converted into the right to receive shares of Iwerks Common Stock in an amount
equal to the number of shares of Showscan Common Stock into which such share of
Showscan Preferred Stock is convertible immediately prior to the Merger
multiplied by 0.62; and
2. To consider and transact such other business as may properly come before
the Special Meeting or any adjournments or postponements thereof.
The Board of Directors of Showscan has fixed the close of business on
February 12, 1998 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof, and only stockholders of record at such time will be
entitled to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof. The affirmative vote of the holders of not less than a
majority of the outstanding shares of Showscan Common Stock and Showscan
Preferred Stock, voting together as a single class, will be necessary for
approval and adoption of the Merger Agreement and the Merger.
IN ORDER TO ENSURE THAT YOUR INTERESTS ARE REPRESENTED AT THE SPECIAL
MEETING, PLEASE COMPLETE, SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY, WHICH
IS BEING SOLICITED BY THE BOARD OF DIRECTORS, WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING. A PRE-ADDRESSED, STAMPED RETURN ENVELOPE WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES IS ENCLOSED FOR THAT PURPOSE.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
By Order of the Board of Directors,
/s/ W. Tucker Lemon
W. Tucker Lemon
Secretary
Culver City, California
March 4, 1998
<PAGE>
JOINT PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS OF
IWERKS ENTERTAINMENT, INC.
AND
SPECIAL MEETING OF STOCKHOLDERS OF
SHOWSCAN ENTERTAINMENT INC.,
BOTH MEETINGS TO BE HELD MARCH 31, 1998
___________________
IWERKS ENTERTAINMENT, INC.
PROSPECTUS
___________________
This Joint Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $.001 (the "Iwerks Common Stock"), of Iwerks Entertainment,
Inc., a Delaware corporation ("Iwerks"), in connection with the solicitation of
proxies by the Board of Directors of Iwerks (the "Iwerks Board") for use at the
1997 Annual Meeting of Stockholders (the "Iwerks Annual Meeting"), to be held on
March 31, 1998 at Iwerks' offices at 4540 West Valerio Street, Burbank,
California, commencing at 10:00 a.m., local time, and at any adjournments or
postponements thereof.
This Joint Proxy Statement/Prospectus also is being furnished to holders of
common stock, par value $.001 (the "Showscan Common Stock"), of Showscan
Entertainment Inc., a Delaware corporation ("Showscan"), and the holders of
Series C Convertible Preferred Stock, par value $.001 (the "Showscan Preferred
Stock" and together with the Showscan Common Stock, the "Showscan Capital
Stock"), of Showscan in connection with the solicitation of proxies by the Board
of Directors of Showscan (the "Showscan Board") for use at the Special Meeting
of Stockholders of Showscan (the "Showscan Special Meeting") to be held on March
31, 1998, at 3939 Landmark Street, Culver City, California, commencing at 10:00
a.m., local time, and at any adjournments or postponements thereof.
Iwerks has filed a registration statement on Form S-4 (together with all
amendments, exhibits and schedules thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), relating to
shares of Iwerks Common Stock that are proposed to be issued in connection with
the merger (the "Merger") of IWK-1 Merger Corporation, a Delaware corporation
and a wholly owned subsidiary of Iwerks ("Merger Corp."), with and into
Showscan, pursuant to the Agreement and Plan of Reorganization, dated as of
August 4, 1997 (the "Original Merger Agreement"), as amended by that certain
Amendment No. 1 to Agreement and Plan of Reorganization dated December 29, 1997
(the "Amendment" and together with the Original Merger Agreement, the "Merger
Agreement"), among Iwerks, Merger Corp. and Showscan in exchange for, or
issuable upon exercise of, all of the outstanding securities of Showscan.
Pursuant to the Merger Agreement, each share of Showscan Common Stock
outstanding shall entitle the holder thereof to 0.62 shares of Iwerks Common
Stock and each share of Showscan Preferred Stock outstanding shall entitle the
holder thereof to that number of shares of Iwerks Common Stock equal to the
number of shares of Showscan Common Stock into which such share of Showscan
Preferred Stock is convertible multiplied by 0.62 (the "Exchange Ratio"). On
December 29, 1997, Iwerks, Showscan and Merger Corp. agreed to amend the
Original Merger Agreement to, among other things, decrease the Exchange Ratio
from 0.85 to 0.62. As part of the Merger, Iwerks will issue an aggregate of
approximately 4,100,854 shares of Iwerks Common Stock 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 Capital Stock valued at $9,739,527 as of December 30, 1997, the date
the changes to the Merger Agreement were announced. Immediately following the
Merger, Showscan stockholders will own approximately 25.2% of the issued and
outstanding shares of the Iwerks Common Stock. At March 3, 1998, the most recent
practicable date before the mailing of this Joint Proxy Statement/Prospectus,
the closing sales price on the Nasdaq National Market of Iwerks Common Stock was
$2.69 per share and of Showscan Common Stock was $1.44 per share. This results
in a merger consideration at such date of $1.67 per share of Showscan Common
Stock.
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
Iwerks filed as part of the Registration Statement. This Joint Proxy
Statement/Prospectus and the accompanying form of proxy are first being mailed
to the respective stockholders of Iwerks and Showscan on or about March 4, 1998.
All information contained in this Joint Proxy Statement/Prospectus concerning
Iwerks has been furnished by Iwerks and information with respect to Showscan has
been furnished by Showscan.
SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
IWERKS AND SHOWSCAN STOCKHOLDERS COMMENCING ON PAGE 13 OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
<PAGE>
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is March 4, 1998
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY
THIS JOINT PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY FROM ANY
PERSON, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER,
SOLICITATION OF AN OFFER OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES MADE
UNDER THIS JOINT PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF IWERKS OR
SHOWSCAN SINCE THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
Iwerks and Showscan each are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by Iwerks and Showscan with the
Commission are available for inspection and copying at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048, and 500
West Madison Street, Suite 1400, Chicago, Illinois 60601. Copies of such
materials can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at
prescribed rates. Iwerks and Showscan also are required to file electronic
versions of these documents with the Commission through the Commissions'
Electronic Data Gathering Analysis and Retrieval (EDGAR) system. The Commission
maintains a world wide web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The shares of Iwerks Common
Stock and Showscan Common Stock are quoted on The Nasdaq Stock Market's National
Market and, as such, certain of the periodic reports, proxy statements and other
information filed by Showscan and Iwerks with the Commission can be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington D.C. 20006.
Iwerks has filed the Registration Statement with the Commission with respect
to the shares of Iwerks Common Stock to be issued in connection with the Merger
to the holders of Showscan Capital Stock. This Joint Proxy Statement/Prospectus
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. The Registration Statement, including exhibits filed as a
part thereof, are available for inspection and copying as set forth above.
Statements contained in this Joint Proxy Statement/Prospectus as to the contents
of any contract or other document referred to herein or therein 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 or
such other document, each such statement being qualified in all respects by such
reference.
ii
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION.................................................................................... ii
SUMMARY.................................................................................................. 1
The Companies.......................................................................................... 1
Meetings of Stockholders............................................................................... 2
The Merger............................................................................................. 3
MARKET PRICE INFORMATION................................................................................. 11
COMPARATIVE PER SHARE DATA............................................................................... 12
RISK FACTORS............................................................................................. 13
Integration of Iwerks and Showscan; Anticipated Net Loss............................................... 13
Anticipated Effects of the Merger...................................................................... 14
Risk that the Merger will not be Consummated........................................................... 14
Dependence on Production of Film Software; Financial Risks of Film Production.......................... 14
Dependence of Owned and Operated Operations upon Sponsorship Revenues; Loss of AT&T Corp. Sponsorship.. 14
Intense Competition; Unpredictability of Consumer Tastes............................................... 15
History of Operating Losses; Fluctuating Periodic Operating Results and Cash Flow...................... 15
New Product Development................................................................................ 17
International Operations............................................................................... 17
Current Trends in the Global Economy................................................................... 17
Dependence on Senior Management; Recent Changes to Key Personnel....................................... 17
Volatility of Stock Price and Merger Consideration..................................................... 18
Litigation............................................................................................. 18
Environmental Matters and Other Governmental Regulations............................................... 18
Effect of Anti-takeover Provisions..................................................................... 18
Patents and Trademarks................................................................................. 19
Employees.............................................................................................. 19
Business Disruption.................................................................................... 19
Dependence on Major Customers.......................................................................... 19
Ability to Produce Additional Films.................................................................... 19
THE MEETINGS OF STOCKHOLDERS............................................................................. 19
General................................................................................................ 19
Matters to be Considered at the Meetings............................................................... 20
Record Dates; Voting Rights; Votes Required for Approval............................................... 20
Proxies................................................................................................ 21
No Dissenters' Rights.................................................................................. 22
Proxy Solicitation..................................................................................... 22
THE MERGER............................................................................................... 22
Background of the Merger............................................................................... 22
Iwerks' Reasons for the Merger; Recommendations of the Iwerks Board.................................... 26
Showscan's Reasons for the Merger; Recommendations of the Showscan Board............................... 28
Opinions of Financial Advisors......................................................................... 30
Interests of Certain Persons in the Merger............................................................. 39
Accounting Treatment................................................................................... 40
Certain Federal Income Tax Consequences................................................................ 40
The Nasdaq National Market............................................................................. 41
Resale Restrictions.................................................................................... 41
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
THE MERGER AGREEMENT..................................................................................... 42
General................................................................................................ 42
Merger Consideration................................................................................... 42
Exchange of Shares..................................................................................... 42
Representations and Warranties......................................................................... 43
Certain Covenants...................................................................................... 43
Conditions to the Merger............................................................................... 46
Termination of the Merger Agreement.................................................................... 46
Amendment and Waiver................................................................................... 48
BUSINESS OF IWERKS....................................................................................... 48
General................................................................................................ 48
Business Strategy...................................................................................... 49
Iwerks Products........................................................................................ 49
Marketing and Customers................................................................................ 50
Enabling Technologies.................................................................................. 51
Manufacturing.......................................................................................... 52
Patents and Trademarks................................................................................. 52
Employees.............................................................................................. 52
Properties............................................................................................. 52
Legal Proceedings...................................................................................... 52
Executive Officers and Directors of Iwerks............................................................. 53
Board Meetings and Committees.......................................................................... 54
Compensation of Directors.............................................................................. 54
Compensation Committee Interlocks and Insider Participation............................................ 54
Report of Compensation Committee on Executive Compensation............................................. 54
EXECUTIVE COMPENSATION................................................................................... 55
Summary Compensation Table............................................................................. 56
Options Grants in Last Fiscal Year..................................................................... 57
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Options............................ 58
Certain Transactions with Management................................................................... 58
Section 16(a) Beneficial Ownership Reporting Compliance................................................ 60
STOCK PERFORMANCE GRAPH.................................................................................. 61
PRINCIPAL STOCKHOLDERS................................................................................... 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF IWERKS.......... 64
General................................................................................................ 64
Recent Acquisition..................................................................................... 64
Results of Operations.................................................................................. 65
Comparison of Year Ended June 30, 1997 to Year Ended June 30, 1996..................................... 66
Comparison of Year Ended June 30, 1996 to Year Ended June 30, 1995..................................... 68
Comparison of Three Months Ended December 31, 1997 to Three Months Ended December 31, 1996............. 69
Seasonality and Fluctuating Quarterly Results.......................................................... 70
Liquidity and Capital Resources........................................................................ 71
BUSINESS OF SHOWSCAN..................................................................................... 72
General................................................................................................ 72
Business Strategy...................................................................................... 72
The Motion Simulation and Specialty Film Library....................................................... 74
Motion Simulation Attractions.......................................................................... 75
Owned and Operated Theatres............................................................................ 76
Specialty Theatres..................................................................................... 79
The Showscan Process................................................................................... 79
Sales and Marketing.................................................................................... 79
</TABLE>
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Equipment.............................................................................................. 80
Research and Development............................................................................... 81
Competition............................................................................................ 81
Patents and Other Intellectual Property................................................................ 82
Royalty Arrangements................................................................................... 83
Employees.............................................................................................. 83
Properties............................................................................................. 83
Legal Proceedings...................................................................................... 83
MANAGEMENT OF SHOWSCAN................................................................................... 84
Directors and Executive Officers of Showscan........................................................... 84
Compliance With Section 16(a) of the Securities Exchange Act of 1934................................... 86
Executive Compensation................................................................................. 86
Security Ownership of Certain Beneficial Owners and Management......................................... 89
Certain Relationships and Related Transactions......................................................... 92
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SHOWSCAN........ 94
Results of Operations.................................................................................. 94
Comparison of Year Ended March 31, 1997 and Year Ended March 31, 1996.................................. 94
Comparison of Year Ended March 31, 1996 and Year Ended March 31, 1995.................................. 95
Comparison of the Nine Months Ended December 31, 1997 and 1996......................................... 97
Liquidity and Capital Resources........................................................................ 99
UNAUDITED PRO FORMA FINANCIAL DATA....................................................................... 101
Unaudited Pro Forma Condensed Combined Statement of Operations......................................... 102
Unaudited Pro Forma Condensed Combined Statement of Operations......................................... 103
Unaudited Pro Forma Condensed Combined Statement of Operations......................................... 104
Unaudited Pro Forma Condensed Combined Statement of Operations......................................... 105
Unaudited Pro Forma Condensed Combined Balance Sheets.................................................. 106
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS..................................... 108
DESCRIPTION OF CAPITAL STOCK OF IWERKS................................................................... 110
Common Stock........................................................................................... 110
Preferred Stock........................................................................................ 110
Certain Provisions of the Delaware General Corporation Law............................................. 110
Anti-takeover Provisions............................................................................... 111
Limitation of Liability and Indemnification Agreements................................................. 111
Transfer Agent......................................................................................... 112
COMPARATIVE RIGHTS OF STOCKHOLDERS....................................................................... 112
General................................................................................................ 112
Authorized Capital..................................................................................... 112
Voting Rights.......................................................................................... 112
Directors.............................................................................................. 112
Removal of Directors................................................................................... 112
Filling Vacancies on the Board of Directors............................................................ 113
Special Meetings of Stockholders....................................................................... 113
Stockholder Action by Written Consent.................................................................. 113
Limitation of Liability of Directors................................................................... 113
Indemnification of Directors and Officers.............................................................. 114
ELECTION OF CLASS III DIRECTOR........................................................................... 114
</TABLE>
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PROPOSAL TO AMEND THE 1994 STOCK INCENTIVE PLAN.......................................................... 115
General................................................................................................ 115
Proposal............................................................................................... 115
Summary of the 1994 Plan............................................................................... 116
Required Vote.......................................................................................... 118
PROPOSALS OF STOCKHOLDERS................................................................................ 118
INDEPENDENT AUDITORS..................................................................................... 119
LEGAL OPINION............................................................................................ 119
EXPERTS.................................................................................................. 119
OTHER MATTERS............................................................................................ 119
INDEX TO FINANCIAL STATEMENTS............................................................................ F-1
</TABLE>
APPENDICES:
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<C> <S>
Appendix A Agreement and Plan or Reorganization and Amendment No. 1 to Agreement and Plan of Reorganization
Appendix B Opinion of Suntrust Equitable Securities dated December 29, 1997
Appendix C Opinion of Suntrust Equitable Securities dated August 1, 1997
Appendix D Opinion of Resource Financial Corporation
Appendix E Opinion of Allen & Company Incorporated dated December 29, 1997
Appendix F Opinion of Allen & Company Incorporated dated July 31, 1997
</TABLE>
vii
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by reference to, the more detailed information and
financial statements contained elsewhere in this Joint Proxy Statement/
Prospectus and the Appendices attached hereto. Stockholders of Iwerks and
Showscan are urged to read carefully this Joint Proxy Statement/Prospectus and
the attached Appendices in their entirety. Unless the context otherwise
requires, as used in this Joint Proxy Statement/Prospectus, "Iwerks" refers to
Iwerks Entertainment, Inc. and its consolidated subsidiaries, and "Showscan"
refers to Showscan Entertainment Inc. and its consolidated subsidiaries and
joint ventures. This Joint Proxy Statement/Prospectus contains 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 COMPANIES
Iwerks. Iwerks was founded in 1986 and is a leading provider of high-tech
software-based theatre attractions for the out-of-home entertainment market.
Iwerks' products combine advanced theatre systems with entertainment or
educational software to create high-impact "attractions" which immerse audiences
in the action. Iwerks' products include ride simulation, giant screen, 360
degree, 3-D films and attractions, and various other specialty attractions. In
addition, Iwerks owns and operates a fleet of touring ride simulation theatres.
Iwerks also produces film and video software for ride simulators and special
format theatres.
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 theatres, which Iwerks supports with a library of
40 ride simulation films, the industry's largest ride simulation film library.
Iwerks also owns and operates a fleet of 16 portable ride simulation theatres.
The primary markets for Iwerks' attractions are theme parks, museums, various
types of location-based-entertainment centers, visitor centers, world
expositions and special events.
The mailing address of Iwerks' principal executive offices is 4540 West
Valerio Street, Burbank, California 91505; its telephone number is (818) 841-
7766. See "BUSINESS OF IWERKS."
Showscan. Showscan was founded in 1984 and is a leading provider of movie-
based motion simulation theatre attractions to the out-of-home entertainment
market. Showscan's motion simulation theatre attractions ("Showscan
Attractions") combine the exhibition of a short action Showscan film with multi-
channel sound systems and synchronized theatre seat movement to produce an
immersive entertainment experience in which the theatre patron has the
perception of actually participating in the on-screen action. Showscan's
attractions incorporate various proprietary technologies, including the award
winning patented 70mm filming and projection process known as Showscan (R).
Showscan believes that films made and exhibited in the Showscan process create a
visual effect of depth, clarity and realism that is superior to any other film
format. The Showscan process is also used for the exhibition of films in large
screen special format movie theatres. Showscan films have been exhibited in
such specialty theatres at world fairs, tourist destinations, trade conventions
and other locations where the operator desires the impact of the large-screen,
intense image that a Showscan film provides.
As of February 12, 1998, Showscan had 61 Showscan Attractions screens
operating around the world. Showscan had 10 additional Showscan Attractions
screens in its delivery and installation backlog, and has contractual
commitments for an additional 28 Showscan Attractions screens with companies
such as United Artists Theatre Circuit, Inc., Apex Science and Technology Corp.
(the assignee of King's Entertainment, Ltd.) in Taiwan and Auscinemagic Pty
Limited in Australia. Showscan includes in its backlog all sales for which it
has a signed agreement or letter of intent, in each case supported by a letter
of credit, cash deposits or damage provisions. Until November 1993, all
Showscan Attractions were owned and operated by unaffiliated third parties.
Since then, ventures in which Showscan has a 15% to 50% ownership interest have
opened motion simulation theatres ("Showscan O&O Theatres") in several
locations: Universal City Walk, Universal City, California, the Trocadero
Arcade at Piccadilly Circus, London, England; and the Asian Trade Center in
Osaka, Japan.
As part of its business, Showscan produces and licenses specialty films in the
Showscan process which are then exhibited in conventional theatres equipped to
show Showscan films. Showscan also markets all of the
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cameras, projectors, motion bases and other equipment necessary to establish and
operate Showscan Attractions and Showscan specialty theatres. Showscan has six
permanent specialty theatres operating as of February 12, 1998.
The mailing address of Showscan's principal executive office is 3939 Landmark
Street, Culver City, California 90232-2315; and its telephone number is (310)
558-0150. See "BUSINESS OF SHOWSCAN."
The Combined Company. At June 30, 1997 on an unaudited pro forma combined
basis the combined company would have had total revenues of $56.9 million of
which 70% would have been contributed by Iwerks and 30% of which would have been
contributed by Showscan and total assets of $83.2 million of which 77% would
have been contributed by Iwerks and 23% contributed by Showscan. Iwerks intends
to integrate the operations of Showscan into its operations at one site located
at Iwerks' principal office in Burbank, California. Although its integration
plan is not yet complete, Iwerks anticipates that as part of the integration
process it will eliminate duplicate overhead and reduce operating expenses of
the combined company.
MEETINGS OF STOCKHOLDERS
Iwerks. The 1997 Annual Meeting of Stockholders of Iwerks (the "Iwerks Annual
Meeting") will be held on March 31, 1998 at 10:00 a.m. (local time), at Iwerks'
principal executive offices located at 4540 West Valerio Street, Burbank,
California 91505. The purpose of the Iwerks Annual Meeting is to consider and
vote on the following proposals: (a) the issuance of shares of Iwerks Common
Stock in exchange for shares of Showscan Capital Stock pursuant to the Merger
Agreement (the "Merger Proposal"), (b) the election of one Class III Director to
the Iwerks Board (the "Director Proposal"), (c) the amendment of the 1994 Stock
Incentive Plan to increase the number of shares reserved for issuance thereunder
from 1,750,000 to 2,500,000 and to provide a per employee limit on stock option
grants in any one year (the "Option Plan Proposals"), and (d) such other matters
as may properly be brought before the Iwerks Annual Meeting. Pursuant to
Iwerks' Bylaws, the Iwerks Annual Meeting may be adjourned whether or not a
quorum is present by vote of a majority of the shares present. Proxies
submitted containing a vote against the Merger Proposal shall not be used by
Iwerks' management to vote for adjournment pursuant to management's
discretionary authority.
Holders of record of Iwerks Common Stock at the close of business on February
12, 1998 (the "Iwerks Record Date") will be entitled to notice of and to vote at
the Iwerks Annual Meeting. On the Iwerks Record Date, there were 12,161,250
shares of Iwerks Common Stock outstanding and entitled to vote. Each share of
Iwerks Common Stock is entitled to one vote on each matter that is properly
presented to the stockholders for a vote at the Iwerks Annual Meeting. Under
the Delaware General Corporation Law (the "DGCL"), the approval of the Director
Proposal will require the affirmative vote of a plurality of the votes cast for
the election of directors at the Iwerks Annual Meeting and the approval of the
Merger Proposal and the Option Plan Proposals will require the affirmative vote
of the holders of a majority of the shares of Iwerks Common Stock present at the
Iwerks Annual Meeting and entitled to vote. See "THE MEETINGS OF STOCKHOLDERS -
- - Record Dates; Voting Rights; Votes Required for Approval."
Proxies (including revocations of previously delivered proxies) may be
delivered (a) by United States mail or courier service to U.S. Stock Transfer
Corporation, 1745 Gardena Avenue, Glendale, California 91204-2991 or (b) by
facsimile to (818) 502-0674.
As of the Iwerks Record Date, directors and executive officers of Iwerks and
their affiliates as a group beneficially owned 1,554,001 shares of Iwerks Common
Stock (excluding shares subject to exercisable options), or approximately 12.8%
of those shares outstanding as of such date. Holders of 1,529,001 shares of
Iwerks Common Stock (12.6% of those shares outstanding as of the Iwerks Record
Date), have executed agreements pursuant to which each holder agrees to vote its
shares of Iwerks Common Stock in favor of the Merger Proposal and each has
granted a proxy to Showscan to do the same in its place and stead.
Showscan. The Special Meeting of Stockholders of Showscan (the "Showscan
Special Meeting" and collectively with the Iwerks Annual Meeting, the
"Stockholder Meetings") will be held on March 31, 1998 at 10:00 a.m. (local
time) at Showscan's principal executive offices located at 3939 Landmark Street,
Culver City, California 90232. The purpose of the Showscan Special Meeting is
to consider and vote on (a) a proposal to approve and adopt the Merger Agreement
and the Merger, and (b) such other matters as may properly be brought before the
Showscan Special Meeting. The Showscan Special Meeting may be adjourned whether
or not a quorum
2
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is present by vote of a majority of the shares present. Proxies submitted
containing a vote against the proposal to approve and adopt the Merger Agreement
and the Merger shall not be used by Showscan's management to vote for
adjournment pursuant to management's discretionary authority.
Holders of record of Showscan Common Stock at the close of business on
February 12, 1998 (the "Showscan Record Date") will be entitled to notice of and
to vote at the Showscan Special Meeting. On the Showscan Record Date, there
were 5,642,058 shares of Showscan Common Stock and 49,000 shares of Showscan
Preferred Stock outstanding and entitled to vote. Each share of Showscan Common
Stock is entitled to one vote on each matter that is properly presented to
stockholders for a vote at the Showscan Special Meeting and each share of
Showscan Preferred Stock is entitled to the number of votes it would have if it
were fully converted into Showscan Common Stock. Under the DGCL, the affirmative
vote of the holders of a majority of the outstanding shares of Showscan Common
Stock and Showscan Preferred Stock, voting together as a single class, is
required to approve and adopt the Merger Agreement. See "THE MEETINGS OF
STOCKHOLDERS" -- Record Dates; Voting Rights; Votes Required for Approval."
Proxies (including revocations of previously delivered proxies) may be
delivered (a) by United States mail or courier service to Continental Stock
Transfer & Trust Company, 2 Broadway, 9th Floor, New York, New York 10004, or
(b) by facsimile to (212) 509-5150.
As of the Showscan Record Date, directors and executive officers of Showscan
and their affiliates as a group beneficially owned 600,380 shares of Showscan
Common Stock (excluding shares subject to exercisable options or warrants or
issuable upon conversion of the Showscan Preferred Stock), or approximately
10.6% of those shares outstanding as of such date and 24,000 shares of Showscan
Preferred Stock (49.0% of those shares outstanding as of such date, and, as
converted, 7.8% of the Showscan Common Stock outstanding). Holders of 237,280
shares of Showscan Common Stock (4.2% of those shares outstanding as of the
Showscan Record Date) and 49,000 shares of Showscan Preferred Stock (100% of
those shares outstanding as of the Showscan Record Date), representing an
aggregate of 18.3% of the voting securities of Showscan as of the Showscan
Record Date have executed agreements (the "Showscan Voting Agreements") pursuant
to which each holder agrees to vote its shares of Showscan Capital Stock in
favor of the Merger Agreement and each has granted a proxy to Iwerks to do the
same in its place and stead. Certain of the directors and executive officers of
Showscan are parties to the Showscan Voting Agreements and each remaining
director and executive officer of Showscan has advised Showscan that he intends
to vote or direct the vote of all of the outstanding shares of Showscan Common
Stock over which he has voting control in favor of approval and adoption of the
Merger Agreement.
THE MERGER
Conversion of Securities. Upon consummation of the Merger, Showscan will
become a wholly owned subsidiary of Iwerks, and (a) each issued and outstanding
share of Showscan Common Stock (other than shares then owned by Showscan or any
of its subsidiaries and shares of Showscan Common Stock then held by Iwerks or
any of its subsidiaries) will be converted into the right to receive 0.62 shares
of Iwerks Common Stock; (b) each issued and outstanding share of Showscan
Preferred Stock (other than shares then owned by Showscan or any of its
subsidiaries, shares of Showscan Preferred Stock then held by Iwerks or any of
its subsidiaries and shares of Showscan Preferred Stock as to which appraisal
rights have been perfected, and not withdrawn or lost, under the DGCL) will be
converted into the right to receive shares of Iwerks Common Stock in an amount
equal to that number of shares of Showscan Common Stock into which such share of
Showscan Preferred Stock is convertible immediately prior to the Merger
multiplied by 0.62; (c) each outstanding option and warrant of Showscan will be
assumed by Iwerks in accordance with the Merger Agreement; and (d) the
conversion obligations under each outstanding 8% Convertible Note due September
1, 1999 (the "8% Notes") will be assumed by Iwerks in accordance with the Merger
Agreement and will be exercisable upon the same terms and conditions as under
the agreement entered into in connection with the issuance of the 8% Notes
except that each 8% Note, upon conversion, in lieu of each share of Showscan
Common Stock deliverable on such conversion, will be convertible into such
number of shares of Iwerks Common Stock which are receivable at the Effective
Time by a holder of one share of Showscan Common Stock. See "THE MERGER
AGREEMENT -- General" and "THE MERGER AGREEMENT -- Merger Consideration."
Based upon the number of shares of Showscan Capital Stock outstanding at the
Showscan Record Date, the former Showscan stockholders will hold, immediately
after the Merger, approximately 25.2% of the aggregate number of outstanding
shares of Iwerks Common Stock.
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<PAGE>
Fractional Shares. Fractional shares of Iwerks Common Stock will not be
issued in connection with the Merger. A holder otherwise entitled to a
fractional share will be paid cash in lieu of such fractional share in an amount
equal to the product of the Average Price (as defined in the Merger Agreement)
of a share of Iwerks Common Stock multiplied by the fraction of a share to which
such holder would otherwise be entitled. See "THE MERGER AGREEMENT -- Exchange
of Shares."
Iwerks' Reasons for the Merger; Recommendations of the Iwerks Board. The
Iwerks Board, by unanimous vote, has determined that the Merger is in the best
interests of the stockholders of Iwerks and recommends that the stockholders of
Iwerks vote in favor of the issuance of shares of Iwerks Common Stock in
exchange of shares of Showscan Capital Stock pursuant to the Merger Agreement
(the "Merger Proposal"). The decision of the Iwerks Board to enter into the
Original Merger Agreement and the Amendment and to recommend that stockholders
vote in favor of the Merger Proposal is based upon its evaluation of a number of
factors including, among others, the opinions of Suntrust Equitable Securities
("Equitable Securities") and Resource Financial Corporation ("Resource
Financial"), Iwerks' financial advisors for the Merger, to the effect that, as
of the dates of their respective opinions and based upon and subject to certain
matters stated therein, the consideration to be paid by Iwerks pursuant to the
Merger Agreement is fair to Iwerks' stockholders from a financial point of view.
See "THE MERGER -- Background of the Merger" and "THE MERGER -- Opinions of
Financial Advisors -- Iwerks."
Additionally, the Iwerks Board and management believe that the Merger will
expand Iwerks' leadership position in the ride simulation industry, 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 world wide provide for access to new
markets and increase recurring revenues while allowing significant cost savings
of Showscan's general and administrative expenses and synergies from the
combination of the two companies. In addition, each of Iwerks and Showscan have
substantial federal and state net operating loss carryovers expiring in 2012
which will be available, subject to certain limitations, to the combined
company. See "IWERKS ENTERTAINMENT, INC. AND SHOWSCAN ENTERTAINMENT INC.
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA," "THE MERGER --
Iwerks' Reasons for the Merger; Recommendations of the Iwerks Board" and "THE
MERGER -- Opinions of Financial Advisors --Iwerks."
Showscan's Reasons for the Merger; Recommendations of the Showscan Board. The
Showscan Board, by unanimous vote, has determined that the Merger is in the best
interests of the stockholders of Showscan and recommends that the stockholders
of Showscan vote to approve the Merger and the Merger Agreement. The decision
of the Showscan Board to enter into the Merger Agreement and to recommend that
stockholders vote to approve the Merger and the Merger Agreement is based upon
its evaluation of a number of factors including, among others, the opinion of
Allen & Company Incorporated ("Allen & Company"), Showscan's financial advisor
for the Merger, to the effect that, as of such date and based upon and subject
to certain matters stated therein, the consideration to be paid by Iwerks
pursuant to the Merger Agreement is fair to holders of Showscan's Capital Stock
from a financial point of view. See "THE MERGER -- Reasons for the Merger;
Recommendations of the Showscan Board" and "THE MERGER -- Opinion of Financial
Advisors -- Showscan."
Opinion of Iwerks' Financial Advisor. On December 29, 1997, prior to the
execution of the Amendment, each of Equitable Securities and Resource Financial
rendered to the Iwerks Board its oral opinion (subsequently confirmed in
writing) to the effect that, as of such date and based upon and subject to
certain matters stated therein, the consideration to be paid by Iwerks pursuant
to the Merger Agreement is fair to the Iwerks stockholders from a financial
point of view. Copies of the full text of the written opinions of Equitable
Securities and Resource Financial dated December 29, 1997 which set forth the
assumptions made, procedures followed, matters considered and limits of their
review, are attached to this Joint Proxy Statement/Prospectus as Appendices B
---------- -
and D, respectively and should be read carefully in their entirety. The
-
opinions of Equitable Securities and Resource Financial do not address any other
aspect of the Merger or the related transactions and do not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
Iwerks Annual Meeting. See "THE MERGER -- Opinions of Financial Advisors --
Iwerks."
Opinion of Showscan's Financial Advisor. Allen & Company has acted as
financial advisor to Showscan in connection with the Merger and rendered its
written opinion to the Showscan Board on December 29, 1997 to the effect that,
as of the date of such opinion and based upon and subject to certain matters
stated therein, the consideration to be received by the holders of Showscan
Capital Stock pursuant to the Merger Agreement was fair
4
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to such holders from a financial point of view. The full text of the written
opinion of Allen & Company dated December 29, 1997, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached as Appendix E to this Joint Proxy Statement/Prospectus and should be
-------- -
read carefully in its entirety. The opinion of Allen & Company is directed only
to the fairness of the consideration issued by Iwerks from a financial point of
view, does not address any other aspect of the Merger or related transactions
and does not constitute a recommendation to any stockholder as to how such
stockholder should vote at the Showscan Special Meeting. See "THE MERGER --
Opinions of Financial Advisors -- Showscan."
Interests of Certain Persons in the Merger. In considering the recommendation
of the Showscan Board with respect to the Merger Agreement and the transactions
contemplated thereby, stockholders should be aware that certain members of the
management of Showscan and the Showscan Board have certain interests in the
Merger that are in addition to the interests of stockholders of Showscan
generally. The Showscan Board entered into agreements with the following
officers that would protect each such officer in the case of a change in control
of Showscan: Dennis Pope, President and Chief Executive Officer; W. Tucker
Lemon, Senior Vice President, General Counsel and Secretary; Gregory W. Betz,
Vice President and Director of Finance; Russell H. Chesley, Vice President --
Worldwide Sales; Michael B. Ellis, Vice President, Engineering and Product
Development and Rui C. Guimarais, Vice President - Film Licensing. The maximum
amount that could be received by Messrs. Pope and Lemon and all six officers in
the aggregate under such agreements, assuming termination upon the closing of
the Merger, are $500,000, $225,000 and $1,070,000, respectively. In addition,
under such agreements the unvested options of Messrs. Pope and Lemon become
vested upon a Change of Control. Assuming that the Merger closes on March 31,
1998, the number of unvested options which would become exercisable upon the
closing for Messrs. Pope and Lemon equal 123,750 and 33,750, respectively. As
of the date hereof, the exercise price of all such options exceeds the closing
sales price of Showscan's Common Stock. All such benefits shall be in lieu of
any benefits provided under any such officer's employment agreement, if any. In
addition to the foregoing arrangements, Iwerks has agreed to use its
commercially reasonable efforts to retain the services of Messrs. Pope and Lemon
to assist in the integration of the two companies for a period of up to six
months following the Effective Time on terms mutually satisfactory to Iwerks and
such individuals. See "THE MERGER -- Interests of Certain Persons in the
Merger" and "THE MERGER AGREEMENT -- Certain Covenants."
Conditions to the Merger. The obligations of Iwerks and Showscan to
consummate the Merger are subject to the fulfillment or waiver of certain
conditions, including, among others, (a) obtaining requisite stockholder
approvals, (b) the absence of any injunction which prohibits the consummation of
the Merger, (c)the effectiveness of the Registration Statement, (d) obtaining
approval for listing the shares of Iwerks Common Stock issued in connection with
the Merger on The Nasdaq National Market, (e) receipt by each of Iwerks and
Showscan of letters from their respective accountants (the "Iwerks Pooling
Letter" and the "Showscan Pooling Letter," respectively) which concur with the
conclusion of Iwerks' and Showscan's management that the accounting for the
Merger as a "pooling of interests" will be appropriate under Accounting
Principles Opinion No. 16 if consummated in accordance with the Merger Agreement
and (f) the receipt of certain legal opinions with respect to the tax
consequences of the Merger. See "THE MERGER AGREEMENT -- Conditions to the
Merger."
Effective Time of the Merger. The Merger will become effective (the
"Effective Time") upon the filing of a Certificate of Merger (the "Certificate
of Merger") with the Secretary of State of the State of Delaware which
certificate will be filed as promptly as practicable after the requisite
stockholder approvals have been obtained and all other conditions to the Merger
have been satisfied or waived. Subject to the satisfaction (or waiver) of the
other conditions to the obligations of Iwerks and Showscan to consummate the
Merger, it is presently expected that the Merger will be consummated on March
31, 1998 or as soon thereafter as such conditions are satisfied. See "THE
MERGER AGREEMENT -- General."
Exchange of Stock Certificates. Upon consummation of the Merger, each holder
of a certificate or certificates representing shares of Showscan Capital Stock
("Certificates") outstanding immediately prior to the Merger will, upon the
surrender thereof together with a letter of transmittal, duly executed, to a
designated exchange agent (the "Exchange Agent"), be entitled to receive a
certificate or certificates representing the number of whole shares of Iwerks
Common Stock into which such shares of Showscan Capital Stock will have been
automatically converted as a result of the Merger. After the consummation of
the Merger, the Exchange Agent will mail a letter of transmittal with
instructions to all holders of record of Showscan Capital Stock as of the
Effective Time for use in surrendering their Certificates in exchange for
certificates representing shares of Iwerks Common Stock. CERTIFICATES SHOULD
NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL AND INSTRUCTIONS ARE
RECEIVED. See "THE MERGER AGREEMENT -- Exchange of Shares."
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Appraisal Rights. Section 262 of the DGCL ("Section 262") provides holders of
Showscan Preferred Stock with appraisal rights in respect of such shares of
Showscan Preferred Stock, subject to satisfaction by such stockholder of the
conditions for appraisal rights established by Section 262. Each holder of
Showscan Preferred Stock has executed an agreement pursuant to which it waives
its appraisal rights in connection with the Merger. The DGCL does not provide
appraisal rights to the holders of the Iwerks Common Stock or the Showscan
Common Stock. See "THE MEETINGS OF STOCKHOLDERS -- No Dissenters' Rights."
Termination. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, before or after the approval
by the stockholders of Iwerks and Showscan, respectively, in a number of
circumstances, which include, among others: (a) by mutual written consent of
Iwerks and Showscan; (b) by either Iwerks or Showscan if (i) the Merger shall
not have been consummated by March 31, 1998, (ii) a court, agency or commission
issues a nonappealable final order permanently restraining or otherwise
prohibiting the Merger, (iii) the approval of the issuance of the Iwerks Common
Stock pursuant to the Merger Agreement by Iwerks' stockholders shall not have
been obtained at a stockholders' meeting duly held for such purpose (including
any adjournment thereof), or (iv) the approval of the Merger and the Merger
Agreement by the Showscan stockholders shall not have been obtained at a
stockholders' meeting duly held for such purpose (including any adjournment
thereof), (c) by action of the Iwerks Board if the Showscan Board withdraws or
modifies in a manner materially adverse to Iwerks its approval or recommendation
to the Showscan stockholders of the Merger Agreement or the Merger, (d) by
action of the Showscan Board if (i) Showscan receives a proposal relating to a
merger, acquisition, consolidation or similar transaction or relating to any
purchase of all or any significant portion of the assets of Showscan and its
subsidiaries taken as a whole, or 25% or more of the outstanding voting power of
the Showscan Capital Stock (an "Alternative Proposal") and the Showscan Board
determines it is necessary to terminate the Merger Agreement in order to fulfill
its fiduciary duties to the Showscan stockholders and the Showscan Board has
received a written opinion from its financial advisor that the Alternative
Proposal would result in a transaction more favorable to Showscan's stockholders
from a financial point of view than the Merger or (ii) the Iwerks Board
withdraws or modifies in a manner materially adverse to Showscan its approval of
the Merger Agreement or the Merger or recommendation to the Iwerks stockholders
of the Merger Proposal. The Merger Agreement may not be terminated as a result
of a decline in the value of the Iwerks Common Stock.
Termination Fees. Showscan is obligated to pay to Iwerks a termination fee of
$1,500,000 (the "Showscan Termination Fee") in the following circumstances: (a)
Showscan terminates the Merger Agreement as a result of an Alternative Proposal;
provided that the Showscan Termination Fee is not payable if the Merger
Agreement is terminated by Showscan prior to January 15, 1998 as a result of an
Alternative Proposal (but in such case Showscan is obligated to reimburse Iwerks
an amount equal to all out-of-pocket expenses incurred by Iwerks up to the date
of termination of the Merger Agreement up to a maximum amount of $1,000,000),
(b) the Showscan Board withdraws or modifies in a manner materially adverse to
Iwerks its approval or recommendation to the Showscan stockholders of the Merger
Agreement or the Merger, (c) if the approval of the Merger and the Merger
Agreement by the Showscan stockholders shall not have been obtained at a
stockholders' meeting duly held for such purpose (including any adjournment
thereof) if prior to such meeting an Alternative Proposal is publicly announced
and Showscan consummates such Alternative Proposal within 12 months of the
termination of the Merger Agreement or (d) Showscan's accountants do not deliver
the Showscan Pooling Letter because of either (i) false or inaccurate statements
made by Showscan in the representation letter delivered to its accountants or
(ii) an affiliate of Showscan transfers Showscan Capital Stock in violation of
the pooling rules or (iii) any action taken by Showscan.
Iwerks is obligated to pay to Showscan a termination fee of $1,500,000 in the
following circumstances: (a) the Iwerks Board withdraws or modifies in a manner
materially adverse to Showscan its approval of the Merger Agreement or the
Merger or recommendation to the Iwerks stockholders of the Merger Proposal or
(b) Iwerks' accountants do not deliver the Iwerks Pooling Letter because of
either (i) false or inaccurate statements made by Iwerks in the representation
letter delivered to its accountants or (ii) an affiliate of Iwerks transfers
Iwerks Common Stock in violation of the pooling rules or (iii) any action taken
by Iwerks.
Option Granted to Iwerks. Showscan has granted to Iwerks an option,
exercisable upon the occurrence of certain events, to purchase for an amount
equal to $4.14 per share in cash up to 330,714 shares of Showscan Common Stock,
or 5.9% of the Showscan Common Stock outstanding as of the Showscan Record Date
if such option is exercised.
6
<PAGE>
Certain Federal Income Tax Consequences. The Merger is intended to qualify as
a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), so that no gain or loss would be
recognized by Iwerks, Showscan or Merger Corp. and no gain or loss would be
recognized by the stockholders of Showscan, except in respect of cash received
in lieu of fractional shares. No ruling from the Internal Revenue Service will
be obtained with respect to the tax consequences. A condition to the
consummation of the Merger is that Iwerks and Showscan each receive from their
respective counsel a legal opinion to the effect that the Merger will constitute
a tax free reorganization. See "THE MERGER -- Certain Federal Income Tax
Consequences."
The Nasdaq National Market. The Iwerks Common Stock and the Showscan Common
Stock each is traded on The Nasdaq National Market under the symbols "IWRK" and
"SHOW," respectively. Iwerks will apply for listing of the additional shares of
Iwerks Common Stock issued to the Showscan stockholders in connection with the
Merger on The Nasdaq National Market. See "THE MERGER -- The Nasdaq National
Market."
Accounting Treatment. The Merger will be accounted for as a "pooling of
interests" under generally accepted accounting principles. See "THE MERGER --
Accounting Treatment."
Resales of Iwerks Common Stock. The shares of Iwerks Common Stock to be
issued to the stockholders of Showscan in connection with the Merger have been
registered under the Securities Act. All shares of Iwerks Common Stock received
by Showscan stockholders in the Merger will be freely transferable, except that
shares of Iwerks Common Stock received by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of Showscan at
the time of the Showscan Special Meeting will be subject to certain resale
restrictions. See "THE MERGER -- Resale Restrictions."
7
<PAGE>
Iwerks Entertainment, Inc.
Selected Condensed Financial Data
(Dollars in Thousands Except Per Share Information)
The following table sets forth selected consolidated financial data of
Iwerks and is derived from the audited consolidated financial statements of
Iwerks. The financial data for the six month periods ended December 31, 1996 and
1997 are derived from unaudited condensed consolidated financial statements. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which Iwerks considers necessary for a fair presentation of
the financial position and the results of operations for these periods.
Operating results for the six months ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the entire fiscal year ended
June 30, 1998. The data should be read in conjunction with the audited
consolidated financial statements and the unaudited consolidated financial
statements of Iwerks, related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations for Iwerks" included elsewhere in
this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
--------------------------------------------------------------- ------------------------
1993 1994 (1) 1995 (1) 1996 1997 1996 1997
--------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Total revenue $ 32,239 $ 36,625 $ 44,975 $ 48,516 $ 39,584 $ 19,618 $ 14,041
Income (loss) from operations 1,412 (8,522) (13,893) 2,464 (10,573)(2) (277) (4,363)
Net income (loss) $ 1,247 $ (8,055) $ (13,473) $ 3,099 $ (9,956)(2) $ 117 $ (4,006)
Net income (loss) per share - basic $ 0.18 $ (1.16) $ (1.32) $ 0.28 $ (0.84)(2) $ 0.01 $ (0.33)
Net income (loss) per share - diluted $ 0.17 $ (1.16) $ (1.32) $ 0.26 $ (0.84)(2) $ 0.01 $ (0.33)
Weighted average shares outstanding -
basic 7,013 6,931 10,210 10,945 11,855 11,675 12,160
Weighted average shares outstanding -
diluted 7,343 6,931 10,210 12,144 11,855 12,335 12,160
FINANCIAL POSITION (AT PERIOD END):
Cash, cash equivalents and short-term
investments $ 2,101 $ 26,526 $ 20,586 $ 25,281 $ 19,067 $ 22,328 $ 17,380
Total assets 25,386 81,235 71,626 72,926 64,529 72,224 57,850
Capital lease obligations and
long-term debt, excluding
current portion 2,757 3,349 2,130 2,732 1,827 2,257 1,511
Stockholders' equity 7,278 62,335 50,374 56,665 48,386 57,095 44,380
Total liabilities and stockholders'
equity $ 25,386 $ 81,235 $ 71,626 $ 72,926 $ 64,529 $ 72,22 $ 57,850
PER SHARE DATA:
Net book value per common share $ 2.44 $ 6.25 $ 4.76 $ 4.89 $ 3.98 $ 4.85 $ 3.65
Common shares outstanding 2,985 9,968 10,592 11,588 12,160 11,770 12,161
<CAPTION>
- -------------------
(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.
<S> <C> <C> <C> <C> <C> <C> <C>
SHARE INFORMATION:
Weighted average shares
outstanding for basic
computation 7,013 6,931 10,210 10,945 11,855 11,675 12,160
Effect of dilutive securities:
Options and warrants 330 (a) (a) 1,199 (a) 660 (a)
------ ------ ------ ------ ------ ------ ------
Weighted average shares outstanding
for diluted computation 7,343 6,931 10,210 12,144 11,855 12,335 12,160
</TABLE>
- --------------------
(a) These common equivalent shares were antidilutive.
8
<PAGE>
Showscan Entertainment Inc.
Selected Condensed Financial Data
(Dollars in Thousands, Except Per Share Information)
The following selected financial data for the five years ended March
31, 1997 are derived from the audited consolidated financial statements of
Showscan. The financial data for the nine month periods ended December 31, 1996
and 1997 are derived from unaudited condensed consolidated financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which Showscan considers necessary for
a fair presentation of the financial position and the results of operations
for these periods. Operating results for the nine months ended December 31,
1997 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending March 31, 1998. The data should be read in
conjunction with the audited consolidated financial statements and the
unaudited condensed consolidated financial statements of Showscan, related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Showscan" included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION> Nine Months Ended
Year Ended March 31, December 31,
--------------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Total revenue
$11,023 $ 5,215 $15,437 $17,465 $17,711 $12,939 $ 7,136
Income (loss) from operations (3,573) (7,818) 268 519 (1,008) (1,865) (4,954)
Net income (loss) $(3,536) $(7,745) $ 79 $ 101 $(3,919) (1) $(2,596) $(5,875)
Net income (loss) per share - $ (0.76) $ (1.68) $ 0.02 $ 0.02 $ (0.70) $ (0.47) $ (1.04)
basic
Net income (loss) per share - $ (0.76) $ (1.68) $ 0.01 $ 0.01 $ (0.70) $ (0.47) $ (1.04)
diluted
Weighted average shares
outstanding - basic 4,680 4,680 5,073 5,345 5,594 5,579 5,642
Weighted average shares outstanding 4,680 4,680 6,798 7,472 5,594 5,579 5,642
- diluted
FINANCIAL POSITION (AT PERIOD END):
Cash, cash equivalents and
short-term investments $ 2,405 $ 2,371 $ 6,791 $ 8,141 $ 2,562 $ 2,697 $ 2,188
Total assets 20,300 14,382 21,230 26,015 19,928 22,101 16,038
Capital lease obligations and
long-term debt 3,004 4,676 3,121 6,620 5,690 5,690 5,690
Stockholder's equity 12,364 5,074 13,249 13,298 10,243 12,298 4,368
Total liabilities and
stockholders' equity $20,300 $14,382 $21,230 $26,015 $19,928 $22,101 $16,038
PER SHARE DATA:
Net book value per common share $ 2.64 $ 1.08 $ 2.53 $ 2.43 $ 1.82 $ 2.18 $ 0.77
Common shares outstanding 4,680 4,680 5,243 5,480 5,642 5,642 5,642
</TABLE>
- ---------------
(1) 1997 net loss includes a write down of $1.8 million ($0.32 loss per share)
for the effect of impairment loss on equity in net operations of owned &
operated theaters.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
SHARE INFORMATION
Weighted average shares outstanding
for basic computation 4,680 4,680 5,073 5,345 5,594 5,579 5,642
Effect of dilutive securities:
Options and Warrants (a) (a) 1,010 1,155 (a) (a) (a)
Series A Preferred Stock (a) (a) 165 - - - -
Series C Preferred Stock (a) (a) 550 972 (a) (a) (a)
Weighted average shares outstanding ----- ----- ----- ----- ------- -------- -------
for diluted computation 4,680 4,680 6,798 7,472 5,594 5,579 5,642
</TABLE>
- ---------------
(a) These common equivalent shares were antidilutive.
9
<PAGE>
Iwerks Entertainment, Inc. and Showscan Entertainment Inc.
Selected Unaudited Pro Forma Condensed
Combined Financial Data
(in thousands)
The following table sets forth selected unaudited pro forma condensed
combined financial data of Iwerks and Showscan and is derived from the Unaudited
Pro Forma Condensed Combined Financial Statements, included elsewhere herein,
which reflects the acquisition of Showscan and the issuance of the Iwerks Common
Stock as if such acquisition and issuance had occurred on July 1, 1994. The
data should be read in conjunction with the audited consolidated financial
statements, the unaudited condensed consolidated financial statements, related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for Iwerks and for Showscan included elsewhere in this
Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended June 30 Ended
----------------------------------------- December 31
OPERATIONS: 1995 1996 1997 1997
------ --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenue $ 60,513 $ 65,935 $ 56,940 $ 19,222
Income (loss) from operations (13,541) 2,846 (12,129) (8,856)
Net income (loss) (1) (13,410) 3,109 (14,068) (2) (8,370)
Net income (loss) per share - basic (1) (1.00) 0.22 (0.92) (2) (0.53)
Net income (loss) per share - diluted (1) (1.00) 0.19 (0.92) (2) (0.53)
Weighted average shares outstanding - basic 13,355 14,259 15,323 15,658
Weighted average shares outstanding -
diluted 13,355 16,777 15,323 15,658
FINANCIAL POSITION (AT DECEMBER 31, 1997):
Cash, cash equivalents and short-term
investments $ 19,568
Total assets 72,792
Capital lease obligations and long-term
debt, including short term portion 8,894
Stockholders' equity 42,559
Total liabilities and stockholders' equity 72,792
PER SHARE DATA:
Net book value per common share $ 2.62
Common shares outstanding 16,261
</TABLE>
(1) Pro forma combined comparative per share net income (loss) amounts do
not include the significant cost savings and economies of scale to be
realized through the Merger in the areas of purchasing, insurance,
marketing, advertising, communications, general and administrative
expenses and the consolidation of facilities, employees and other
resources. It is estimated that had the companies been combined for the
full year the initial cost savings could have been $4.8 million or $0.31
per share in 1997. However, there can be no assurances that all of these
savings could or would have been realized.
(2) Pro forma net income (loss) and per share amounts include provisions for
impairment ($7,357,000 or $0.44 loss per share) pursuant to the adoption
by both Iwerks and Showscan of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" in their respective 1997 fiscal years.
10
<PAGE>
MARKET PRICE INFORMATION
The Iwerks Common Stock and the Showscan Common Stock are 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 and the Showscan
Common Stock.
<TABLE>
<CAPTION>
Iwerks Common Stock Showscan Common Stock
------------------------------------ -----------------------------------
High Low High Low
-------- -------- -------- --------
1995:
- ------------------------------------
<S> <C> <C> <C> <C>
First Quarter $ 5-3/8 $ 4 $ 6-3/4 $ 5-1/4
Second Quarter 4-1/2 2-7/8 6-1/2 5
Third Quarter 6-3/8 4 8-1/8 5-1/4
Fourth Quarter 6-7/8 4-5/8 7-3/4 5-3/4
1996:
- ------------------------------------
First Quarter $ 8-1/4 $ 6-1/8 $ 7-1/4 $ 5-3/4
Second Quarter 12 6-15/16 8-1/8 5-7/8
Third Quarter 10-3/8 6-3/8 7-7/8 5
Fourth Quarter 7-1/4 4-5/8 6-3/4 4-7/8
1997:
- ------------------------------------
First Quarter $ 6 $ 4-1/4 $ 5-3/8 $ 2-1/4
Second Quarter 5-1/4 3-11/16 3 2-1/8
Third Quarter 5-5/8 3-1/2 3-1/2 2-1/4
Fourth Quarter 4-3/8 2-1/4 3-3/8 1
</TABLE>
The closing sale prices per share of the Iwerks Common Stock and the Showscan
Common Stock on August 4, 1997, the last trading day preceding public
announcement of the Original Merger Agreement, were $4 7/8 and $2 11/16
respectively. The closing sale prices per share of the Iwerks Common Stock and
the Showscan Common Stock on December 29, 1997, the last trading day preceding
public announcement of the Amendment, were $2.25 and $1.06, respectively. On
December 29, 1997 on a pro forma basis, the merger consideration per share of
Showscan Common Stock would be equal to approximately $1.40, or a 31.3% premium
over the closing sale price per share of the Showscan Common Stock on such date.
On March 3, 1998, the latest practicable trading day before the printing of
this Joint Proxy Statement/Prospectus, the closing sale price per share of
Iwerks Common Stock was $2.69 and the closing sale price per share of Showscan
Common Stock was $1.44 (or $1.67 on a pro forma basis).
As of February 12, 1998, Iwerks and Showscan had approximately 400 and 124
holders of record, respectively. No dividends have been declared or paid on
either Iwerks Common Stock or Showscan Common Stock since the incorporation of
Iwerks and Showscan, respectively. Each of Iwerks and Showscan currently
intends to retain earnings for use in their respective businesses and does not
anticipate paying any cash dividends on their common stock in the foreseeable
future. In addition, the Merger Agreement prohibits the payment of any
dividends by Iwerks or Showscan prior to the Effective Time. Any payment of
dividends following the Effective Time will be at the discretion of the Iwerks
Board and will be dependent upon the combined company's financial condition,
results of operations, capital requirements and such other factors as the Iwerks
Board deems relevant.
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables present selected historical per common share data for
Iwerks and Showscan, pro forma data per share of Iwerks Common Stock and
equivalent pro forma data per share of Showscan Common Stock. The pro forma
combined per share data and the pro forma equivalent per share data are derived
from the Unaudited Pro Forma Condensed Combined Financial Statements, included
elsewhere herein, which reflect the acquisition of Showscan and the issuance of
the Iwerks Common Stock in exchange for the outstanding Showscan Capital Stock
as if such acquisition and issuance had occurred on July 1, 1994. The Merger
will be accounted for as a pooling of interests. The Showscan Pro Forma
Equivalent data is based on the respective pro forma amount per share of Iwerks
Common Stock multiplied by 0.62, the number of shares of Iwerks Common Stock
issued in exchange for one share of Showscan Common Stock in the Merger. This
data should be read in conjunction with the consolidated financial statements of
Iwerks and Showscan and the Unaudited Pro Forma Condensed Combined Financial
Statements included elsewhere herein.
The Unaudited Pro Forma Condensed Combined Financial Statements are not
necessarily indicative of the operating results which would have been achieved
had the Merger been effected as of the beginning of the periods presented and
should not be construed as representative of future operations.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31
--------------------------------------------------- ----------------
1995 1996 1997 1997
-------- ------- ------- ----------------
<S> <C> <C> <C> <C>
IWERKS:
Net income (loss) per share - basic $ (1.32) $ 0.28 $ (0.84) $ (0.33)
Net income (loss) per share - diluted $ (1.32) $ 0.26 $ (0.84) $ (0.33)
Book value of common stock $ 4.76 $ 4.89 $ 3.98 $ 3.65
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31
--------------------------------------------------- ----------------
1995 1996 1997 1997
-------- ------- ------- ----------------
<S> <C> <C> <C> <C>
SHOWSCAN:
Net income (loss) per share - basic $ 0.02 $ 0.02 $ (0.70) $ (1.04)
Net income (loss) per share - diluted $ 0.01 $ 0.01 $ (0.70) $ (1.04)
Book value of common stock $ 2.53 $ 2.43 $ 1.82 $ 0.77
<CAPTION>
Six Months Ended
Year Ended June 30, December 31
--------------------------------------------------- ----------------
1995 1996 1997 1997
-------- ------- ------- ----------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED (1):
Net income (loss) per share - basic (2) (4) $ (1.00) $ 0.22 $ (0.92) $ (0.53)
Net income (loss) per share - diluted (2) (4) $ (1.00) $ 0.19 $ (0.92) $ (0.53)
Book value of common stock $ 2.62
SHOWSCAN PRO FORMA EQUIVALENT (3):
Net income (loss) per share - basic $ (0.62) $ 0.14 $ (0.57) $ (0.33)
Net income (loss) per share - diluted $ (0.62) $ 0.12 $ (0.57) $ (0.33)
Book value of common stock $ 1.62
</TABLE>
____________________________
(1) Based on combined data for Iwerks and Showscan after giving effect at the
beginning of each of the respective periods to the conversion of each
share of Showscan Common Stock into Iwerks Common Stock at the exchange
ratio of 0.62.
(2) Pro forma combined comparative per share net income (loss) amounts do not
include the significant cost savings and economies of scale to be realized
through the Merger in the areas of purchasing, insurance, marketing,
advertising, communications, general and administrative expenses and the
consolidation of facilities, employees and other resources. It is
estimated that had the companies been combined for the full year the
initial cost savings could have been $4.8 million or $0.31 per share in
1997. However, there can be no assurances that all of these savings could
or would have been realized.
(3) Represents the pro forma equivalent of one share of Showscan Common Stock
calculated by multiplying pro forma combined data by the exchange ratio of
0.62.
(4) Pro forma net income (loss) and per share amounts include provisions for
impairment ($7,357,000 or $0.44 loss per share) pursuant to the adoption
by both Iwerks and Showscan of SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in their
respective 1997 fiscal years.
12
<PAGE>
RISK FACTORS
Iwerks stockholders and Showscan stockholders should consider carefully the
following factors, as well as the other information appearing elsewhere in
this Joint Proxy Statement/Prospectus in evaluating the Merger.
This Joint Proxy Statement/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 and/or Showscan, their
respective directors or officers with respect to, among other things (a) trends
affecting the financial condition or results of operations of Iwerks, Showscan
and/or the combined company, and (b) the business and growth strategies of
Iwerks, Showscan and/or the combined company. The stockholders of Iwerks and
Showscan 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 Joint Proxy
Statement/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 either
before or after the date of the Iwerks Annual Meeting. 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 Effective Time.
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 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.
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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
time of the mailing of this Joint Proxy Statement/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 September 30, 1997, which are estimated
to be approximately $4.7 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 $19.2 million cash balance of Iwerks at September 30, 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 "Risk
Factors -- 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 consummation. 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 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
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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 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 ending 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 ending
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
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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 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 September 30, 1997, which are estimated to be approximately
$4.7 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 $19.2
million cash balance of Iwerks at September 30, 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. See "MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF IWERKS."
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
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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 Merger 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. See "THE MERGER --
Background of the Merger."
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.
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 either before or after the date of the Iwerks Annual Meeting.
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 Effective Time.
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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 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 "Exchange Ratio"). See "THE
MERGER AGREEMENT -- Merger Consideration." 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 in
the U.S. District Court of New York 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 but, to date, has not made
such a motion. 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
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 DGCL 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
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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.
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.
THE MEETINGS OF STOCKHOLDERS
GENERAL
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This Joint Proxy Statement/Prospectus is being furnished to holders of Iwerks
Common Stock in connection with the solicitation of proxies by the Iwerks Board
for use at the Iwerks Annual Meeting to be held on March 31, 1998, at Iwerks'
offices located at 4540 West Valerio Street, Burbank, California 91505,
commencing at 10:00 a.m., local time, and at any adjournments or postponements
thereof.
This Joint Proxy Statement/Prospectus also is being furnished to holders of
Showscan Capital Stock in connection with the solicitation of proxies by the
Showscan Board for use at the Showscan Special Meeting to be held on March 31,
1998 at Showscan's offices located at 3939 Landmark Street, Culver City,
California 90232, commencing at 10:00 a.m., local time, and at any adjournments
or postponements thereof.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to stockholders of Iwerks and Showscan on or about March 4,
1998.
MATTERS TO BE CONSIDERED AT THE MEETINGS
Iwerks Annual Meeting. At the Iwerks Annual Meeting, holders of Iwerks Common
Stock will consider and vote upon:
(i) the issuance of shares of Iwerks Common Stock in exchange for shares of
Showscan Capital Stock pursuant to the Merger Agreement (the "Merger Proposal");
(ii) the election of one Class III Director to the Iwerks Board (the "Director
Proposal");
(iii) the amendments to Iwerks' 1994 Stock Incentive Plan to increase the
number of shares reserved for issuance from 1,750,000 to 2,500,000 and to
provide a per employee limit on stock option grants in any one year (the "Option
Plan Proposals"); and
(vi) such other matters as may properly be brought before the Iwerks Annual
Meeting, or any postponements or adjournments of the Iwerks Annual Meeting.
Showscan Special Meeting. At the Showscan Special Meeting, holders of
Showscan Capital Stock will consider and vote upon a proposal to approve and
adopt the Merger Agreement and such other matters as may properly be brought
before the Showscan Special Meeting, or any postponements or adjournments of the
Showscan Special Meeting.
Boards of Directors' Recommendations. THE IWERKS BOARD HAS UNANIMOUSLY
APPROVED THE MERGER PROPOSAL, THE DIRECTOR PROPOSAL AND THE OPTION PLAN
PROPOSALS AND RECOMMENDS A VOTE FOR APPROVAL OF SUCH PROPOSALS.
The Showscan Board has unanimously approved the Merger Agreement and
recommends a vote FOR approval and adoption of the Merger Agreement and the
Merger.
RECORD DATES; VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
Iwerks. The Iwerks Board has fixed the close of business on February 12, 1998
as the Iwerks Record Date. Only holders of record of shares of Iwerks Common
Stock on the Iwerks Record Date are entitled to notice of and to vote at the
Iwerks Annual Meeting. As of February 12, 1998 there were 12,161,250 shares of
Iwerks Common Stock outstanding and entitled to vote held by approximately 400
stockholders of record. Each holder of record as of the Iwerks Record Date of
Iwerks Common Stock is entitled to cast one vote per share. The presence, in
person or by proxy, of the holders of a majority of the outstanding shares of
Iwerks Common Stock entitled to vote is necessary to constitute a quorum at the
Iwerks Annual Meeting.
The approval of the Director Proposal will require the affirmative vote of a
plurality of the votes cast for the election of directors at the Iwerks Annual
Meeting. The approval of the Merger Proposal and the Option Plan Proposals will
require the affirmative vote of the holders of a majority of the shares of
Iwerks Common Stock present at the Iwerks Annual Meeting and entitled to vote.
The approval of the issuance of shares of Iwerks Common Stock pursuant to the
Merger is required by the rules of the National Association of Securities
Dealers, Inc. governing corporations with securities quoted on The Nasdaq
National Market.
As of February 12, 1998, directors and executive officers of Iwerks, and their
affiliates as a group beneficially owned 1,023,970 shares of Iwerks Common Stock
(excluding shares subject to exercisable options), or approximately 8.4% of the
shares of Iwerks Common Stock outstanding as of such date. Certain directors
and executive officers of Iwerks, and their affiliates have executed an
agreement with Showscan pursuant to which he agrees to vote his shares of Iwerks
Common Stock in favor of the Merger Proposal and has granted to certain
executive officers of Showscan a proxy to do the same in his place and stead
(collectively, the "Iwerks Voting Agreements"). In addition, each of the
directors and executive officers of Iwerks has advised Iwerks that he intends to
vote or direct the vote of all shares of Iwerks Common Stock over which he has
voting control for approval of the Director Proposal and the Option Plan
Proposals.
As of February 12, 1998, Showscan owned no outstanding shares of Iwerks Common
Stock.
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Showscan. The Showscan Board has fixed the close of business on February 12,
1998 as the Showscan Record Date. Only holders of record of shares of Showscan
Common Stock and Showscan Preferred Stock on the Showscan Record Date are
entitled to notice of and to vote at the Showscan Special Meeting. On February
12, 1998, there were 5,642,058 shares of Showscan Common Stock and 49,000 shares
of Showscan Preferred Stock (representing 972,222 shares of Showscan Common
Stock on an as-converted basis) outstanding and entitled to vote at the Showscan
Special Meeting held by approximately 124 stockholders of record. Each holder
of record as of the Showscan Record Date of Showscan Common Stock is entitled to
cast one vote per share and each holder of record as of the Showscan Record Date
of Showscan Preferred Stock is entitled to a number of votes equal to the number
of shares of Showscan Common Stock issuable upon conversion of its Showscan
Preferred Stock. The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of Showscan Capital Stock, on an as-converted
basis, entitled to vote is necessary to constitute a quorum at the Showscan
Special Meeting.
Under the DGCL, the affirmative vote, in person or by proxy, of the holders of
a majority of the shares of Showscan Common Stock and Showscan Preferred Stock,
voting as a single class, outstanding on the Showscan Record Date and entitled
to vote on the Merger and the Merger Agreement is required to approve and adopt
the Merger and the Merger Agreement.
As of February 12, 1998, directors and executive officers of Showscan and
their affiliates as a group beneficially owned approximately 600,380 shares of
Showscan Common Stock (excluding shares subject to exercisable options or
warrants or issuable upon conversion of the Showscan Preferred Stock), and
24,000 shares of Showscan Preferred Stock (constituting 49.0% of the outstanding
shares of Showscan Preferred Stock) or approximately 7.8% of the shares of
Showscan Common Stock, on an as-converted basis and outstanding as of the
Showscan Record Date. Certain directors and executive officers of Showscan
and their affiliates have executed an agreement with Iwerks pursuant to which
each agrees to vote his shares of Showscan Capital Stock in favor of the Merger
Agreement and has granted to certain executive officers of Iwerks a proxy to do
the same in his place and stead (collectively, the "Showscan Voting Agreements"
and together with the Iwerks Voting Agreements, the "Voting Agreements"). The
remaining directors and executive officers of Showscan own a nominal amount, if
any, of Showscan Common Stock and each has advised Showscan that he intends to
vote or direct the vote of all shares of Showscan Common Stock over which he has
voting control for approval of the Merger and the Merger Agreement.
As of February 12, 1998, Iwerks owned no outstanding shares of Showscan Common
Stock or Showscan Preferred Stock.
Effects of Abstentions and "Broker Non-Votes." At the Iwerks Annual Meeting,
(a) in determining whether the Director Proposal has received the requisite
number of affirmative votes, abstentions and broker non-votes will have no
effect on the outcome of the vote on the Director Proposal; and (b) in
determining whether the Merger Proposal or the Option Plan Proposals has
received the requisite number of affirmative votes, (i) abstentions will be
counted and will have the same effect as a vote against such proposal and (ii)
broker non-votes will have no effect on the outcome of the vote on such
proposal. At the Showscan Special Meeting, in determining whether the proposal
to approve and adopt the Merger and the Merger Agreement has received the
requisite number of affirmative votes, abstentions and broker non-votes will be
counted and will have the same effect as a vote against such proposal. At both
the Iwerks Annual Meeting and the Showscan Special Meeting, abstentions and
broker non-votes will be counted for purposes of determining the presence or
absence of a quorum.
PROXIES
This Joint Proxy Statement/Prospectus is being furnished to Iwerks and
Showscan stockholders in connection with the solicitation of proxies by and on
behalf of the Iwerks Board and the Showscan Board for use at the Iwerks Annual
Meeting and the Showscan Special Meeting, respectively.
All shares of Iwerks Common Stock and Showscan Capital Stock which are
entitled to vote and are represented at the relevant stockholder meeting by
properly executed proxies received prior to or at the relevant stockholder
meeting, and not revoked, will be voted at such stockholder meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated (other than in the case of broker non-votes), such proxies will be
voted:
(i) in the case of the Iwerks Annual Meeting, FOR approval of the Merger
Proposal, the Director Proposal and the Option Plan Proposals; and
(ii) in the case of the Showscan Special Meeting, FOR approval and adoption of
the Merger Agreement and the Merger.
Proxies may be delivered by United States mail or courier service, in the case
of Iwerks stockholders, to U.S. Stock Transfer Corporation, 1745 Gardena Avenue,
Glendale, California 91204-2991 or by facsimile to (818) 502-0674 and in the
case of Showscan stockholders, to Continental Stock Transfer & Trust Company, 2
Broadway, 19th Floor, New York, New York 10004 or by facsimile to (212) 509-
5150.
If any other matters are properly presented at the stockholder meetings for
consideration, including, among other things, consideration of a motion to
adjourn either stockholder meeting to another time and/or place (including,
without limitation, for the purpose of soliciting additional proxies), the
persons named in the enclosed forms of proxy and acting thereunder will have
discretion to vote on such matters in accordance with their best judgment.
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Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Iwerks or Showscan, as the case may be, c/o U.S. Stock
Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204-2991 (or
if by facsimile, to (818) 502-0674) or c/o Continental Stock Transfer & Trust
Company, 2 Broadway, 19th Floor, New York, New York 10004 (or if by facsimile,
to (212) 509-5150), respectively, at or before the taking of the vote at the
relevant stockholder meeting, a written notice of revocation bearing a later
date than the proxy, (ii) duly executing a later dated proxy relating to the
same shares and delivering it to the Secretary of Iwerks or Showscan, as the
case may be, c/o U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale,
California 91204-2991 (or if by facsimile, to (818) 502-0674) or c/o Continental
Stock Transfer & Trust Company, 2 Broadway, 19th Floor, New York, New York 10004
(or if by facsimile, to (212) 509-5150), respectively, before the taking of the
vote at the relevant stockholder meeting or (iii) attending a stockholder
meeting and voting in person (although attendance at a stockholder meeting will
not in and of itself constitute a revocation of a proxy). Any written notice of
revocation or subsequent proxy should be sent so as to be delivered, in the case
of Iwerks stockholders, to Secretary, Iwerks Entertainment, Inc., c/o U.S. Stock
Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204-2991 (or
if by facsimile, to (818) 502-0674), and in the case of Showscan stockholders,
to Secretary, Showscan Entertainment Inc., c/o Continental Stock Transfer &
Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 (or if by
facsimile, to (212) 509-5150), at or before the taking of the vote at the
relevant stockholder meeting.
NO DISSENTERS' RIGHTS
No holder of Showscan Common Stock will have any dissenters' rights in
connection with, or as a result of, the matters to be acted upon at the Showscan
Special Meeting. Under the DGCL, holders of Showscan Preferred Stock have the
right to obtain cash payment of the "fair value" of their shares of Showscan
Preferred Stock, excluding any element of value arising from the accomplishment
or expectation of the Merger. Each holder of Showscan Preferred Stock has
executed an agreement with Iwerks pursuant to which such holder waives its
rights to dissent in connection with the transactions contemplated by the Merger
Agreement with respect to any of its shares of Showscan Preferred Stock.
PROXY SOLICITATION
All expenses of this solicitation, including the cost of preparing and mailing
this Joint Proxy Statement/Prospectus will be borne by Iwerks and Showscan. In
addition to solicitation by mail, proxies may be solicited in person by
directors, officers and employees of Iwerks or Showscan or by telephone,
telegram, facsimile or other means of communication. Such directors, officers
or employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses incurred in connection with such solicitation.
Arrangements will be made with brokerage houses and other custodians, nominees
and fiduciaries to send proxy material to beneficial owners; and Iwerks or
Showscan, as the case may be, will, upon request, reimburse them for their
reasonable expenses in so doing. To the extent necessary in order to ensure
sufficient representation at the Iwerks Annual Meeting or the Showscan Special
Meeting, Iwerks or Showscan, as the case may be, may request by telephone or
telegram the return of proxies. The extent to which this will be necessary
depends entirely upon how promptly proxies are returned.
HOLDERS OF SHOWSCAN COMMON STOCK AND/OR SHOWSCAN PREFERRED STOCK SHOULD NOT
SEND ANY CERTIFICATES REPRESENTING SHOWSCAN COMMON STOCK AND/OR SHOWSCAN
PREFERRED STOCK WITH THE ENCLOSED PROXY CARD. IF THE MERGER IS APPROVED, A
LETTER OF TRANSMITTAL WILL BE MAILED AFTER THE EFFECTIVE TIME TO EACH PERSON WHO
WAS A HOLDER OF OUTSTANDING SHARES OF SHOWSCAN COMMON STOCK AND/OR SHOWSCAN
PREFERRED STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. SHOWSCAN STOCKHOLDERS
SHOULD SEND CERTIFICATES REPRESENTING SHOWSCAN COMMON STOCK AND/OR SHOWSCAN
PREFERRED STOCK TO THE EXCHANGE AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE
WITH THE INSTRUCTIONS CONTAINED IN, THE LETTER OF TRANSMITTAL.
THE MERGER
This section of the Joint Proxy Statement/Prospectus describes certain of the
more important aspects of the Merger. The following description does not
purport to be complete and the reader is encouraged to review the entire Merger
Agreement, a copy of which is set forth in Appendix A to this Joint Proxy
----------
Statement/Prospectus, and the other Appendices to this Joint Proxy
Statement/Prospectus, all of which are incorporated herein by reference.
BACKGROUND OF THE MERGER
In June 1996, Allen & Company was engaged by Showscan to act as its financial
advisor and to assist it in implementing a plan to maximize stockholder value,
including possible dispositions, mergers or other business combinations,
strategic alliances, corporate partnerships and joint ventures. Prior to the
emergence of Iwerks as a prospective strategic partner, Allen & Company
contacted a number of companies, which have businesses in the entertainment
and/or leisure industries, to ascertain potential interest in a range of
possible transactions involving Showscan. None of these discussions proceeded
beyond the preliminary stage. In connection with its ongoing advisory work for
Showscan, in December 1996 Allen & Company assessed the merits of a potential
business combination with Iwerks and prepared for Showscan's management an
analysis describing the potential financial benefits of a combination of
Showscan and Iwerks.
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The possibility of a strategic combination was first raised to Roy Wright,
Iwerks' former Chief Executive Officer, by Equitable Securities in mid February
1997. During the month of February 1997, members of Iwerks' management and
Equitable Securities met several times to discuss the advantages of a strategic
combination of the two companies. In February 1997, Iwerks retained Equitable
Securities to advise it on the possible strategic combination and
representatives of Equitable Securities contacted Showscan to determine if there
was a mutual interest in exploring a possible business combination with Iwerks.
On February 21, 1997, senior members of management of Iwerks and Showscan, and
Equitable Securities and Allen & Company, their respective financial advisors,
met to discuss generally the strategic advantages of a combination and the
general parameters of the structure of any transaction to be effected.
Following February 1997, the Iwerks Board did not consider any transaction which
it considered as a strategic alternative to the Merger with Showscan.
On February 28, 1997, the management of Showscan, with the assistance of Allen
& Company, made an initial presentation to the Showscan Board on the
considerations regarding, and received the questions and comments of the
Showscan Board with respect to, a possible combination with Iwerks, including
(i) a preliminary analysis of the strategic factors associated with a possible
business combination and (ii) a preliminary presentation regarding each
companies' respective positioning in the market. The Showscan Board authorized
and instructed management to explore the possibility of combining with Iwerks
and to continue discussions with representatives of Iwerks. Following February
1997, Showscan did not contact, nor was it contacted by, any merger partner that
it considered as a strategic alternative to the Merger with Iwerks.
On March 6, 1997, Iwerks and Showscan executed a non-disclosure agreement
providing for the exchange of non-public information. During the months of
March and April 1997, Iwerks and Showscan exchanged business and legal
information directly and, through their respective financial advisors, conducted
financial due diligence on each other. Iwerks retained James Timmins, a former
director of Iwerks and currently a principal in a venture capital firm, to
provide consulting services to it to assist Iwerks in its due diligence
investigations and analysis of the strategic advantages obtainable in a possible
combination. During the month of April 1997, contacts between Iwerks'
management and Showscan's management, alone or with their respective financial
advisors, intensified, with several meetings and additional phone conversations
during which they discussed long-term business and market strategies of the two
companies, possible synergies which could be achieved in a strategic
combination, the differing projection technologies used by the two companies and
technical issues related thereto and possible transaction structures.
On April 30, 1997, the management of Iwerks with Equitable Securities and
Troop Meisinger Steuber & Pasich LLP, Iwerks' legal counsel, made an initial
presentation to the Iwerks Board on the considerations regarding, and received
the questions and comments of the Iwerks Board with respect to, a possible
combination with Showscan, including (i) a preliminary analysis of the strategic
factors associated with a possible business combination, (ii) a preliminary
comparative review of Iwerks' and Showscan' market capitalization, revenues,
earnings and margins and (iii) a preliminary presentation regarding each
companies' respective positioning in the market. The Iwerks Board authorized
and instructed management to explore the possibility of combining Iwerks with
Showscan and to continue discussions with representatives of Showscan.
On each of May 1 and May 14, 1997, senior executives of each of Iwerks and
Showscan met to determine the organizational, operational and financial issues
attendant to a possible strategic business combination and the terms upon which
each party would be willing to effect such a combination.
On May 13, 1997, the Showscan Board met and heard presentations from
management and from Allen & Company and Latham & Watkins, Showscan's legal
advisors, concerning the on-going negotiations with Iwerks. The Showscan Board
discussed various factors and as an alternative to the proposed Merger whether
Allen & Company should continue to search for an alternative strategic partner
for Showscan or whether Showscan should remain independent and seek additional
financing. However, the benefits to Showscan and its stockholders resulting
from the Merger and described in " -- Showscan's Reasons for the Merger;
Recommendations of the Showscan Board" were considered by the Showscan Board to
be more attractive than pursuing any such alternatives, given the uncertainty
regarding the availability of additional financing on terms acceptable to
Showscan, and the fact that it was unlikely that a prospective partner other
than Iwerks interested in pursuing a strategic transaction with Showscan could
be identified. The Showscan Board authorized management to continue the
discussions with Iwerks management and to continue certain due diligence
activities.
Iwerks and Showscan, and their respective legal counsel and financial
advisers, commenced negotiations and documentation of a possible merger of the
two companies in May of 1997. During the months of May and June, Iwerks and
Showscan conducted business, technical, legal and financial due diligence
regarding a proposed combination. Management, Equitable Securities and Iwerks'
legal counsel updated the Iwerks Board on the status of the negotiations at
meetings held on June 9 and June 20, 1997. Negotiations continued through the
remainder of June and early July.
On July 10, 1997, Mr. Wright and Mr. Pope met and discussed the final terms of
the proposed merger, which would include the conversion of each outstanding
share of Showscan Common Stock into the right to receive 0.85 shares of Iwerks
Common Stock, the conversion of each outstanding share of Showscan Preferred
Stock into the right to receive that number of shares of Iwerks Common Stock
equal to the number of shares of Showscan Common Stock into which such share of
Showscan Preferred Stock is convertible multiplied by 0.85 and the assumption by
Iwerks of the conversion obligations under each outstanding 8% Note which, after
the Merger, would be exercisable upon the same terms and conditions as under the
agreement entered into in connection with the issuance of the 8% Notes except
that each 8% Note, upon conversion, in lieu of each share of Showscan Common
Stock deliverable on such conversion,
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would be convertible into such number of shares of Iwerks Common Stock which
would be receivable at the Effective Time by a holder of one share of Showscan
Common Stock.
On July 12, 1997, the Iwerks Board met and heard presentations from management
and from its financial and legal advisors concerning the ongoing negotiations
with Showscan. Equitable Securities presented a preliminary evaluation of the
effects of the acquisition from a financial point of view and Iwerks' legal
counsel discussed material terms of the Original Merger Agreement. The Iwerks
Board discussed various factors and alternatives to the proposed merger. The
Iwerks Board reviewed the terms of the draft Original Merger Agreement and
related valuation issues. The Iwerks Board concluded that it was reasonable and
appropriate for the officers to proceed with negotiations.
On July 15, 1997, the Showscan Board met and heard presentations from
management and from Allen & Company and its legal advisors concerning the
ongoing negotiations with Iwerks. Allen & Company presented a preliminary
evaluation of the effect of the acquisition from a financial point of view and
Showscan's legal counsel discussed material terms of the Original Merger
Agreement. The Board discussed various factors and alternatives to the proposed
Merger including whether to search for an alternative strategic partner or to
continue independently and seek additional financing. However, the benefits to
Showscan and its stockholders resulting from the Merger and described in " --
Showscan's Reasons for the Merger; Recommendations of the Showscan Board" were
considered by the Showscan Board to be more attractive than pursuing any such
alternatives, given the uncertainty regarding the availability of additional
financing on terms acceptable to Showscan, and the fact that it was unlikely
that a prospective partner other than Iwerks interested in pursuing a strategic
transaction with Showscan could be identified. The Showscan Board reviewed the
terms of the draft Original Merger Agreement and related valuation issues. The
Showscan Board concluded that it was reasonable and appropriate for the officers
to proceed with negotiations. On July 16, 1997, Mr. Wright and Mr. Pope again
met to further discuss the business terms of the Original Merger Agreement.
On July 24, 1997, management of Iwerks provided the Iwerks Board with a
current status of the transaction and responded to questions presented regarding
the Merger during the Iwerks Board meeting. On July 30, 1997, Iwerks and
Showscan reached preliminary agreement with one another on the terms of the
proposed Original Merger Agreement, subject to the approval of the respective
boards of directors.
The Merger was unanimously approved by Iwerks' Board at a special meeting held
on July 30, 1997 at the executive offices of Iwerks. At that meeting, Equitable
Securities reviewed in detail its financial analysis of the proposed Merger and
Iwerks' legal counsel reviewed material terms of the Original Merger Agreement.
The Iwerks Board received an opinion from Equitable Securities that, as of July
30, 1997 and based upon and subject to certain matters stated therein, the
consideration to be paid by Iwerks pursuant to the Original Merger Agreement is
fair to Iwerks' stockholders from a financial point of view. The Iwerks Board
reviewed and fully discussed the terms of the Original Merger Agreement and then
unanimously approved the Original Merger Agreement and the Merger.
The Merger was unanimously approved by the Showscan Board at a special meeting
held on July 31, 1997 at the executive offices of Showscan. At that meeting,
Allen & Company reviewed in detail its financial analysis of the proposed
Merger. The Showscan Board received a written opinion from Allen & Company
that, as of July 31, 1997 and based upon and subject to certain matters stated
therein, the consideration to be paid by Iwerks pursuant to the Original Merger
Agreement is fair to holders of Showscan Common Stock and Showscan Preferred
Stock from a financial point of view. Showscan's legal advisors reviewed the
material terms of the Original Merger Agreement with the Showscan Board and,
following discussion of such terms, the Showscan Board unanimously approved the
Original Merger Agreement and the Merger.
In the evening of August 4, 1997, Iwerks and Showscan executed and delivered
the Original Merger Agreement.
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 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 and, in
connection therewith, reviewed information provided by Equitable Securities from
its prior due diligence and financial analysis of Iwerks and discussed with
Equitable Securities various methodologies employed in evaluating the fairness
of the Merger from a financial point of view. 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 if
requested to issue a fairness opinion with respect to the Merger 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
resulted in the Iwerks Board beginning deliberations as to whether it continued
to recommend the Merger to the Iwerks stockholders under the terms set forth in
the Original Merger Agreement. The Iwerks Board met on October 24, 1997 and
October 31, 1997 to discuss these matters but made no determination with respect
to this issue. However, adverse stockholder reaction, the report by Resource
Financial and the passage of time raised significant concerns as to whether the
conditions to the Merger could be satisfied. As a consequence, the Iwerks Board
directed management to begin discussions with Showscan about a possible
amendment to the Merger Agreement in order to reduce the merger consideration to
be paid and to otherwise make the consummation of the Merger more certain.
On December 5, 1997, Mr. Pope received a letter from Mr. Wright stating that
"our transaction as originally negotiated is at extreme risk of failure." The
letter contained the reasons why Iwerks believed that consummation of the
transaction contemplated by
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the Original Merger Agreement was in serious jeopardy. These reasons included
(i) Iwerks' largest stockholder, Heartland Advisors, Inc., which holds 24.8% of
the Iwerks Common Stock, during phone conversations with Iwerks in August
expressed its opposition to the Merger primarily on the basis of its belief that
the exchange ratio was too high, (ii) similar opposition from certain of Iwerks'
other institutional stockholders, (iii) Resource Financial's inability to render
an opinion that the transaction was fair to Iwerks, and (iv) the limited time
until of December 31, 1997, at which time the Original Merger Agreement could be
terminated by either party.
In response to Mr. Wright's letter, management of Showscan met with the
Showscan Board. In that meeting, the Showscan Board and management discussed a
range of alternatives to amending the Merger Agreement in order to reduce the
exchange ratio. These alternatives included proceeding with the transaction
pursuant to the terms of the Original Merger Agreement despite the apparent lack
of support for the transaction, terminating the Original Merger Agreement on
December 31, 1997 and continuing to seek a buyer for Showscan, terminating the
Original Merger Agreement on December 31, 1997 and abandoning efforts to sell
Showscan, and bring an action against Iwerks for breach of the Original Merger
Agreement. In evaluating these alternatives the Showscan Board considered the
contents of the letter from Mr. Wright, statements made by representatives of
Resource Financial that in its opinion, the largest stockholders of Iwerks would
not vote in favor of the transaction contemplated by the Original Merger
Agreement, advice provided to Showscan from Beacon Hill Partners, Inc., the
proxy solicitor retained by Iwerks and Showscan in connection with the Merger,
that Iwerks would have difficulty in obtaining approval of a majority of its
stockholders in face of Heartland Advisors, Inc.'s opposition to the transaction
contemplated by the Original Merger Agreement, although such approval was still
possible, and management's assessment of Showscan's prospects if the Merger were
not to be consummated. At the conclusion of the meeting, the Showscan Board
authorized Messrs. Pope and Lemon to discuss amending the Original Merger
Agreement to reduce the exchange ratio.
Among the factors the Showscan Board considered in reaching its decision not
to terminate the Original Merger Agreement and seek another buyer for Showscan
was the fact that after an extensive period of soliciting prospective
purchasers, Iwerks was at that time the only company interested in pursuing an
acquisition of Showscan. They also considered that the terms of the Merger
Agreement would give them the ability to respond to and accept a more favorable
transaction which arose after the renegotiation of the exchange ratio. Among
the factors the Showscan Board considered in reaching its decision not to
terminate the Original Merger Agreement, abandon its efforts to sell Showscan
and bring an action against Iwerks for breach of the Original Merger Agreement
were the prospects Showscan faced as a stand alone company and the length of
time and expense incurred in pursuing such action. Among the factors the
Showscan Board considered in reaching its decision not to proceed with the
transaction pursuant to the terms of the Original Merger Agreement were the risk
that the Iwerks stockholders would not approve the transaction, the risk that
the Iwerks Board would not be interested in pursuing a revised transaction if
the Original Merger Agreement was not approved, the risk that Iwerks would
terminate the Original Merger Agreement on December 31, 1997 prior to any
stockholder vote and the risk of a change in Showscan's condition or prospects
during the period of time necessary to negotiate and hold a stockholder meeting
for a revised transaction if the Original Merger Agreement was not approved by
the Iwerks stockholders.
During the month of December 1997, Roy Wright consulted with each of Equitable
Securities and Resource Financial with respect to potential modifications to the
Original Merger Agreement. Additionally, senior executives of each of Iwerks
and Showscan conducted several meetings in an effort to reach agreement on a
modification of the terms of the Original Merger Agreement in order to provide
certainty to the transaction. On December 10, 1997, Roy Wright, Dennis Pope, W.
Tucker Lemon and Mark Teufel, Managing Director of Resource Financial, met in
Los Angeles with the purpose of reaching an agreeable exchange ratio and making
such other modifications to the Original Merger Agreement as would help to
ensure the successful completion of the Merger. The parties discussed a
decrease in the exchange ratio from 0.85 to 0.62, the establishment of a
transition team composed of certain members of management of each of Iwerks and
Showscan, the elimination of certain conditions to Iwerks' obligations to effect
the Merger, the modification of the provisions limiting Showscan's ability to
solicit, discuss and negotiate Alternative Proposals (the "No Shop Provisions")
and the related termination fee provisions and certain other changes to the
Original Merger Agreement.
On December 16, 1997, management of Iwerks, with the assistance of Resource
Financial, made a presentation to the Iwerks Board on the considerations
regarding, and received the questions and comments of the Iwerks Board with
respect to, proposed changes to the Original Merger Agreement, including (i) an
analysis of the strategic factors associated with the Merger, (ii) a review of
the valuation summary prepared by Resource Financial including a relative
contribution analysis and an asset valuation, and (iii) a discussion of the
other proposed changes to the Original Merger Agreement. The Iwerks' Board
discussed the decrease in the exchange ratio from 0.85 to 0.62, the
establishment of a transition team composed in part of members of Showscan's
management and a decrease from three directors, as provided for in the Original
Merger Agreement, to one director to be appointed to the Iwerks Board by
Showscan. The Iwerks' Board conditionally approved a decrease in the exchange
ratio, pending resolution of the composition of the transition team and the
number of directors to be appointed to the Iwerks Board.
On December 17, 1997, Iwerks provided Showscan with a letter setting forth
proposed terms of an amended merger agreement which Iwerks would be willing to
execute and thereafter to move forward as quickly as practicable to consummate
the Merger. The proposed terms included a reduction in the exchange ratio from
0.85 to 0.62, a reduction in the number of directors to be appointed by Showscan
to serve on the Iwerks Board from three to one and the expansion of the Iwerks
Board to seven members as soon as practicable following the Effective Time, the
establishment of a transition team composed of three members of Iwerks'
management and two members of Showscan's management, and the elimination or
modification of certain conditions to Iwerks' obligation to effect the Merger.
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Upon receipt of the December 17, 1997 letter from Iwerks, Mr. Pope discussed
the contents of the letter with several members of the Showscan Board and with
Showscan's financial and legal advisors. On December 20, 1997, Mr. Pope sent a
letter to Mr. Wright indicating the terms he was prepared to recommend to the
Showscan Board. In phone calls which followed the receipt of that letter,
Messrs. Pope and Wright discussed the letter and agreed to recommend to their
respective boards the Amendment.
On December 22, 1997, the Iwerks' Board, with its legal and financial
advisors, met telephonically to discuss the proposals of Showscan with respect
to the modification to the No Shop Provisions and the termination provisions.
The Iwerks' Board reviewed and fully discussed all of the terms of the amendment
to the Original Merger Agreement, including Showscan's proposals and unanimously
approved the amendment to the Original Merger Agreement. The Iwerks Board
receive the oral opinions of Equitable Securities and Resource Financial (each
as confirmed in writing as of December 29, 1997) that, based upon and subject to
certain matters stated therein, the consideration to be paid by Iwerks pursuant
to the Amendment is fair to Iwerks' stockholders from a financial point of view.
On December 29, 1997, the Iwerks' Board executed a unanimous written consent
adopting the Amendment No. 1 dated December 29, 1997 (the "Amendment") to the
Original Merger Agreement (as amended, the "Merger Agreement").
On December 29, 1997, the Showscan Board met telephonically to discuss the
Amendment. The Showscan Board reviewed the terms of the Amendment, including
the reduced Exchange Ratio, the reduction in the number of Showscan directors to
be appointed to the Iwerks Board, the provisions providing for the establishment
of a transition team, and the engagement of Messrs. Pope and Lemon as members
thereof, and the modification to the No Shop Provisions and the termination
provisions. Allen & Company then reviewed in detail its financial analysis of
the Merger and rendered its opinion that as of December 29, 1997 and based upon
and subject to certain matters stated therein, the consideration to be paid by
Iwerks pursuant to the Merger Agreement is fair to holders of Showscan Common
Stock and Showscan Preferred Stock from a financial point of view. Following
discussion of the presentation and of the terms of the Amendment, the Showscan
Board unanimously approved the Merger Agreement and the Merger.
In the evening of December 29, 1997, Iwerks and Showscan executed and
delivered the Amendment. After execution of the Amendment, as permitted by the
Merger Agreement, Allen & Company began contacting, or was contacted by,
companies previously interested in investigating an acquisition of Showscan. Of
those contacted, five expressed varying degrees of interest in a possible
transaction. As required by the Merger Agreement, on January 14, 1998 Showscan
ceased to provide confidential information to and ceased discussions with these
parties pending receipt from them of a proposal or offer which the Showscan
Board, after advice of outside counsel, determined it is required, pursuant to
its fiduciary duties, to discuss, negotiate or otherwise evaluate. On January
14, 1998, Showscan received a proposal from one of the interested companies (the
"Proposer") which contemplates an acquisition of Showscan for consideration
which the Proposer believed "will result in greater value" to the stockholders
of Showscan than currently available under the Merger Agreement. After receipt
of the proposal, the Proposer continued its due diligence investigation of
Showscan. On February 3, 1998, after completion of its due diligence
investigation the Proposer informed Showscan that it would not make a specific
offer to acquire Showscan, was withdrawing its proposal and ceased discussion
with Showscan concerning an acquisition.
IWERKS' REASONS FOR THE MERGER; RECOMMENDATIONS OF THE IWERKS BOARD
The Iwerks Board unanimously has approved the Merger and determined that the
Merger is advisable and fair and in the best interest of Iwerks and its
stockholders. THE IWERKS BOARD UNANIMOUSLY RECOMMENDS TO THE IWERKS STOCKHOLDERS
THAT THEY VOTE FOR THE APPROVAL AND THE ADOPTION OF THE MERGER PROPOSAL. The
Iwerks Board believes that the Merger will assist Iwerks in maintaining its
position as a leading provider of high-tech software-based theatre attractions
and will establish the combined company as the premiere company in that segment
of the out-of-home entertainment market.
The Iwerks Board considered without limitation the following factors which
constitute all of the material factors considered:
. Larger Installed Base. The combined company will have an installed base of
approximately 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 theatres in 28 countries around the world. The combined company
has 41 screens presently being installed (including nine from Showscan) and
28 screens (all from Showscan) in its contracted backlog resulting in 321
total screens upon build-out and installation. The installed base will be
supported by a library of 75 ride simulation titles. Iwerks anticipates that
the larger installed base of attractions will better position the combined
company to compete successfully for new simulation products and to negotiate
with outside suppliers of software. The increase in the number of theaters in
the distribution base for the combined company also may permit Iwerks to
expand more, to create or produce better quality films (including remakes and
sequels to the most popular titles in the industry) using recognized brand
names and utilizing state of the art film techniques (including 3D). This is
possible because the costs of the simulation films can be amortized over the
largest installed base of simulation theatres in the world.
. Expanded Film Library. The combined company will have 75 ride simulation
titles and 47 specialty film titles including several award winning films.
The distribution into each company's respective theatre networks of film
software is anticipated to result in significant short-term cash savings in
film production and distribution expenses. For the three years ended June 30,
1997 Showscan and Iwerks combined had invested approximately $12.1 million in
film library production and acquisition costs. The cross-distribution of
existing film libraries to each company's respective theatre network (a) will
provide all locations with greater variety and choice of films and (b) is
anticipated to result in increased recurring film licensing revenues without
the burden of the amortization of new film production costs.
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. New Simulation Technologies. The Merger will bring to Iwerks additional
simulation technologies including platform, capsule style simulators and an
electromagnetic motion base technology (which is exclusively marketed
worldwide by Showscan), without the necessity of additional and significant
research and development expenditures. Also, the combined company will be
better positioned to enter into 3D simulation thrill ride production and
distribution as the Showscan network of theatres can be easily upgraded to
exhibit 3D simulation titles at a reasonable cost. The combined company will
be better able to retain and expand its role as a leader of new simulation
technologies, including high definition and digital technologies.
. Increased Access to New and Expanding Markets. The Merger will expand and
strengthen Iwerks' geographic presence in the Pacific Rim and particularly in
Japan. Although, these markets are currently experiencing an economic
downturn, they have historically provided significant revenue to both Iwerks
and Showscan and Iwerks believes that they will continue to have significant
strategic value in the long-term. Additionally, as a result of the combined
company's increased film library and the variety of motion base technologies
it offers, the Merger is expected to provide access to new markets such as
smaller family entertainment centers and other areas with a large volume of
repeat customers.
. Significant Increase in Film Licensing Revenues. The Merger also is expected
to substantially increase the recurring revenue of Iwerks due to the combined
companies' film licensing activities. For the year ended June 30, 1997,
Iwerks film licensing revenue was $5.4 million (on a historical basis)
compared to $11.6 million (on a combined companies historical pro forma
basis). Additionally, as a result of the combined operations, the increased
number of titles in the film library, and international brand names of each
company provides significant opportunities for increasing the average per
theatre film licensing revenue. Showscan's average simulation film licensing
revenue per theatre historically has been approximately 30% greater than
Iwerks' per theatre revenue.
. Cost Savings and Synergies. The Iwerks' Board anticipates that the Merger
will provide the combined business with significant opportunities to realize
the efficiencies and synergies available by operating with one corporate
overhead and the economics of scale. Iwerks believes that it can realize
significant cost savings in the combination of the two companies,
particularly in the areas of purchasing, insurance, marketing, advertising,
communications, administration and the consolidation of facilities, employees
and other resources.
. Stronger Competitive Position. The combined resources and capital of the two
companies will serve as a foundation for the company to become an
increasingly aggressive and effective competitor in all aspects of the film-
based out-of-home entertainment industry including: (1) in the giant screen
15/70, (2) giant screen 8/70, (3) large screen 5/70 and (4) simulation thrill
ride markets. This will be supported by the broadest selection of technology
options, providing existing and potential customers with the widest array of
motion base film projection, including (high-definition video) of any company
in these industries.
. Opinion of Financial Advisors. The Iwerks Board considered as favorable to
its determination the opinions delivered on December 29, 1997 by Equitable
Securities and Resource Financial, respectively, to the effect that, as of
such dates, the consideration to be paid by Iwerks pursuant to the Merger
Agreement is fair to the Iwerks stockholders from a financial point of view.
The Iwerks Board also considered the oral and written presentations made to
it by Equitable Securities and Resource Financial. See " -- Opinions of
Financial Advisors --Iwerks." Copies of Equitable Securities' and Resource
Financials' written opinions to the Iwerks Board, each dated December 29,
1997, which set forth the assumptions made, matters considered and limits on
the review undertaken, are attached as Appendices B and D to this Joint Proxy
---------- - -
Statement/Prospectus respectively and are incorporated herein by reference.
The Iwerks Board also considered certain other factors including: (a) that
each of Iwerks and Showscan has significant federal and state net operating loss
carry forwards which will be available, subject to certain limitations, to the
combined company and (b) the combined company also will have available to it the
patented Showscan process which is directly compatible with emerging
technologies, including high-definition and digital cameras and projection
systems.
The Iwerks Board also considered the pro forma effect of the Merger. At June
30, 1997, on an unaudited pro forma basis, the combined companies would have had
cash and short-term investments of $22.5 million, assets of $83.2 million,
stockholders equity of $50.4 million (net of pro forma adjustments), long-term
and capital lease obligations of $8.3 million and book value per share of $2.83.
In addition, for the fiscal year ended June 30, 1997 on an unaudited pro forma
basis, operating losses would have increased from $10.5 million to $12.1
million, net losses would have increased from $10.0 million to $14.1 million and
net losses per share would have increased from $0.84 to $0.85. The Iwerks Board
placed considerable emphasis on the expectation that the Merger would be
accretive to earnings (prior to taking into account Merger related costs)
commencing in the third fiscal quarter of 1998 and attributed less weight to the
historical pro forma effect of the Merger.
Each of Iwerks and Showscan are aware that an article printed in The Daily
News of Los Angeles on August 6, 1997 stated that "[m]anagement [of Iwerks]
insisted the deal will start producing profits by April 1999." Neither Iwerks
nor Showscan has made statements to any party indicating that the Merger will
not be profitable until 1999. Neither company has confirmed, endorsed or
adopted the statement printed in The Daily News of Los Angeles referenced above
or any other statements made by a third party that the Merger will not be
profitable until 1999 and specifically disclaims any such statements. Iwerks
and Showscan each initially indicated
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that the Merger will be accretive to earnings commencing in the third fiscal
quarter of fiscal 1998, based on the assumption that the Merger would be
consummated in the second fiscal quarter of 1998. Any statements to the contrary
are inconsistent with information previously provided by each of Iwerks and
Showscan to the public in press releases, public filings and in this Joint Proxy
Statement/Prospectus.
The Iwerks Board also considered certain risks attendant to the Merger,
including (a) the risk that the benefits sought in the Merger would not be fully
achieved, (b) the risk that the Merger would not be consummated, and the effect
of the public announcement of the Merger on Iwerks' sales and operating results,
(c) the risks attendant to the integration of the two companies, (d) risks
relating to maintaining Showscan's material contracts and its customer
relationships, (e) risks relating to the operation and continued development of
Showscan's O&O Theaters, (f) the risk of future potential dilution relating to a
significant number of issued and unexercised Showscan options and the 8% Notes
and (g) the other risks described under "RISK FACTORS." The Iwerks Board
believes that these risks were outweighed by the potential significant benefits
to be gained by the Merger.
In the course of its deliberations during board meetings held on April 30,
1997, June 9, 1997, June 20, 1997, July 12, 1997, July 24, 1997, July 30, 1997,
October 24, 1997, October 31, 1997, December 16, 1997 and December 22, 1997 the
Iwerks Board reviewed with Iwerks management a number of factors relevant to the
Merger, including the strategic overview and prospects for Iwerks. The Iwerks
Board considered and discussed other alternatives for Iwerks. The Iwerks Board
also considered among other factors (i) information concerning Iwerks' and
Showscan's respective businesses, prospects, financial performance and
condition, operations, management and competitive position; (ii) the financial
condition, results of operations and businesses of Iwerks and Showscan before,
and after, giving effect to the Merger; and (iii) current financial market
conditions and historical market prices, volatility and trading information with
respect to the Iwerks Common Stock and the Showscan Common Stock. In addition,
the directors reviewed the consideration to be issued to Showscan's stockholders
in the Merger and the principal terms of the Merger Agreement and related
agreements. With respect to the consideration to be issued in the Merger, the
Iwerks Board examined the premium to be paid over the current share price of
Showscan and weighed that against (a) the contribution that the Showscan assets
would make to the combined company, (b) the projected accretion to Iwerks'
earnings from the acquisition, and (c) the premium paid in transactions of
similar size and structure. The Iwerks Board considered the financial analyses
prepared by Equitable Securities and Resource Financial, including the opinions
of Equitable Securities and Resource Financial delivered on December 29, 1997,
to the effect that, as of such date and based upon and subject to certain
matters stated therein, the consideration to be paid by Iwerks pursuant to the
Merger Agreement is fair to the Iwerks stockholders from a financial point of
view. The Iwerks Board also took into account that Iwerks would be the
surviving corporation and its board of directors and officers would continue as
senior management of the combined business.
In reaching the determination to approve and recommend approval and adoption
of the Merger Proposal, in view of the wide variety of factors considered in
connection with its evaluation thereof, the Iwerks Board did not assign any
relative or specific weights to the factors set forth above, and individual
directors may have given differing weights to the different factors. In
determining that the terms of the Merger are fair to, and in the best interests
of, Iwerks and its stockholders, the Iwerks Board considered all of the
foregoing factors, including, with respect to its analysis of the fairness of
the exchange ratio from a financial point of view, the opinion of Equitable
Securities and the oral presentations by management of Iwerks regarding its
independent financial analysis of Iwerks, Showscan and the combined company.
However, the Iwerks Board did not distinguish between factors that support a
determination that the Merger is "fair" and factors that support a determination
that the Merger is in the "best interests" of Iwerks' stockholders.
THE IWERKS BOARD UNANIMOUSLY RECOMMENDS THAT IWERKS STOCKHOLDERS VOTE TO
APPROVE THE MERGER PROPOSAL.
SHOWSCAN'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE SHOWSCAN BOARD
The Showscan Board unanimously has approved the Merger and determined that the
Merger is advisable and fair and in the best interest of Showscan and its
stockholders. The Showscan Board unanimously recommends to the Showscan
stockholders that they vote FOR approval of the Merger and the Merger Agreement.
In reaching its determination, the Showscan Board considered various historical
and current challenges in Showscan's business and financial performance,
including (a) levels of revenue, profitability and revenue growth, (b) poor
financial performance of certain O&O theaters, and (c) prospects for new theatre
installations and film licensing revenue. The Showscan Board consulted with
Showscan management, as well as its legal counsel and its financial advisor, and
considered, without limitation, the following factors which constitute all of
the material factors considered:
. Combined Company's Business, Condition and Prospects. The Showscan Board
believes that the Merger will create the premiere provider of high-tech
software-based theatre attractions in the out-of-home entertainment market.
The Showscan Board gave consideration to the same matters as included under "
Iwerks' Reasons for the Merger", together with advise and counsel from
Showscan's financial advisors and further concluded that the Merger would
allow Showscan stockholders to be a part of the largest, strongest, broadest
and most versatile player in the ride simulation industry.
. Showscan's Business, Condition and Prospects. The Showscan Board considered
information with respect to the financial condition, results of operations
and business of Showscan, on both a historical and prospective basis, and
current industry, economic and market conditions. The Showscan Board also
considered Showscan's historical growth strategies, including potential
business combinations with entities other than Iwerks that had been
previously explored. The Showscan Board considered favorable to its
determination that a combination with Iwerks would allow Showscan to enjoy
opportunities for
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operating efficiencies and synergies as a result of the Merger, particularly
through the integration of corporate overheads and the economies of scale.
. Iwerks's Business, Condition and Prospects. The Showscan Board considered
information with respect to the financial condition, results of operations
and business of Iwerks, on both a historical and prospective basis. In its
evaluation of Iwerks, the Showscan Board considered various historical and
current challenges in Iwerks's business and financial performance, including
(a) levels of revenue, profitability and revenue growth, (b) poor financial
performance of its portable ride simulation business, (c) prospects for the
new theatre installations and hardware installation revenue, and (d) the
reported losses for the first quarter of fiscal 1998 and the projected losses
for the second and third quarters of fiscal 1998. Management and Showscan's
legal and financial representatives made presentations to the Showscan Board
and provided it with information regarding Iwerks' financial condition and
prospects after conducting business, legal and financial due diligence. In
evaluating Iwerks' prospects, the Showscan Board considered, among other
things, the performance of Iwerks' products, the strength of its management
team and the reputation of the Iwerks brand name in motion simulation theatre
attractions. The Showscan Board also considered Iwerks' geographical
distribution of motion simulation theatres and found it to be complementary
to the distribution of Showscan theatres. The Showscan Board found favorable
the fact that the combined company would enjoy increased market
capitalization and greater financial strength.
. Termination Provisions and Termination Fee. The Showscan Board reviewed the
provisions of the Merger Agreement that permit the Showscan Board to continue
to receive unsolicited inquiries and proposals, negotiate and give
information to third parties and to change its recommendation in certain
designated circumstances. The Showscan Board also considered Showscan's
unrestricted ability to solicit, discuss and negotiate Alternative Proposals
prior to January 15, 1998 and the expense reimbursement provisions of the
Merger Agreement if Showscan should choose to terminate the Merger Agreement
due to a superior Alternative Proposal prior to January 15, 1998. The
Showscan Board also considered the provisions of the Merger Agreement which
provide for the payment to Iwerks of a termination fee under certain
circumstances and which grant Iwerks an option to purchase Showscan Common
Stock. See "THE MERGER AGREEMENT -- Termination of the Merger Agreement."
. Opinion of Allen & Company. The Showscan Board considered as favorable to its
determination the written opinion delivered on December 29, 1997 by Allen &
Company to the effect that, as of such date, the consideration to be received
by holders of Showscan Common Stock and Showscan Preferred Stock in
connection with the Merger was fair to such holders from a financial point of
view. The Showscan Board also considered the oral and written presentations
made to it by Allen & Company. In approving the Merger Agreement, the
Showscan Board did not consider the fairness opinion delivered by Allen &
Company in connection with the Showscan Board's approval of the Original
Merger Agreement. The Showscan Board considered that the exchange ratio was
below that previously agreed to by Iwerks in the Original Merger Agreement,
but concluded in light of the alternatives available to Showscan, that
proceeding with the Merger upon the terms set forth in the Merger Agreement
is in the best interest of Showscan and its stockholders. See "--
Alternatives" and "-- Opinions of Financial Advisors-- Showscan." A copy of
Allen & Company's written opinion to the Showscan Board, dated as of December
29, 1997, which sets forth the assumptions made, matters considered and
limits on the review undertaken, is attached as Appendix E to this Joint
-------- -
Proxy Statement/Prospectus and is incorporated herein by-reference.
. Ability of Stockholders of Showscan to Obtain a Continuing Equity Interest in
Iwerks. The Showscan Board regarded as favorable to its determination the
fact that the terms of the Merger permit holders of Showscan Capital Stock to
continue to hold an equity interest in Iwerks following the Merger, thus
enabling Showscan stockholders to participate in the long-term stockholder
value expected to result from the combination of the two companies.
. Historical and Recent Market Prices Compared to Consideration to be Received
by Holders of Showscan Common Stock. The Showscan Board reviewed the
historical market prices and recent trading activity of Showscan Common
Stock. The Showscan Board considered as favorable to its determination the
fact that the value to be received per share of Showscan Common Stock
represented a premium (based on the December 29, 1997 stock prices of Iwerks
and Showscan) within the equity reference ranges of premiums paid in all-
stock merger transactions with a comparable transaction value.
. Alternatives. In considering the Amendment the Showscan Board and management
discussed a range of alternatives to amending the Original Merger Agreement
in order to reduce the exchange ratio. These alternatives included proceeding
with the transaction pursuant to the terms of the Original Merger Agreement
despite the apparent lack of support among certain of Iwerks' stockholders
for the transaction, terminating the Original Merger Agreement on December
31, 1997 and continuing to seek a buyer for Showscan, terminating the
Original Merger Agreement on December 31, 1997 and abandoning efforts to sell
Showscan, and bringing an action against Iwerks for breach of the Original
Merger Agreement. In evaluating these alternatives the Showscan Board
considered the contents of the December 5, 1997 letter from Mr. Wright,
statements made by representatives of Resource Financial that in its opinion,
the largest stockholders of Iwerks would not vote in favor of the transaction
contemplated by the Original Merger Agreement, advice provided to Showscan
from Beacon Hill Partners, Inc., the proxy solicitor retained by Iwerks and
Showscan in connection with the Merger and management's assessment of
Showscan's prospects if the Merger were not to be consummated.
29
<PAGE>
. Other Considerations. The Showscan Board also considered certain negative
factors relating to the Merger, including (a) the risk that the Merger would
not be consummated, and the effect of the public announcement of the Merger
on Showscan's sales and operating results, (b) the risk that the benefits
sought in the Merger would not be fully achieved, (c) the risks attendant to
the integration of the two companies and (d) the other potential risks
described above under "RISK FACTORS." The Showscan Board believes that these
risks were outweighed by the potential significant benefits to be gained by
the Merger.
In reaching the determination to approve and recommend approval and adoption
of the Merger Agreement and the Merger, in view of the wide variety of factors
considered in connection with its evaluation thereof, the Showscan Board did not
assign any relative or specific weights to the factors set forth above, and
individual directors may have given differing weights to the different factors.
In determining that the terms of the Merger are fair to, and in the best
interests of, Showscan and its stockholders, the Showscan Board considered all
of the foregoing factors, including, with respect to its analysis of the
fairness of the exchange ratio from a financial point of view, the opinion of
Allen & Company and the oral presentations by management of Showscan regarding
its independent financial analysis of Iwerks, Showscan and the combined company.
However, the Showscan Board did not distinguish between factors that support a
determination that the Merger is "fair" and factors that support a determination
that the Merger is in the "best interests" of Showscan's stockholders.
THE SHOWSCAN BOARD UNANIMOUSLY RECOMMENDS THAT SHOWSCAN STOCKHOLDERS VOTE TO
APPROVE THE MERGER AND THE MERGER AGREEMENT.
OPINIONS OF FINANCIAL ADVISORS.
Iwerks
------
Equitable Securities
--------------------
Equitable Securities was retained by Iwerks to evaluate the fairness, from a
financial point of view, of the consideration to be offered and paid to the
stockholders of Showscan pursuant to the Merger. On December 22, 1997, in
connection with the evaluation of the proposed Merger Agreement by the Iwerks
Board, Equitable Securities delivered its oral opinion to the Iwerks Board to
the effect that, as of such date and based upon and subject to certain matters
stated in its opinion, the consideration to be paid by Iwerks in the Merger is
fair to Iwerks and its stockholders from a financial point of view. Equitable
Securities confirmed its oral opinion in its written opinion dated as of
December 29, 1997. No limitations were imposed by the Iwerks Board with respect
to the investigations made or the procedures followed by Equitable Securities in
rendering its opinion. Equitable Securities' opinion was delivered for the
information of the Iwerks Board and is not a recommendation to any Iwerks
stockholder as to how such stockholder should vote at any meeting of Iwerks
stockholders called to consider matters relating to the Merger and does not
address Iwerks' business decision to effect the Merger.
In arriving at its opinion, Equitable Securities reviewed certain publicly
available business and financial information relating to Iwerks and Showscan,
certain non-public information relating to Iwerks and Showscan and the terms and
conditions of the draft Amendment. Equitable Securities also reviewed certain
other information, including financial forecasts provided to it by Iwerks and
Showscan, and met with management of both Iwerks and Showscan to discuss the
businesses and prospects of the respective companies.
In addition, Equitable Securities considered the financial terms of certain
other business combinations and other transactions which have recently been
effected and also considered the financial effects of the Merger on Iwerks.
Furthermore, Equitable Securities considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
which it deemed relevant.
In connection with its review, Equitable Securities did not assume any
responsibility for independent verification of the foregoing information and
relied upon the accuracy and completeness of all of the foregoing information.
With respect to the financial forecasts (including without limitation projected
operational benefits and cost savings arising from the Merger), Equitable
Securities assumed that they had been reasonably prepared on bases reflecting
the best currently available estimates and judgments of the management of
Showscan and Iwerks as to the future financial performance of Showscan and
Iwerks. Equitable Securities expressed no view as to such forecasts or the
assumptions on which they were based and there cannot be any assurance that
actual results of Showscan or Iwerks will not differ materially from those
reflected in the forecasts. In addition, Equitable Securities did not make an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of Showscan or Iwerks, nor was Equitable Securities furnished with
such evaluations or appraisals.
The full text of the written opinion of Equitable Securities, dated as of
December 29, 1997, which sets forth the assumptions made, procedures followed,
matters considered and limitations on and the scope of the review of Equitable
Securities in rendering its opinion, is attached hereto as Appendix B.
----------
Equitable Securities has consented to the inclusion and discussion of its
opinion in the Joint Proxy Statement/Prospectus and Iwerks stockholders are
urged to read Equitable Securities' opinion in its entirety. The summary of the
opinion of Equitable Securities is qualified in its entirety by reference to the
full text of such opinion.
The generally accepted financial analyses Equitable Securities used in
reaching its opinion which it discussed with the Iwerks Board including (a) a
relative contribution analysis, which included a comparison of respective
financial positions and certain operating results
30
<PAGE>
of Iwerks and Showscan, (b) a comparable acquisition analysis, which consisted
of reviewing the financial terms of certain other similar transactions recently
effected which were considered to be comparable to the Merger, (c) an economic
value analysis, which included an assessment of the book value and estimated
economic value of the assets to be acquired by Iwerks in the Merger relative to
the consideration paid, (d) a discounted cash flow ("DCF") analysis, which
consisted of discounting to present value the incremental projected cash flows
and terminal values anticipated following the Merger and (e) an analysis of the
pro forma effect of the Merger on Iwerks' fully diluted earnings per share over
the fiscal years 1998-2000. The material portions of these analyses are
summarized below.
Relative Contribution Analysis
Equitable Securities analyzed the relative contribution of Iwerks and Showscan
across a broad range of financial and operating measures. Utilizing publicly
available information as of the most recent annual and quarterly reporting
period for each company, Equitable Securities determined the percentage
contribution provided by Iwerks and Showscan of several key financial measures
including, total revenues, film licensing revenues, total assets, stockholders'
equity, market capitalization and firm value, among others. In addition,
Equitable Securities applied a similar analysis to certain key operating
measures including, installed theater base and size of film library, among
others. This analysis indicated a reference range of post-Merger ownership
percentage for Showscan stockholders of approximately 20%-25% on a fully-diluted
basis.
Comparable Acquisition Analysis
Equitable Securities reviewed selected acquisitions completed under the
pooling-of-interests method over the past two years with total consideration
between $25 million and $75 million across a wide range of industries. Few
transactions during this time period were directly comparable to the Merger. As
such, a broad sample of precedent transactions was selected for comparative
purposes. Equitable Securities analyzed the premiums paid in the selected
transactions, based on the target's closing prices (i) one day, (ii) one week
and (iii) four weeks prior to the public announcement of the transaction.
Reference ranges and averages for each of the time periods were (i) 26%-92% (48%
average), (ii) 30%-94% (50% average) and (iii) 29%-190% (62% average),
respectively.
Economic Value Analysis
Equitable Securities compared the estimated value of the Merger, relative to
the total consideration offered, on the basis of acquired book value and
estimated economic value. Based on Showscan's financial statements for the
quarter ended September 30, 1997, the company reported stockholders' equity of
approximately $7.6 million. Equitable Securities estimated Showscan's economic
value to include the present value of the gross margin contributed by
anticipated future film distribution revenue and equipment sales, the
replacement value of seven key films in the Showscan library, Showscan's net
working capital balance at September 30, 1997, the book value of Showscan
patents and operating equipment as of September 30, 1997, and estimated
realizable present value of Showscan's net operating loss carryforwards as of
March 31, 1997. These components resulted in a reference range for the economic
value to be acquired in the Merger of approximately $26.2 million to $28.2
million.
Discounted Cash Flow Analyses
Equitable Securities' DCF analyses included analyses of the incremental cash
flows anticipated to be generated by the combined operations relative to Iwerks'
projected stand-alone cash flows. The analyses were based on financial
forecasts provided by management of Iwerks and Showscan and a cash forecast
prepared in conjunction with Iwerks management for each of the five years ended
June 30, from 1998 to 2002.
Equitable Securities derived the incremental "free cash flow" and discounted
this cash flow to present values, applying discount rates ranging from 12.2% to
14.2%. Equitable Securities arrived at this range of appropriate discount rates
based on its analysis of the combined entity's estimated weighted average cost
of capital. To approximate the perpetual value of the incremental cash flow
stream in 2002, Equitable Securities applied terminal multiples of 5.0x to 7.0x
"free cash flow" in 2002.
Based on the foregoing analysis, Equitable Securities derived an overall
reference range of value for the incremental cash flows anticipated to be
generated by the combined operations relative to Iwerks' projected stand-alone
cash flows, ranging from approximately $45.5 million to $56.5 million.
Pro Forma Effect on Iwerks' Fully Diluted Earnings Per Share
Equitable Securities analyzed the pro forma effect on Iwerks' fully diluted
earnings per share from the Merger based on financial forecasts prepared by
Iwerks management. This analysis indicated that the Merger would be accretive
(prior to one-time transaction related charges) for Iwerks for the fiscal years
analyzed (1998-2000).
Equitable Securities also rendered a fairness opinion in connection with the
Original Merger Agreement. The full text of the written opinion of Equitable
Securities, dated as of August 1, 1997, which sets forth the assumptions made,
procedures followed, matters considered and limitations on and the scope of the
review of Equitable Securities in rendering its opinion, is attached hereto as
Appendix C. Equitable Securities has consented to the inclusion and discussion
- ----------
of its opinion in the Joint Proxy Statement/Prospectus and Iwerks
31
<PAGE>
stockholders are urged to read Equitable Securities' opinion in its entirety.
The summary of the opinion of Equitable Securities is qualified in its entirety
by reference to the full text of such opinion.
Equitable Securities used the same generally accepted financial analyses in
reaching its opinion dated as of August 1, 1997 as those employed in reaching
its opinion dated as of December 29, 1997. The material portions of the
analyses conducted in connection with the opinion dated August 1, 1997 are
summarized below.
Relative Contribution Analysis
Equitable Securities analyzed the relative contribution of Iwerks and Showscan
across a broad range of financial and operating measures. Utilizing publicly
available information as of the most recent fiscal year end for each company,
Equitable Securities determined the percentage contribution provided by Iwerks
and Showscan of several key financial measures including total revenues, film
licensing revenues, total assets, stockholders' equity, market capitalization
and firm value, among others. In addition, Equitable Securities applied a
similar analysis to certain key operating measures including, installed theater
base and size of film library, among others. This analysis indicated a
reference range of post-Merger ownership percentage for Showscan stockholders of
approximately 27% to 30% on a primary basis and 30% to 35% on a fully-diluted
basis. Based upon the terms of the Merger Agreement, the former Showscan
stockholders will hold, immediately after the Merger, approximately 31.6% of the
outstanding shares of Iwerks Common Stock on a primary basis, or approximately
34.9% on a fully-diluted basis.
Comparable Acquisition Analysis
Equitable Securities reviewed approximately 20 selected acquisitions involving
public targets completed under the pooling-of-interests method over the past two
years with total consideration between $25 million and $75 million across a wide
range of industries to compare premiums paid with the contemplated Merger.
Equitable Securities analyzed the premiums paid in such transactions based on
the target's closing prices (i) one day, (ii) one week and (iii) four weeks
prior to the public announcement of the transaction. Reference ranges and
averages for each of the time periods were (i) 26% - 92% (48% average), (ii) 28%
- - 94% (50% average) and (iii) 29% - 190% (62% average), respectively. Based
upon Iwerks' closing price of $5.375 on July 25, 1997, the most recent trading
date prior to completion of Equitable Securities' analysis for the Iwerks Board,
the proposed terms of the Merger represented a 56%, 54% and 68% premium to
Showscan's closing prices one day, one week and four weeks prior to such date,
respectively. Based upon Iwerks' closing price of $4.875 on August 4, 1997, the
day prior to the public announcement, the proposed terms of the Merger
represented a 54%, 33% and 66% premium to Showscan's closing prices one day, one
week (7/28/97) and four weeks (7/7/97) prior to such date, respectively. No
transactions involving a public target company during this time period were
deemed to be directly comparable to the Merger.
Economic Value Analysis
Equitable Securities compared the estimated value of the Merger, relative to
the total estimated consideration offered of approximately $36.9 million
(including assumed debt obligations), on the basis of acquired book value and
estimated economic value. Based on Showscan's audited financial statements for
the fiscal year ended March 31, 1997, the company reported stockholders' equity
of approximately $10.2 million. Equitable Securities estimated Showscan's
economic value to include the present value of the gross margin contributed by
anticipated future film distribution revenue and equipment sales, the
replacement value of seven key films in the Showscan library, Showscan's net
working capital balance at March 31, 1997, the book value of Showscan patents
and operating equipment as of March 31, 1997, and estimated realizable present
value of Showscan's net operating loss carry forwards as of March 31, 1997.
These components resulted in a reference range for the economic value to be
acquired in the Merger of approximately $38.3 million to $40.3 million.
Discounted Cash Flow Analyses
Equitable's Securities DCF analyses included analyses of the incremental cash
flows anticipated to be generated by the combined operations relative to Iwerks'
projected stand-alone cash flows. The analyses were based on financial
forecasts provided by management of Iwerks and Showscan and a cash forecast
prepared in conjunction with Iwerks management for each of the five years ended
June 30, from 1998 to 2002. Equitable Securities derived the incremental "free
cash flow" and discounted this cash flow to present values, applying discount
rates ranging from 12.2% to 14.2%. Equitable Securities arrived at this range
of appropriate discount rates based on its analysis of the combined entity's
estimated weighted average cost of capital. This measure was calculated
applying the Capital Asset Pricing Model and included a 2.5% small
capitalization risk premium to account for limited liquidity and volatility of
revenues derived from equipment sales. In addition, Equitable Securities
assumed a 0.0% marginal tax rate given Iwerks' and Showscan's large net
operating loss positions, which increases the after tax cost of debt financing.
To approximate the perpetual value of the incremental cash flow stream in 2002,
Equitable Securities applied terminal multiples of 5.0x to 7.0x "free cash flow"
in 2002.
Based on the foregoing analysis, Equitable Securities derived an overall
reference range of value for the incremental cash flows anticipated to be
generated by the combined operations relative to Iwerks' projected stand-alone
cash flows, ranging from approximately $37.8 million to $46.8 million. This
compares to total estimated consideration offered in the Merger of approximately
$36.9 million (including assumed debt obligations).
32
<PAGE>
Pro forma Effect on Iwerks' Fully Diluted Earnings Per Share
Equitable Securities analyzed the pro forma effect on Iwerks' fully diluted
earnings per share from the Merger based on financial forecasts prepared by
Iwerks management. This analysis indicated that the Merger would be accretive
(prior to one-time transaction related charges) for Iwerks for the fiscal years
analyzed (1998 - 2000).
In arriving at its opinions, Equitable Securities performed a variety of
financial analyses, including those summarized above. The summary set forth in
this section does not purport to be a complete description of Equitable
Securities' analyses. Equitable Securities believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or of the summary
above, without considering all factors and analyses, could create an incomplete
view of the processes underlying Equitable Securities' opinions, so that the
ranges of valuation resulting from any particular analysis described above
should not be taken to be Equitable Securities' view of the actual value of
Showscan. Equitable Securities' analyses depend on numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Iwerks and Showscan. Equitable Securities' analyses are not necessarily
indicative of actual values or actual future results that might be achieved and
are not and do not purport to be appraisals or otherwise reflective of prices at
which companies may actually be sold.
Pursuant to an engagement letter dated as of February 28, 1997 as amended on
August 6, 1997 (the "August Amendment") and as further amended in January,
1998 (as amended, the "Engagement Letter") between Iwerks and Equitable
Securities, Equitable Securities received a fee of $50,000 upon the issuance of
its opinion and a fee of $50,000 upon execution of the Merger Agreement. Such
fees are not contingent upon consummation of the Merger, but will be credited
against an additional advisory fee of up to $361,000 payable by Iwerks to
Equitable Securities under the Engagement Letter upon consummation of the
Merger. Pursuant to the August Amendment, Equitable Securities was entitled to
a $495,000 advisory fee. At the suggestion of Equitable Securities, the
advisory fee was reduced to a maximum of $361,000 in light of the aggregate
merger consideration to be issued to the holders of Showscan Capital Stock
pursuant to the Merger Agreement. Iwerks has also agreed to reimburse Equitable
Securities for out-of-pocket expenses, including reasonable fees and
disbursements of counsel. Iwerks has also agreed to indemnify Equitable
Securities and its affiliates, their respective directors, officers, partners,
agents and employees and each person, if any, controlling Equitable Securities
or any of its affiliates against certain liabilities, including certain
liabilities under the federal securities laws, relating to or arising out of its
engagement.
Equitable Securities is a nationally recognized investment banking firm and
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions and for other purposes. The Iwerks
Board selected Equitable Securities to act as its financial advisor on the basis
of the reputation and previous mergers and acquisitions experience of Equitable
Securities. Equitable Securities does not currently publish research reports or
maintain markets in or actively trade the Iwerks Common Stock or the Showscan
Common Stock.
Resource Financial
------------------
On October 24, 1997, Resource Financial was retained by Iwerks to evaluate the
fairness, from a financial point of view, of the consideration to be paid to the
stockholders of Showscan pursuant to the Merger. On December 22, 1997, in
connection with the evaluation of the proposed Merger Agreement by the Iwerks
Board, Resource Financial delivered its oral opinion to the Iwerks Board to the
effect that, as of such date and based upon and subject to certain matters
stated in its opinion, the consideration to be paid by Iwerks in the Merger is
fair to Iwerks and its stockholders from a financial point of view. Resource
Financial confirmed its oral opinion in its written opinion delivered to the
Iwerks Board on December 29, 1997.
The opinion of Resource Financial was delivered for the information of the
Iwerks Board and is not a recommendation to any Iwerks stockholder as to how
such stockholder should vote at any meeting of Iwerks stockholders called to
consider matters relating to the Merger and does not address Iwerks' business
decision to effect the Merger.
In arriving at its opinion, Resource Financial: (a) reviewed the terms and
conditions of the Merger Agreement and related documents; (b) analyzed publicly
available historical business and financial information relating to Iwerks and
Showscan, as presented in documents filed with the Securities and Exchange
Commission; (c) reviewed Iwerks' and Showscan's operations, visited Iwerks' and
Showscan's respective headquarters; (d) reviewed certain non-public information
relating to Iwerks and Showscan, including financial and operating results of
Showscan and Iwerks and management's forecasts prepared by Showscan and Iwerks;
(e) conducted discussions with certain members of the senior management of
Iwerks and Showscan with respect to the financial condition, business,
operations, strategic objectives and prospects of Iwerks and Showscan; (f)
reviewed and analyzed public information, including certain stock market data
and financial information relating to selected public companies which Resource
Financial deemed generally comparable to Iwerks and Showscan; (g) reviewed the
trading history of the Iwerks Common Stock and the Showscan Common Stock,
including each company's respective performance in comparison to market indices
and to selected companies in comparable businesses; (h) considered premiums and
multiples paid in merger and acquisition transactions that Resource Financial
deemed to be comparable to the Merger; (i) compared trading multiples and
valuation measures with respect to certain financial performance criteria for
publicly-traded companies that participate in the ride simulation and/or giant
screen industry, and (j) conducted such other financial analyses and
investigations as Resource Financial deemed necessary or appropriate for the
purposes of its opinion.
33
<PAGE>
In connection with its review, Resource Financial did not assume any
responsibility for independent verification of the foregoing information and
relied upon the accuracy and completeness of all of the foregoing information.
With respect to the financial forecasts (including without limitation projected
operating benefits and cost savings arising from the Merger), Resource Financial
assumed that they had been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of Iwerks and
Showscan as to the future financial performance of Iwerks and Showscan.
Resource Financial expressed no view as to such forecasts or the assumptions on
which they were based and there cannot be any assurance that actual results of
Iwerks and Showscan will not differ materially from those reflected in the
forecasts. In addition, Resource Financial did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Iwerks and Showscan, nor was Resource Financial furnished with any such
evaluations or appraisals.
In determining the appropriate analyses to conduct and when performing those
analyses, Resource Financial made numerous assumptions with respect to industry
performance, general business, financial, market and economic conditions and
other matters, many of which are beyond the control of Iwerks and Showscan. The
analyses which Resource Financial performed are not necessarily indicative of
actual values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be bought
or sold or the prices at which any securities may trade at the present time or
at any time in the future.
The full text of the written opinion of Resource Financial, dated as of
December 29, 1997, which sets forth the assumptions made, procedures followed,
matters considered, limitations on, and the scope of, the review of Resource
Financial in rendering its opinion, is attached hereto as Appendix D. Resource
-------- -
Financial has consented to the inclusion and discussion of its opinion in the
Joint Proxy Statement/Prospectus and Iwerks stockholders are urged to read the
opinion in its entirety. The summary of the opinion of Resource Financial set
forth in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
The generally accepted financial analyses Resource Financial used in reaching
its opinion (and which it discussed with the Iwerks Board) included (a) a
relative contribution analysis, which included a comparison of respective
financial positions and certain operating results of Iwerks and Showscan, (b) an
analysis of the market values of companies engaged in similar businesses to
those of Iwerks and Showscan, (c) an economic value analysis, which included an
assessment of the book value and estimated economic value of the Showscan assets
to be acquired by Iwerks in the Merger, and a comparison to the consideration
paid, and (d) an analysis of the pro forma effect of the Merger on Iwerks' fully
diluted earnings per share. The material portions of these analyses are
summarized below.
Relative Contribution Analysis
------------------------------
Resource Financial analyzed the relative contribution of Iwerks and Showscan
across a broad range of financial and operating measures. Utilizing publicly
available information as of the most recent fiscal quarters and years end for
each company, Resource Financial determined the percentage contribution provided
by Iwerks and Showscan of several key financial measures including total
revenues, film licensing revenues, total assets, stockholders' equity, market
capitalization and total firm value, among others. This analysis indicated a
reference range of post-Merger ownership percentage for Showscan stockholders of
approximately 13.7% to 29.9% on both a primary and fully diluted basis (assuming
the Showscan Preferred Stock is converted). Based upon the terms of the Merger
Agreement, the former Showscan stockholders will hold, immediately after the
Merger, approximately 25.2% of the outstanding shares of Iwerks Common Stock on
both a primary and fully diluted basis (assuming the Showscan Preferred Stock is
converted and assuming no exercise of outstanding options or warrants of
Showscan or conversion of the 8% Notes since the respective exercise or
conversion prices, as applicable, on an as converted basis, exceed the fair
market value of the Iwerks Common Stock on December 26, 1997).
Comparable Company Analysis
---------------------------
Resource Financial analyzed a number of companies in the entertainment
industry. Because of Iwerks' and Showscan's leading positions in the
ride simulation industry, Resource Financial concluded that there were no
companies directly comparable to Iwerks or Showscan for purposes of
analyzing relative value.
Economic Value Analysis
-----------------------
Resource Financial compared the estimated value being assigned to Showscan in
the Merger, relative to the total estimated consideration offered to Showscan's
stockholders of approximately $15.5 million. This consideration is calculated
based on the December 26, 1997 closing sale price of the Iwerks Common Stock of
$2.625, and assumes that Showscan has approximately $6.7 million in funded debt
and $2.0 million in cash on that date. The value analysis is based on the
acquired book value and estimated economic value of Showscan's assets and
liabilities. Resource Financial included in Showscan's economic value the
present value of the contribution margin of anticipated future film distribution
revenue and equipment sales. These components result in a reference range for
the economic value to be acquired in the Merger of approximately $13.3 million
to $17.7 million.
Pro forma Effect on Iwerks' Fully Diluted Earnings Per Share
------------------------------------------------------------
Resource Financial analyzed the pro forma effect on Iwerks' fully diluted
earnings per share from the Merger based on financial forecasts prepared by
Iwerks' management. This analysis indicated that the Merger would be accretive
(prior to one-time transaction related charges) for Iwerks for the fiscal years
analyzed (1998 - 2000).
34
<PAGE>
In arriving at its opinion, Resource Financial performed a variety of
financial analyses, including those summarized above. The summary set forth in
this section does not purport to be a complete description of Resource
Financial's analyses. Resource Financial believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses or the summary above, without considering all factors
and analyses, could create an incomplete view of the processes underlying
Resource Financial's opinion, so that the ranges of valuation resulting from any
particular analysis described above should not be taken to be Resource
Financial's view of the actual value of Showscan.
Pursuant to an engagement letter dated as of October 24, 1997, between Iwerks
and Resource Financial (as amended on December 23, 1997, the "Engagement
Letter"), Resource Financial received an initial transaction evaluation and
consultative fee of $100,000, and a fee of $50,000 upon approval of the Merger
Agreement by the Iwerks Board. Furthermore, Resource Financial has been
retained to prepare, in conjunction with the management of Iwerks and Showscan,
a transition plan setting forth the integration of Showscan into Iwerks, as well
as the anticipated synergies from said integration. For its activities relating
to this plan, Resource Financial will receive an additional $50,000, upon
approval of this plan by management of Iwerks. Such fees are not contingent upon
consummation of the Merger. Resource Financial will receive an additional
advisory fee of $200,000 upon consummation of the Merger. Iwerks has also
agreed to reimburse Resource Financial for out-of-pocket expenses in connection
to the above-referenced activities. Iwerks has also agreed to indemnify
Resource Financial and its affiliates, their respective directors, officers,
partners, agents and employees and each person controlling Resource Financial or
any of its affiliates, against certain liabilities, including certain
liabilities under the federal securities laws, relating to or arising out if its
engagement.
Resource Financial is a nationally recognized investment banking firm and
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions and for other purposes. The Iwerks
Board selected Resource Financial to act as its financial advisor on the basis
of the reputation and previous mergers and acquisitions experience of Resource
Financial. Resource Financial does not currently publish research reports or
maintain markets in or actively trade the Iwerks Common Stock or the Showscan
Common Stock.
SHOWSCAN
--------
As part of its ongoing advisory relationship, Allen & Company was retained by
Showscan to evaluate the fairness, from a financial point of view, of the
consideration to be offered and paid to the holders of Showscan Common Stock and
Showscan Preferred Stock in connection with the Merger. At the meeting of the
Showscan Board on December 29, 1997, Allen & Company delivered its opinion to
the effect that, as of such date, the consideration to be received by holders of
Showscan Common Stock and Showscan Preferred Stock in connection with the Merger
was fair to such holders from a financial point of view. At the meeting of the
Showscan Board on July 31, 1997, Allen & Company made a similar presentation to
the Showscan Board (the "July Presentation") and delivered an opinion of similar
tenor to the December 29, 1997 opinion based upon the original terms of the
Merger.
The full text of the written opinion of Allen & Company, dated December 29,
1997 (the "December Opinion"), is set forth as Appendix E to this Joint Proxy
-------- -
Statement/Prospectus and describes the assumptions made, matters considered and
limits on the review undertaken. Allen & Company has consented to the inclusion
and discussion of its opinion in the Joint Proxy Statement/Prospectus and
Showscan stockholders are urged to read the opinion in its entirety. Allen &
Company's opinion is directed only to the fairness, from a financial point of
view, of the consideration which the holders of Showscan Common Stock and
Showscan Preferred Stock would receive in the Merger and does not constitute a
recommendation of the Merger over other courses of action that may be available
to Showscan or constitute a recommendation to any holder of Showscan Common
Stock or Showscan Preferred Stock concerning how such holder should vote with
respect to the Merger or the Merger Agreement. The summary of the opinion of
Allen & Company set forth in this Joint Proxy Statement/Prospectus is qualified
in its entirety by reference to the full text of such opinion.
In arriving at its opinion, Allen & Company (a) reviewed the terms and
conditions of the Merger Agreement and related documents; (b) analyzed publicly
available historical business and financial information relating to Showscan and
Iwerks, as presented in documents filed with the Securities and Exchange
Commission; (c) reviewed Showscan's and Iwerks' operations, visited Showscan's
and Iwerks' respective headquarters and considered the views of professional
analysts covering Showscan and Iwerks; (d) reviewed certain non-public
information relating to Showscan and Iwerks, including financial and operating
results of Showscan and Iwerks and management's forecasts prepared by Showscan
and Iwerks; (e) conducted discussions with certain members of the senior
management of Showscan and Iwerks with respect to the financial condition,
business, operations, strategic objectives and prospects of Showscan and Iwerks,
respectively; (f) reviewed and analyzed public information, including certain
stock market data and financial information relating to selected public
companies which Allen & Company deemed generally comparable to Showscan and
Iwerks; (g) reviewed the trading history of the Showscan Common Stock and the
Iwerks Common Stock, including each company's respective performance in
comparison to market indices and to selected companies in comparable businesses;
(h) considered premiums paid in selected all-stock merger and acquisition
transactions that Allen & Company deemed to be of a size comparable to the
Merger; and (i) conducted such other financial analyses and investigations as
Allen & Company deemed necessary or appropriate for the purposes of its opinion.
In connection with its review, Allen & Company assumed and relied on the
accuracy and completeness of the financial and other information it reviewed for
the purposes of its opinion and did not assume any responsibility for any
independent verification of such information or for any independent evaluation
or appraisal of the assets of Showscan or Iwerks. With respect to Showscan's
and Iwerks' financial forecasts, Allen & Company assumed that they had been
reasonably prepared on a basis reflecting the best currently available judgments
of the management of Showscan and Iwerks as to the future financial performance
of Showscan and Iwerks, respectively,
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and Allen & Company expressed no opinion with respect to such forecasts or the
assumptions on which they were based. Allen & Company's opinion was necessarily
based upon general economic, monetary and market conditions existing on the date
of its opinion as such conditions may affect the business and prospects of
Showscan. Allen & Company's opinion does not imply any conclusion as to the
likely trading range of the Iwerks Common Stock following the consummation of
the Merger, which may vary depending on, among other factors, changes in
interest rates, dividend rates, market conditions, general economic conditions
and other factors that generally influence the price of securities.
The following is a summary of all material matters presented by Allen &
Company to the Showscan Board on December 29, 1997 in connection with the
rendering of Allen & Company's fairness opinion:
Overview of Transaction Terms. Allen & Company presented an overview of the
-----------------------------
terms of Merger, as amended by the Amendment to the Original Merger Agreement.
Allen & Company commented to the Board that the Amendment provides Showscan with
the ability to enter into an alternative transaction until January 15, 1998
without the payment of a termination fee to Iwerks and, consequently, this
change provides the Showscan Board with an additional measure of comfort that
the terms of the Merger are fair to Showscan's stockholders. Allen & Company
noted that based on the December 26, 1997 closing price of the Iwerks Common
Stock ($2.625), the per share value of the consideration payable to the holders
of Showscan Common Stock was $1.628, a 53.2% premium based on the closing price
of the Showscan Common Stock on December 26, 1997 ($1.063). Allen & Company
also noted that the 0.62 exchange ratio constituted a 12.5% premium to the ratio
of the market price of the Showscan Common Stock to the market price of the
Iwerks Common Stock on August 4, 1997, the last trading day prior to the public
announcement of the Merger. Allen & Company commented that following the
original public announcement of the Merger, the market prices of the Showscan
Common Stock and the Iwerks Common Stock appeared to have been linked, as
evidenced by the 19% decline in the market price of each stock from August 7,
1997 to December 8, 1997. Allen & Company noted that from December 8, 1997 to
December 26, 1997, such stocks became progressively unlinked as the Showscan
Common Stock and the Iwerks Common Stock declined by approximately 50% and 16%,
respectively, during such period. Allen & Company commented to the Board that a
potential factor in such stock prices becoming unlinked may have been increasing
doubts in the market concerning the ultimate consummation of the Merger. As a
result, Allen & Company concluded that the market price of the Showscan Common
Stock on December 26, 1997 was likely a representative price for such security.
Allen & Company also analyzed the total equity value based on the merger
consideration and the equity value of the merger consideration plus long-term
debt net of any cash of Showscan (the "Transaction Value"). This analysis
indicated an equity value of Showscan of $10.8 million and a Transaction Value
of Showscan of $15.5 million.
Iwerks' Recent Developments. Allen & Company reviewed for the Showscan
---------------------------
Board the recent developments relating to Iwerks since the date of the July
Presentation as contained in public announcements made by Iwerks since such
date. Allen & Company reviewed Iwerks' financial performance since the date of
the July Presentation, including Iwerks' balance sheet as of September 30, 1997
and its historical and projected revenue, EBITDA and net income for the fiscal
quarters ended September 30, 1997 and December 31, 1997 and the fiscal year
ending June 30, 1998. Allen & Company also charted Iwerks' stock price and
trading volume history since July 1, 1997 and provided a comparison of Iwerks'
stock price performance against that of the S&P 500 and other companies in its
industry since August 4, 1997. Allen & Company noted that the decline in
Iwerks' financial performance over such period coincided with a corresponding
decline in the market price of the Iwerks Common Stock.
Showscan's Recent Developments. Allen & Company reviewed for the Showscan
------------------------------
Board the recent developments relating to Showscan since the date of the July
Presentation as contained in public announcements made by Showscan since such
date. Allen & Company reviewed Showscan's financial performance since the date
of the July Presentation, including Showscan's balance sheet as of September 30,
1997 and its historical and projected revenue, EBITDA and net income for the
fiscal quarters ended June 30, 1997 and September 30, 1997 and the fiscal year
ending March 31, 1998. Allen & Company also charted Showscan's stock price and
trading volume history since July 1, 1997. Noting a linkage between the market
prices of the Showscan Common Stock and the Iwerks Common Stock since the public
announcement of the Merger, Allen & Company commented that the market price of
the Showscan Common Stock has been impacted negatively by the decline in the
Iwerks' Common Stock and by the decline in Showscan's own financial performance.
Allen & Company concluded that the disparate performance of the Showscan Common
Stock and the Iwerks Common Stock since December 8, 1997, potentially as a
result of increasing market doubts about the realization of the Merger, likely
indicated that the price of the Showscan Common Stock on December 26, 1997 was a
representative price for such security.
Transaction Analysis. Allen & Company reviewed the merger consideration to
--------------------
be received by Showscan stockholders in terms of historical and projected
multiples of key valuation measures and financial statistics, as compared to (a)
Imax Corporation ("Imax"), Iwerks and Cinema Ride, Inc., publicly-traded
companies that participate in the ride simulation and/or giant screen industry,
and (b) AMC Entertainment Inc., Carmike Cinemas, Inc., Cineplex Odeon
Corporation, GC Companies, Inc. and Regal Cinemas, Inc., all of which are
engaged in the motion picture exhibitor business (collectively, the
"Exhibitors"). Based on the merger consideration implied by Iwerks' closing
stock price on December 26, 1997, the multiple of Transaction Value to revenue
represented by Iwerks' offer for Showscan was 0.8x and the multiple of equity
value to book value was 0.9x. The multiple of Transaction Value to EBITDA was
not meaningful due to losses. Based on such analysis, Allen & Company concluded
that the multiples and valuation measures represented by the merger
consideration was within the range of the comparable companies.
Allen & Company noted that the merger consideration payable for each share
of Showscan Common Stock pursuant to the Merger (based on a closing price of the
Iwerks Common Stock on December 26, 1997) was $1.628, representing a premium of
approximately 53.2% over the closing price on December 26, 1997; comparatively,
the average in selected all-stock merger transactions
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involving public company targets with a transaction value ranging from $10
million to $30 million for premiums above the one-day closing price and the one-
week and four-week closing prices would be 28.6%, 29.4% and 35.7%, respectively.
Based on these analyses, Allen & Company concluded that the premium represented
by the merger consideration (based on the December 26, 1997 stock prices of
Iwerks and Showscan) was within the equity reference ranges of premiums paid in
all-stock merger transactions with a comparable transaction value.
Allen & Company also analyzed the relative contribution of revenues, book
value and business activities compared to the relative equity value and
Transaction Value ascribed by the Merger and performed various additional
analyses after giving effect to the merger consideration, including implied
offer premiums being paid for the Showscan Capital Stock, based on the
historical ratios of Iwerks' stock prices to Showscan's stock prices on selected
dates; the recent historical relationship between Iwerks and Showscan stock
prices; and pro forma ownership of the Iwerks Common Stock by Showscan's pre-
Merger stockholders. Allen & Company also summarized its combination analysis
of the Merger after giving effect to the merger consideration. Based on the
assumptions used in this analysis, including certain cost savings and pooling of
interests accounting treatment, Allen & Company confirmed its conclusion that
the transaction would continue to be significantly accretive to the stand-alone
per share earnings of both companies.
Allen & Company also rendered its opinion with respect to the Original Merger
Agreement. The full text of the written opinion of Allen & Company, dated July
31, 1997 (the "July Opinion"), is set forth as Appendix F to this Joint Proxy
-------- -
Statement/Prospectus and describes the assumptions made, matters considered and
limits on the review undertaken. Allen & Company has consented to the inclusion
and discussion of its July Opinion in the Joint Proxy Statement/Prospectus and
Showscan stockholders are urged to read the opinion in its entirety.
In arriving at its July Opinion, Allen & Company conducted primarily the same
financial analyses and investigations as it did in connection with its December
Opinion along with such other analyses and investigations that it deemed
necessary or appropriate for the purposes of its July Opinion. The following is
a summary of the material items that Allen & Company reviewed and analyzed in
its presentation to the Showscan Board in connection with the rendering of Allen
& Company's July Opinion:
Transaction Overview. Allen & Company presented an overview of the Merger,
noting the strategic fit of combining Iwerks, the largest provider of ride
simulation theaters and second largest provider of giant screen theater systems,
with Showscan's motion simulation theater business. Allen & Company noted that
based on the July 29, 1997, closing price of the Iwerks Common Stock, the per
share value of the consideration payable to the holders of the Showscan Common
Stock was $4.463, a 70.0%, 55.2% and 78.5% premium based on the closing prices
of Showscan Common Stock on July 29, 1997, one week prior and four weeks prior,
respectively. Allen & Company also analyzed the total equity value and the
Transaction Value of Showscan based on the merger consideration. This analysis
indicated an equity value of Showscan implied by the merger consideration of
$30.4 million and a Transaction Value of Showscan of $33.5 million.
Overview of Iwerks. Allen & Company presented an overview of Iwerks,
including a description of Iwerks' ride simulation and giant screen theater
businesses and film libraries. Allen & Company reviewed Iwerks' financial
performance, including its revenue growth and operating margins, for the fiscal
years ended June 30, 1993 through the last twelve months ended March 31, 1997,
and those projected for the fiscal years ending June 30, 1997 and 1998. Allen &
Company also charted Iwerks' stock price and trading volume history since the
initial public offering of Iwerks' Common Stock in October 1993. Allen &
Company provided a comparison of Iwerks' stock price performance against that of
the S&P 500 and other companies in its industry over the past year and
summarized selected analyst reports on Iwerks' Common Stock.
Finally, Allen & Company presented comparable company trading multiples and
valuation measures with respect to certain financial performance criteria for
two groups of related companies consisting of (a) Imax, Showscan and Cinema Ride
Inc., publicly-traded companies that participate in the ride simulation and/or
giant screen industry, and (b) the Exhibitors. Such trading multiples and
valuation measures included, among other things, ratios of the equity market
value, adjusted for the net debt position ("Enterprise Value"), to revenues and
EBITDA, each for the latest reported twelve month period ("LTM") and ratios of
equity market value to book value as of the latest reported period and based on
stock prices as of the most recent practical date available prior to delivery of
Allen & Company's July Opinion. Allen & Company also reviewed the ratios of
equity market prices per share to LTM and projected earnings per share, however,
it was noted that such ratios were not meaningful due to the lack of material
profitability of Iwerks and Showscan. Allen & Company noted that the multiple
of Enterprise Value to revenue was 6.8x, 0.8x and 1.2x for Imax, Cinema Ride
Inc., and Showscan, respectively, as compared to 1.1x for Iwerks. The multiple
of Enterprise Value to revenue for the Exhibitors ranged from 0.5x to 3.6x, with
a mean, excluding the high and low, of 1.2x. The multiple of Enterprise Value
to EBITDA was 16.8x and 15.1x for Imax and Cinema Ride Inc., respectively, as
compared to 10.4x for Iwerks (Showscan's multiple of Enterprise Value to EBITDA
was not meaningful due to losses). The multiple of Enterprise Value to EBITDA
for the Exhibitors ranged from 5.7x to 13.9x, with a mean, excluding the high
and low, of 8.6x. The multiple of market equity value to book value was 13.7x,
0.2x and 1.7x for Imax, Cinema Ride Inc., and Showscan, respectively, as
compared to 1.1x for Iwerks. The multiple of market equity value to book value
for the Exhibitors ranged from 1.4x to 3.4x, with a mean, excluding the high and
low, of 2.2x. Allen & Company concluded that the trading multiples and
valuation measures represented by Iwerks' stock price were generally within the
range of other companies so analyzed.
Overview of Showscan. Allen & Company presented an overview of Showscan,
including a description of Showscan's domestic and international motion
simulation theater business and motion simulation and specialty film libraries.
Allen & Company reviewed
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Showscan's financial performance, including its revenue growth and operating
margins, for the fiscal years ended March 31, 1993 through 1997, and those
projected for the fiscal year ending March 31, 1998. Allen & Company also noted
Showscan's five-year historical stock price and trading volume history. Allen &
Company conducted a comparable company analysis, using the same comparable
entities and types of financial data and valuation measures utilized in its
overview of Iwerks. Based on Showscan's closing stock price as of July 29, 1997,
the comparable multiple of Enterprise Value to revenue for Showscan was 1.2x and
the multiple of market equity value to book value was 1.7x. Showscan's multiple
of Enterprise Value to EBITDA was not meaningful due to losses. Allen & Company
concluded that the trading multiples and valuation measures represented by
Showscan's stock price were generally within the range of other companies so
analyzed.
Finally, Allen & Company summarized the terms and analyzed the value of the
Showscan Preferred Stock. Based upon its analysis, Allen & Company concluded
that the value of such stock approximates its conversion value, the value of the
underlying common stock if the Showscan Preferred Stock were converted to
Showscan Common Stock.
Transaction Analysis. Allen & Company noted that the merger consideration
payable for each share of Showscan Common Stock pursuant to the Merger under the
Original Merger Agreement (based on a closing price of Iwerks Common Stock on
July 29, 1997) was $4.46, representing premiums of approximately 70.0% over the
closing price on July 29, 1997, 55.2% over the closing price one week prior to
that date and 78.5% over the closing price four weeks prior to that date;
comparatively, the average in selected all-stock merger transactions involving
public company targets with a transaction value ranging from $20 to $75 million
for premiums above the one-day closing price and the one-week and four-week
closing prices would be 23.3%, 29.2% and 41.0%, respectively. Based on these
analyses, Allen & Company concluded that the premium represented by the merger
consideration (based on the July 29, 1997 stock prices of Iwerks and Showscan)
was within the equity reference ranges of premiums paid in all-stock merger
transactions with a comparable transaction value.
Allen & Company reviewed the merger consideration to be received by Showscan
stockholders under the Original Merger Agreement in terms of historical and
projected multiples of key valuation measures and financial statistics, as
compared to Imax, Iwerks, Cinema Ride, Inc. and the Exhibitors. Based on the
merger consideration implied by Iwerks' closing stock price as of July 29, 1997,
the multiple of Transaction Value to revenue represented by Iwerks' offer for
Showscan was 1.9x and the multiple of equity value to book value was 3.0x. The
multiple of Transaction Value to EBITDA was not meaningful due to losses. Based
on such analysis, Allen & Company concluded that the multiples and valuation
measures represented by the merger consideration were generally within the range
of the comparable companies.
Allen & Company also analyzed Iwerks' acquisition of Omni Films International
Inc. ("Omni Films"), which Allen & Company believes is the only recent
comparable acquisition in Iwerks' and Showscan's industry. Iwerks' purchase of
Omni Films represented 1.9x trailing revenues and 2.9x book value of Omni Films,
as compared to 1.9x trailing revenue and 3.0x book value for Iwerks' offer to
Showscan.
Allen & Company also analyzed the relative contribution of revenues and book
values. Allen & Company noted that, based on LTM revenue and book value for the
most recent reported period for each of Showscan and Iwerks, the relative
revenue contribution of Showscan and Iwerks to the pro forma entity was 30% and
70%, respectively, and the relative book value contribution of Showscan and
Iwerks was 15% and 85%, respectively. Allen & Company also performed various
additional analyses, including implied offer premiums being paid for the
Showscan Capital Stock, based on a range of Iwerks stock prices; the historical
relationship between Iwerks and Showscan stock prices; and pro forma ownership
of Iwerks' Common Stock by Showscan's pre-Merger stockholders which ranged from
28% on a primary shares outstanding basis to 37% on a fully-diluted basis.
Allen & Company also summarized its combination analysis of the Merger. Based
on the assumptions used in the example, including certain cost savings and
pooling of interests accounting treatment, the transaction would be
significantly accretive to the stand-alone per share earnings of both companies.
Finally, Allen & Company conducted a hypothetical stock price analysis, which
illustrated that under certain assumptions, the post-Merger stock price of the
Combined company attributable to Showscan stockholders could significantly
exceed the future stand-alone stock price of Showscan.
No company used in the comparable company analyses summarized above is
identical to Showscan or Iwerks, and no transaction used in the comparable
transaction analysis summarized above is identical to the Merger. Accordingly,
any such analysis of the value of the consideration to be received by the
holders of Showscan Common Stock and Showscan Preferred Stock pursuant to the
Merger involves complex considerations and judgments concerning differences in
the potential financial and operating characteristics of the comparable
companies and transactions and other factors in relation to the trading and
acquisition values of the comparable companies.
The preparation of a fairness opinion is not susceptible to partial analysis
or summary description. Allen & Company believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the processes
underlying the analysis set forth in its opinion. Allen & Company has not
indicated that any of the analyses which it performed had a greater significance
than any other.
In determining the appropriate analyses to conduct and when performing those
analyses, Allen & Company made numerous assumptions with respect to industry
performance, general business, financial, market and economic conditions and
other matters, many of which are beyond the control of Showscan or Iwerks. The
analyses which Allen & Company performed are not necessarily indicative
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of actual values or actual future results, which may be significantly more or
less favorable than suggested by such analyses. Such analyses were prepared
solely as part of Allen & Company's analysis of the fairness, from a financial
point of view, of the consideration which the holders of Showscan Common Stock
and Showscan Preferred Stock would receive pursuant to the Merger. The analyses
do not purport to be appraisals or to reflect the prices at which a company
might actually be sold or the prices at which any securities may trade at the
present time or at any time in the future.
Allen & Company's opinion does not constitute a recommendation with respect
to whether any stockholder of Showscan should, upon the consummation of the
Merger, continue its investment in the Iwerks Common Stock received as
consideration in the Merger or sell such shares of Iwerks Common Stock
immediately or at any time. Allen & Company did not specifically analyze the
impact on any individual Showscan stockholder of continuing its investment in
the Iwerks Common Stock after the Merger because it is believed that Showscan
stockholders would make such decision only after appropriate consultation with
their respective tax advisors with respect to a detailed analysis of specific
tax consequences affecting such decision.
Pursuant to an engagement letter dated as of June 19, 1996 between Showscan
and Allen & Company (as amended through August 4, 1997, the "Allen & Company
Engagement Letter"), Allen & Company was engaged to act as Showscan's financial
advisor and to assist it in implementing a plan to maximize the value of
stockholders' investment in Showscan, including through possible dispositions,
mergers or other business combinations, strategic alliances, corporate
partnerships and joint ventures. Pursuant to the Allen & Company Engagement
Letter, Showscan has agreed to pay Allen & Company a fee (including for
rendering its opinion) of between $1.1 million and $1.25 million (depending on
the average closing stock price for Iwerks during the five days prior to the
closing of the Merger) if the Merger is consummated. In addition to the
foregoing compensation, Showscan has agreed to reimburse Allen & Company for its
expenses, including reasonable fees and expenses of its counsel and other
consultants and advisors engaged with Showscan's consent. Showscan has agreed
to indemnify Allen & Company and its officers, employees, agents, affiliates or
controlling persons, if any, against certain liabilities and expenses related to
or arising out of Showscan's engagement of Allen & Company.
Allen & Company is a nationally recognized investment banking firm that is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Showscan
retained Allen & Company based on such qualifications as well as its familiarity
with Showscan. In addition, as a part of its investment banking and securities
trading business, Allen holds positions in and trades in the securities of
Showscan from time to time.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Showscan Board with respect to the
Merger and the Merger Agreement, stockholders of Showscan should be aware that
certain members of the management of Showscan and the Showscan Board have
certain interests in the Merger that are in addition to the interests of
stockholders of Showscan generally. Showscan does not believe that the
additional interests of such members of management are in conflict with the
interests of the stockholders of Showscan.
As of the Showscan Record Date, directors and executive officers of Showscan
and their affiliates as a group beneficially owned 600,380 shares of Showscan
Common Stock (excluding shares subject to exercisable options or warrants or
issuable upon conversion of the Showscan Preferred Stock), or approximately
10.6% of those shares outstanding as of such date and 24,000 shares of Showscan
Preferred Stock (49.0% of those shares outstanding as of such date, and, as
converted, 7.8% of the Showscan Common Stock outstanding). Holders of 237,280
shares of Showscan Common Stock (4.2% of those shares outstanding as of the
Showscan Record Date) and 49,000 shares of Showscan Preferred Stock (100% of
those shares outstanding as of the Showscan Record Date), representing an
aggregate of 18.3% of the voting securities of Showscan as of the Showscan
Record Date have executed agreements (the "Showscan Voting Agreements") pursuant
to which each holder agrees to vote its shares of Showscan Capital Stock in
favor of the Merger Agreement and each has granted a proxy to Iwerks to do the
same in its place and stead. Certain of the directors and executive officers of
Showscan are parties to the Showscan Voting Agreements and each remaining
director and executive officer of Showscan has advised Showscan that he intends
to vote or direct the vote of all of the outstanding shares of Showscan Common
Stock over which he has voting control in favor of approval and adoption of the
Merger Agreement.
The executive officers of Showscan who will continue as officers and employees
of Iwerks will participate in the Iwerks 1994 Stock Incentive Plan. See
"PROPOSAL TO AMEND THE IWERKS 1994 STOCK INCENTIVE PLAN."
At the Effective Time of the Merger, each outstanding Showscan option and
warrant shall, by virtue of the Merger and without any further action on the
part of Iwerks, Showscan or the holder of any Showscan option or warrant, be
assumed by Iwerks in such manner that Iwerks (x) is a corporation "assuming a
stock option in a transaction to which Section 424 applied" within the meaning
of Section 424(a) of the Code or (y) to the extent Section 424 of the Code does
not apply to any such Showscan options or warrants, would be such a corporation
were Section 424 applicable to such option. In connection with the assumption
of the Showscan options and warrants, Iwerks shall effect such assumption in
such manner as not to affect the "incentive stock option" status of those
options which are "incentive stock options" within the meaning of Section 422 of
the Code at the Effective Time.
The Showscan Board entered into agreements with the following officers that
would protect each such officer in the case of a change in control of Showscan:
Dennis Pope, President and Chief Executive Officer; W. Tucker Lemon, Senior Vice
President, General Counsel and Secretary; Gregory W. Betz, Vice President and
Director of Finance; Russell H. Chesley, Vice President Worldwide
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Sales; Michael B. Ellis, Vice President, Engineering and Product Development and
Rui C. Guimarais, Vice President - Film Licensing. These agreements are intended
to provide certain benefits to the officers upon a "Change of Control" which is
defined to mean (a) the acquisition by any person of 20% or more of the Showscan
Common Stock and Showscan Common Stock equivalents of Showscan or 20% of
Showscan's voting power, (b) a liquidation, merger or consolidation of Showscan,
or (c) a change in the membership of the Showscan Board over any period of two
(2) years or less such that the directors sitting at the beginning of such
period or who were nominated by at least two-thirds of the sitting directors
cease to be a majority of the Showscan Board. The Merger will constitute a
change of control under this definition. These officers of Showscan are entitled
to receive certain cash payments and health benefits if they leave Showscan,
either one year before or within two years after a Change in Control, for "Good
Reason," "Disability," death or retirement or if they were terminated without
"Cause" (in each case as the foregoing terms are defined in the agreements).
Messrs. Pope and Lemon also have an additional period after a Change in Control
in which they can voluntarily leave Showscan and receive the benefits. The cash
benefits provided for Mr. Pope will equal 200% of his annual salary on the date
of termination. Mr. Lemon will receive 150% of the greater of his average salary
and bonuses over the period of three (3) fiscal years preceding the Change in
Control or the period of three (3) fiscal years preceding his termination. The
other four officers each will receive 75% of the greater of his average salary
and bonuses over the three (3) fiscal years preceding the Change in Control or
the period of three (3) fiscal years preceding his termination. The maximum
amount that could be received by Messrs. Pope and Lemon and all six officers in
the aggregate under such agreements, assuming termination upon the closing of
the Merger, are $500,000, $225,000 and $1,070,000, respectively. In addition,
under such agreements the unvested options of Messrs. Pope and Lemon become
vested upon a Change of Control. Assuming that the Merger closes on March 31,
1998, the number of unvested options which would become exercisable upon the
closing for Messrs. Pope and Lemon equal 123,750 and 33,750, respectively. As of
the date hereof, the exercise price of all such options exceeds the closing
sales price of Showscan's Common Stock. All such benefits shall be in lieu of
any benefits provided under any such officer's employment agreement, if any.
In addition to the foregoing arrangements, Iwerks has agreed to use its
commercially reasonable efforts to retain the services of Messrs. Pope and Lemon
to assist in the integration of the two companies for a period of up to six
months following the Effective Time on terms mutually satisfactory to Iwerks and
such individuals.
In connection with the adoption of the Merger Agreement, Showscan adopted a
plan designed to retain certain of its employees. The plan allows Showscan to
pay bonuses to employees who maintain their employment with Showscan through the
closing of the Merger. The aggregate amount of such payments may not exceed
$450,000.
The Merger Agreement provides that, from and after the Effective Time, Iwerks
shall cause Showscan to include as part of its Certificate of Incorporation and
Bylaws provisions relating to the indemnification of all current and former
directors, officers, employees and agents of Showscan which are no less
favorable to such persons than are the provisions contained in Showscan's
current Certificate of Incorporation and Bylaws. Such provisions shall not be
amended, repealed or otherwise modified after the Effective Time in any manner
that would adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors, officers, employees or agents of
Showscan in respect to actions or omissions occurring at or prior to the
Effective Time (including, without limitation, actions or omissions which occur
in connection with the transactions contemplated by the Merger Agreement),
unless such modification is required by law. Further, after the Effective Time,
Iwerks and Showscan shall indemnify and hold harmless each present and former
director, officer or employee of Showscan or any of its subsidiaries against
any costs or expenses (including attorneys fees), judgements, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any claim, action, suit, proceeding or investigation arising out of or
pertaining to the transactions contemplated by the Merger Agreement or otherwise
with respect to any act or omissions occurring at or prior to the Effective
Time, in each case for a period of six years after the date of the Merger
Agreement. In the event of an indemnification claim arising out of any act or
omissions occurring at or prior to the Effective Time, Iwerks is not obligated
to provide indemnity in excess of $10,243,000, which figure represents
Showscan's net worth as of June 30, 1997. Iwerks is also obligated to maintain
in effect for a period of six years after the Effective Time, directors' and
officers' liability insurance covering those persons who are currently covered
by Showscan's directors' and officers' insurance policy on terms no less
favorable than those now applicable to the directors and officers of Showscan.
Iwerks has agreed to appoint, immediately after the Effective Time, Charles B.
Moss, Jr., a current member of the Showscan Board, to serve as a Class I
director on the Iwerks Board.
Except as set forth above, no officer or director of Showscan will receive any
benefits in the Merger other than as a stockholder or security holder of
Showscan.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "pooling of interests" under generally
accepted accounting principles. SEE "UNAUDITED PRO FORMA FINANCIAL DATA."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences of
the Merger to Showscan and the stockholders of Showscan and reflects the opinion
of Troop Meisinger Steuber & Pasich LLP attached as Exhibit 8.1 to the
Registration Statement of which this Joint Proxy Statement/Prospectus is a part.
Such opinions are based upon certain assumptions noted in such opinion. The
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discussion below is based on current law. This summary relates only to
Showscan Capital Stock held as a capital asset within the meaning of Section
1221 of the Code by persons who are citizens or residents of the United States.
This discussion does not address aspects of federal taxation other than income
taxation, nor does it address all aspects of federal income taxation, including,
without limitation, aspects of income taxation that may be applicable to
particular stockholders, such as stockholders who are foreign persons, tax-
exempt organizations, insurance companies, financial institutions and dealers in
stock and securities or persons who acquired all their Showscan Capital Stock in
a compensation transaction, such as an exercise of an employee option. No
rulings will be sought from the Internal Revenue Service with respect to the
federal income tax consequences of the Merger.
SHOWSCAN STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER.
Consummation of the Merger is conditioned upon the receipt by Showscan and
Iwerks of an opinion of Latham & Watkins and Troop Meisinger Steuber & Pasich,
LLP, counsel to Showscan and Iwerks, respectively, based upon reasonably
requested representation letters and dated as of the closing date of the Merger,
to the effect that (a) the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code and Showscan, Iwerks and Merger Corp. will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code, (b) no gain or loss will be recognized by Showscan, Iwerks or Merger
Corp. as a result of the Merger, and (c) no stockholder of Showscan will
recognize gain or loss on the exchange of Showscan Common Stock or Showscan
Preferred Stock solely for Iwerks Common Stock in the Merger.
The following portion of the summary assumes that the Merger will be treated
in accordance with the opinions of Latham & Watkins and Troop Meisinger Steuber
& Pasich, LLP described above upon which consummation of the Merger is
conditioned. A holder of Showscan Capital Stock who, pursuant to the Merger,
exchanges Showscan Capital Stock for Iwerks Common Stock will not recognize gain
or loss upon such exchange (except as discussed below with respect to cash
received in lieu of a fractional interest in Iwerks Common Stock). Such
holder's tax basis in the Iwerks Common Stock received pursuant to the Merger
will be equal to its tax basis in the Showscan Capital Stock surrendered
(reduced by any amount allocable to a fractional share interest for which cash
is received), and its holding period for the Iwerks Common Stock will include
its holding period for the Showscan Capital Stock surrendered, provided that the
Showscan Capital Stock is held as a capital asset at the Effective Time. The
Merger will result in no gain or loss to Iwerks on the exchange of shares of
Showscan Capital Stock. A Showscan stockholder who is entitled to receive cash
in lieu of a fractional share interest of Iwerks Common Stock in connection with
the Merger will recognize gain (or loss) equal to the difference between such
cash amount and the stockholder's basis in the fractional share interest as long
as the cash payment is not essentially equivalent to a dividend. In such event,
any gain or loss recognized will be capital gain (or loss) if the Showscan
Capital Stock is held by such stockholder as a capital asset at the Effective
Time. Furthermore, such gain or loss will be treated as long-term capital gain
or loss if the shares of Showscan Capital Stock have been held by such
stockholder for more than one year and otherwise as short-term capital gain or
loss. Long-term capital gain recognized by certain non-corporate stockholders
is subject to federal income tax at preferential capital gains rates, and such
gain recognized with respect to an asset with a holding period of more than 18
months is subject to federal income tax at further reduced capital gains rates.
THE DISCUSSION SET FORTH ABOVE DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN
TAX ASPECTS OF THE MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING
ARE SUBJECT TO CHANGE AND ANY SUCH CHANGES COULD AFFECT THE CONTINUING VALIDITY
OF THIS DISCUSSION. EACH IWERKS AND SHOWSCAN STOCKHOLDER SHOULD CONSULT SUCH
STOCKHOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF
THE MERGER TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL AND FOREIGN TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL LAWS
OR OTHER TAX LAWS.
THE NASDAQ NATIONAL MARKET
The obligations of the parties to consummate the Merger are subject to the
condition that the shares of Iwerks Common Stock have been approved for
quotation on The Nasdaq National Market subject only to official notice of
issuance. Iwerks has filed an application for such approval, which application
is currently pending. See "THE MERGER AGREEMENT Conditions to the Merger."
RESALE RESTRICTIONS
The shares of Iwerks Common Stock to be issued to the stockholders of Showscan
in connection with the Merger have been registered under the Securities Act.
All shares of Iwerks Common Stock received by Showscan stockholders in the
Merger will be freely transferable, except that shares of Iwerks Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of Showscan at the time of the Showscan Special
Meeting may be resold by them only in compliance with the resale provisions of
Rule 145 promulgated under the Securities Act (or Rule 144 in the case of such
persons who become affiliates of Iwerks) or pursuant to an effective
registration statement under the Securities Act covering such shares. Persons
who may be deemed to be affiliates of Showscan or Iwerks generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include certain officers and directors of such
party as well as principal stockholders of such party.
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The Merger Agreement requires Showscan to use reasonable efforts to deliver or
cause to be delivered to Iwerks from each of its affiliates an "affiliate
letter," in the form attached as a schedule to the Merger Agreement, to the
effect that such person will not sell, pledge, transfer or otherwise dispose of
any of the shares of Iwerks Common Stock received by such person pursuant to the
Merger, except upon delivery to Iwerks of an opinion of such person's counsel
reasonably acceptable to Iwerks that the proposed disposition will not violate
Rule 145(d).
THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger Agreement,
a copy of which is attached as Appendix A to this Joint Proxy
-----------
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full text of the Merger Agreement.
Stockholders of Iwerks and Showscan are urged to read the Merger Agreement in
its entirety for a more complete description of the Merger.
GENERAL
Pursuant to the Merger Agreement, subject to the terms and conditions thereof,
at the Effective Time, Merger Corp. will be merged with and into Showscan. As a
result of the Merger, the separate corporate existence of Merger Corp. will
cease and Showscan will continue as the surviving corporation of the Merger and
become a wholly owned subsidiary of Iwerks.
As promptly as practicable following the satisfaction or waiver of all
conditions to the Merger, and provided that the Merger Agreement has not been
terminated or abandoned, Iwerks and Showscan will cause the Certificate of
Merger to be executed, acknowledged and filed with the Secretary of State of the
State of Delaware in accordance with Section 251 of the DGCL.
MERGER CONSIDERATION
Upon consummation of the Merger, pursuant to the Merger Agreement (a) each
share of Showscan Common Stock which is outstanding immediately prior to the
Effective Time (other than shares then owned by Showscan or any of its
subsidiaries and shares of Showscan Common Stock then held by Iwerks or any of
its subsidiaries) will be converted into the right to receive 0.62 shares of
Iwerks Common Stock and (b) each share of Showscan Preferred Stock which is
outstanding immediately prior to the Effective Time (other than shares then
owned by Showscan or any of its subsidiaries, shares of Showscan Preferred Stock
then held by Iwerks or any of its subsidiaries and shares of Showscan Preferred
Stock as to which appraisal rights have been perfected, and not withdrawn or
lost, under the DGCL) will be converted into the right to receive shares of
Iwerks Common Stock in an amount equal to the number of shares of Showscan
Common Stock into which such share of Showscan Preferred Stock is convertible
immediately prior to the Merger multiplied by 0.62.
At the Effective Time of the Merger, each outstanding Showscan option and
warrant shall, by virtue of the Merger and without any further action on the
part of Iwerks, Showscan or the holder of any Showscan option or warrant, be
assumed by Iwerks in such manner that Iwerks (x) is a corporation "assuming a
stock option in a transaction to which Section 424 applied" within the meaning
of Section 424(a) of the Code or (y) to the extent Section 424 of the Code does
not apply to any such Showscan options or warrants, would be such a corporation
were Section 424 applicable to such option. In connection with the assumption
of the Showscan options and warrants, Iwerks shall effect such assumption in
such manner as not to affect the "incentive stock option" status of those
options which are "incentive stock options" within the meaning of Section 422 of
the Code at the Effective Time.
Each 8% Note outstanding immediately prior to the Effective Time will be
converted into the right to receive, during the period the 8% Note is
convertible, upon conversion, in lieu of each share of Showscan Common Stock
deliverable on such conversion, such number of shares of Iwerks Common Stock
which are receivable at the Effective Time by a holder of one share of Showscan
Common Stock.
EXCHANGE OF SHARES
Promptly after the Effective Time, transmittal forms will be mailed to each
holder of record of shares of Showscan Capital Stock to be used in forwarding
Certificates representing such shares for surrender and exchange for
certificates representing the shares of Iwerks Common Stock to which such holder
has become entitled and, if applicable, cash in lieu of a fractional share of
Iwerks Common Stock. After receipt of such transmittal form, each holder of
Certificates formerly representing Showscan Capital Stock should surrender such
Certificates, together with a duly completed transmittal form, to the Exchange
Agent, and each such holder will receive in exchange therefor certificates
representing the whole number of shares of Iwerks Common Stock to which he or
she is entitled and any cash which may be payable in lieu of a fractional share.
Such transmittal forms will be accompanied by instructions specifying other
details of the exchange.
SHOWSCAN STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
LETTER OF TRANSMITTAL.
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No fractional shares of Iwerks Common Stock will be issued and any holder of
shares of Showscan Capital Stock entitled under the Merger Agreement to receive
a fractional share will be entitled to receive only a cash payment in lieu
thereof, which payment will be in an amount equal to the product of the Average
Price of a share of Iwerks Common Stock multiplied by the fractional percentage
of a share of Iwerks Common Stock to which such holder would otherwise be
entitled. Under the Merger Agreement, "Average Price" means the average of the
closing sale prices of the Iwerks Common Stock on The Nasdaq National Market (as
reported by the Wall Street Journal, or if not so reported as reported by
another authoritative source) over the 20 trading day period ending on (and
including) the third trading day immediately preceding the date of the Showscan
Special Meeting. For purposes of the preceding sentence, a "trading day" means
a day on which trading generally takes place on The Nasdaq National Market and
on which trading in shares of Iwerks Common Stock occurred.
No dividends or other distributions on shares of Iwerks Common Stock will be
paid with respect to any shares of Showscan Capital Stock until the Certificate
representing such shares is surrendered for exchange as provided in the Merger
Agreement. Subject to applicable laws, such dividends and distributions, if
any, will be accumulated and, at the time of such surrender, all such unpaid
dividends and distributions, together with any cash payment in lieu of a
fractional share, will be paid, without interest.
At and after the Effective Time, there will be no transfers on the transfer
books of Showscan of shares of Showscan Capital Stock which were outstanding
immediately prior to the Effective Time.
Any portion of the monies from which cash payments in lieu of fractional
interests in shares of Iwerks Common Stock will be made (including the proceeds
of any investments thereof) and any shares of Iwerks Common Stock that are
unclaimed by the former stockholders of Showscan one year after the Effective
Time will be released or repaid by the Exchange Agent to Iwerks. Any former
stockholders of Showscan who have not theretofore complied with the exchange
procedures in the Merger Agreement shall thereafter look, subject to applicable
escheat or other laws, only to Iwerks as a general creditor for payment of their
shares of Iwerks Common Stock, cash in lieu of fractional shares, and any unpaid
dividends and distributions on shares of Iwerks Common Stock, deliverable in
respect of each share of Showscan Capital Stock such stockholder holds.
Notwithstanding the foregoing, none of Showscan, Iwerks, the Exchange Agent or
any other person will be liable to any former holder of shares of Showscan
Capital Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
In the event that any Certificate has been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by the surviving corporation, the
posting by such person of a bond in such reasonable amount as Iwerks may direct
as indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Iwerks Common Stock, cash in lieu of
fractional shares, and any unpaid dividends and distributions on shares of
Iwerks Common Stock, as described above.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and warranties
relating to, among other things: (a) due incorporation, valid existence and
good standing of Iwerks, Merger Sub and Showscan and each of their respective
subsidiaries and certain corporate matters; (b) the capital structure of each of
Iwerks, Merger Sub and Showscan; (c) the authorization, execution, delivery and
enforceability of the Merger Agreement, the consummation of the transactions
contemplated by the Merger Agreement and related matters; (d) no conflicts under
charters or bylaws, required consents or approvals and no violation of any
instruments or laws; (e) certain documents and financial statements filed by
each of Iwerks and Showscan with the Commission and the accuracy of information
contained therein; (f) the absence of any material changes or events; (g)
litigation and compliance with laws; (h) taxes, tax returns and audits; (i)
properties; (j) employee benefit plans; (k) certain agreements; (l) compliance
with applicable law; (m) environmental and intellectual property matters; (n)
receipt of fairness opinions and board approval; (o) brokers' and finders' fees
with respect to the Merger; (p) the inapplicability of anti-takeover provisions
set forth in Iwerks' and Showscan's respective stockholder rights plans; and (q)
no dissenters rights available to holders of Showscan Common Stock.
CERTAIN COVENANTS
Interim Operations. Under the Merger Agreement, Iwerks and Showscan have made
various customary covenants relating to the Merger. Showscan has agreed that,
prior to the Effective Time, Showscan and its subsidiaries will conduct their
operations only in the ordinary course of business in a manner consistent with
past practice and to preserve intact their business organizations, goodwill,
services of their respective officers and employees and business relationships.
Without limiting the generality of the foregoing, Showscan has agreed, with
certain limited exceptions, not to, and to cause its subsidiaries not to, until
the earlier of the termination of the Merger Agreement or the Effective Time,
propose or do any of the following without the prior written consent of Iwerks:
(a) amend or otherwise change its Certificate of Incorporation or Bylaws;
(b) split, combine, reclassify or amend the terms of any of its capital stock;
(c) declare, set aside or pay any dividend or distribution payable in cash,
stock or property or any combination thereof with respect to shares of its
capital stock (other than pursuant to their terms);
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(d) except pursuant to options or warrants outstanding on the date of the
Merger Agreement, authorize, issue, sell, pledge, encumber or agree to
authorize, issue, sell, pledge or encumber any additional shares of its capital
stock of any class or any other securities in respect of, in lieu of or in
substitution of Showscan Common Stock outstanding as of the date hereof or any
options, warrants, conversion rights or other rights to acquire capital stock of
Showscan or any of its subsidiaries;
(e) redeem or otherwise acquire any of its outstanding equity securities or
any outstanding options or rights to purchase any such equity securities or make
any commitment to take such action (other than pursuant to their terms);
(f) accelerate, amend or change (or permit any acceleration, amendment of
change of) the period of exercisability of any option or warrant (other than
pursuant to the express terms of such option or warrant or pursuant to other
contractual obligations to accelerate, amend or change the period of
exercisability);
(g) sell, pledge, dispose of or encumber any of its material assets (including
the capital stock of a subsidiary) or those of any of its subsidiaries, except
in the ordinary course of business consistent with past practice and except any
encumbrance on its film library to secure indebtedness allowed pursuant to
clause (i) below;
(h) acquire (by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or any other business organization or division thereof;
(i) incur any indebtedness for borrowed money, or assume, guarantee or
otherwise as an accommodation become responsible for, the obligations of any
other person or entity in excess of $1,000,000;
(j) authorize or make any capital expenditures or purchase of fixed assets for
it and its subsidiaries which in the aggregate exceed $500,000;
(k) increase the compensation or benefits payable or to become payable to its
officers or employees, except in amounts consistent with past practices; or
grant any severance or termination pay to, or enter into any employment or
severance agreement with, any director, officer or other employee of Showscan or
any of its subsidiaries; or establish any collective bargaining, bonus, profit
sharing, compensation, stock option, pension, retirement, deferred compensation,
employment or consulting or other plan, agreement, trust, fund, plan, policy or
arrangement for the benefit of any current or former directors, officers or
employees; provided, however, notwithstanding the foregoing, Showscan may expend
sums not to exceed an aggregate of $450,000 to provide transition bonuses to its
employees;
(l) make any change to its accounting (including tax accounting) methods,
principles or practices except for any changes required by GAAP;
(m) make any material tax election inconsistent with past practices or settle
or compromise any material federal, state, local or foreign tax liability;
(n) take or agree to take, any action which would cause a material breach of
any of the representations or warranties of Showscan contained in the Merger
Agreement or prevent it from performing or cause it not to perform its covenants
under the Merger Agreement in any material respect;
(o) submit any matters to Showscan's stockholders for a vote prior to the
Effective Time other than the Merger;
(p) enter into, or permit any of its subsidiaries to enter into any production
or distribution arrangements, including, without limitation, any joint venture
agreements, with a term in excess of one year, without consulting with Iwerks;
or
(q) take any action which to Showscan's knowledge would prevent treatment of
the Merger on a pooling of interests basis.
Iwerks has agreed that, until the earlier of the termination of the Merger
Agreement or the Effective Time unless Showscan has otherwise consented in
writing, it will use its reasonable commercial efforts, and shall cause each of
its subsidiaries to use its reasonable commercial efforts, to preserve intact
their respective business organizations and goodwill, keep available the
services of its respective officers and employees and maintain satisfactory
relationships with those persons having business relationships with it. In
addition, Iwerks has agreed not to (a) issue any shares of capital stock or
securities convertible into shares of its capital stock at less than the fair
market value of the stock as determined based on the closing sale price of a
share of Iwerks Common Stock on The Nasdaq National Market on the day preceding
such issuance other than pursuant to outstanding options and warrants; (b) amend
or otherwise change its Certificate of Incorporation or bylaws; (c) split,
combine, reclassify or amend the terms of any of its capital stock; (d) declare,
set aside or pay any dividend or distribution payable in cash, stock or property
or any combination thereof with respect to shares of its capital stock; (e) take
or agree to take any action which would cause a material breach of any of the
representations or warranties of Iwerks contained in the Merger Agreement or
prevent Iwerks from performing or cause Iwerks not to perform its covenants
hereunder in any material respect; (f) submit any matters to the stockholders of
Iwerks for a vote prior to the Effective Time other than the Merger and other
than the other matters presented to the stockholders of Iwerks concurrently with
the Merger; and (g) take any action which to Iwerks' knowledge would prevent
treatment of the Merger on a pooling of interests basis.
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No Solicitation of Transactions. Pursuant to the Merger Agreement, Showscan
has agreed that prior to the earlier of the termination of the Merger Agreement
and the Effective Time, neither it nor any of its subsidiaries will, and it will
direct officers, directors, employees, agents and representatives (including,
without limitation, any investment banker, attorney or accountant retained by it
or any of its subsidiaries) not to, initiate or solicit, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its stockholders) with
respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of (a) all or any significant portion of the assets
of, Showscan and its subsidiaries, taken as a whole, or (b) 25% or more of the
outstanding voting power of the capital stock of Showscan (any such proposal or
offer being hereinafter referred to as an "Alternative Proposal") or engage in
any negotiations concerning, or provide any confidential information or data to,
or have any discussions with, any person relating to an Alternative Proposal;
provided that, this covenant is not applicable prior to January 15, 1998, except
that Showscan is obligated to notify Iwerks in writing prior to furnishing any
information to, or entering into discussions or negotiations with, any person
concerning an Alternative Proposal. Showscan has further agreed to notify
Iwerks immediately if any such inquiries or proposals are received by, any such
information is received from, or any such negotiations or discussions are sought
to be initiated or continued with Showscan. However, the Showscan Board is not
prohibited from (i) furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
offer or proposal with respect to an Alternative Proposal, if, and only to the
extent that (A) the Showscan Board determines in good faith, after advice from
outside counsel, that such action is required for the Showscan Board to comply
with its fiduciary duties to stockholders imposed by law, and (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, Showscan provides written notice to Iwerks to the
effect that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity (provided that Showscan is not required
to identify such person or entity); and (ii) to the extent applicable, taking
and disclosing to Showscan's stockholders a position with regard to a tender or
exchange offer contemplated by Rules 14d-9 or 14e-2 promulgated under the
Exchange Act and making such disclosure to Showscan's stockholders as may be
required under applicable law. Showscan may not terminate the Merger Agreement
(except pursuant to the termination provisions contained in the Merger
Agreement), enter into any agreement with respect to, or in any way facilitate,
an Acquisition Proposal while the Merger Agreement remains in effect other than
a confidentiality agreement in customary form, or fail to comply with any of its
obligations under the Merger Agreement.
Meetings of Stockholders. Pursuant to the Merger Agreement, each of Iwerks
and Showscan has agreed to take all necessary or appropriate action, in
accordance with the Exchange Act, the Delaware General Corporation Law (the
"DGCL"), the Bylaws of the National Association of Securities Dealers, Inc. and
other applicable Nasdaq rules and the Certificate of Incorporation and Bylaws of
Iwerks and Showscan, to convene the Stockholder Meetings promptly following the
effective date of the Registration Statement and in no event later than 45 days
following such date. The Iwerks Board and the Showscan Board each have agreed
to recommend approval of the Merger Proposal and the Merger Agreement and
Merger, respectively, and to take all lawful action to solicit such approvals.
Indemnification and Insurance. The Merger Agreement provides that, from and
after the Effective Time, Iwerks shall cause Showscan to include as part of its
Certificate of Incorporation and Bylaws provisions relating to the
indemnification of all current and former directors, officers, employees and
agents of Showscan which are no less favorable than the provisions contained in
Showscan's current Certificate of Incorporation and Bylaws. Such provisions
shall not be amended, repealed or otherwise modified after the Effective Time in
any manner that would adversely affect the rights thereunder of individuals who
at any time prior to the Effective Time were directors, officers, employees or
agents of Showscan in respect to actions or omissions occurring at or prior to
the Effective Time (including, without limitation, actions or omissions which
occur in connection with the transactions contemplated by the Merger Agreement),
unless such modification is required by law. Further, after the Effective Time,
Iwerks and Showscan shall indemnify and hold harmless each present and former
director, officer or employee of Showscan or any of its subsidiaries against any
costs or expenses (including any attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any claim, action, suit, proceeding or investigation arising out of or
pertaining to the transactions contemplated by the Merger Agreement or otherwise
with respect to any act or omissions occurring at or prior to the Effective
Time, in each case for a period of six years after the date of the Merger
Agreement. In the event of an indemnification claim arising out of any act or
omissions occurring at or prior to the Effective Time, Iwerks is not obligated
to provide indemnity in excess of $10,243,000, which figure represents
Showscan's net worth as of June 30, 1997. Iwerks is also obligated to maintain
in effect for a period of six years after the Effective Time, directors' and
officers' liability insurance covering those persons who are currently covered
by Showscan's directors' and officers' insurance policy on terms no less
favorable than those now applicable to the directors and officers of Showscan.
Iwerks Board. Iwerks has agreed to appoint, immediately after the Effective
Time, Charles B. Moss, Jr., a current member of the Showscan Board, to serve as
a Class I director on the Iwerks Board. In addition, Iwerks also has agreed, as
soon as practicable following the Effective Time, to expand the number of
directors to serve on the Iwerks Board to seven and to commence a search for two
additional qualified candidates to serve as a Class II and a Class III director,
respectively, who shall be elected by a majority of the then existing Iwerks
Board.
Certain Other Covenants. Both Iwerks and Showscan also have agreed: (a) to
obtain all consents, approvals, permits or authorizations from the necessary
federal, state and foreign governments and regulatory agencies prior to the
Effective Time; (b) to consult with each other prior to issuing any press
release or public statement; (c) to allow all designated officers, attorneys,
accountants and other representatives of the other reasonable access to offices,
the records and files, correspondence, audits and properties, as well as to all
information relating to commitments, contracts, titles and financial position,
or otherwise pertaining to, the business and affairs of Showscan and Iwerks and
their respective subsidiaries; (d) to cooperate in the filing of the
Registration Statement and obtain all
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necessary state securities laws permits or approvals; (e) that Showscan will use
reasonable efforts to deliver or cause to be delivered to Iwerks an affiliate
letter, in the form attached as a Schedule to the Merger Agreement, from each
"affiliate" of Showscan, as such term is defined and used in Rule 145 under the
Securities Act and, if requested by Iwerks, a "comfort" letter from its
accountants; (f) not to take any action or fail to take any action that would
jeopardize qualification of the Merger as a tax free reorganization; (g) that
Showscan will use its reasonable efforts to cause each holder of 5% or more (by
value) of the Showscan Common Stock and Showscan Preferred Stock (determined as
of the date of the Merger Agreement) to execute a continuity of interest letter
relating to the tax free nature of the Merger; and (h) that all costs and
expenses incurred in connection with the Merger shall be paid by the party
incurring such costs and expenses except that the filing fees associated with
the Registration Statement filing as well as the expenses incurred in connection
with the printing and mailing of the Registration Statement and the Joint Proxy
Statement/Prospectus shall be shared equally by Iwerks and Showscan.
Other Actions. Pursuant to the Merger Agreement, both Iwerks and Showscan
have agreed to use their best efforts to take, or cause to be taken, all other
action and to do, or cause to be done, all other things necessary, proper or
appropriate to consummate the transactions contemplated by the Merger Agreement.
CONDITIONS TO THE MERGER
The obligations of Iwerks and Showscan to consummate the Merger are
conditioned on the fulfillment of the following: (a) the effectiveness of the
Registration Statement and the absence of any stop order suspending the
effectiveness thereof and no proceeding for that purpose having been initiated
by the Commission; (b) requisite approval of the stockholders of Iwerks and the
stockholders of Showscan, of the Merger Agreement and all transactions
contemplated thereby; (c) neither Iwerks nor Showscan shall be subject to any
injunction or other order, decree or ruling issued by any court of competent
jurisdiction or agency or commission which prohibits the consummation of the
transactions contemplated in the Merger Agreement; (d) the approval for listing
of the Iwerks Common Stock issued to the Showscan stockholders in connection
with the Merger on The Nasdaq National Market; (e) the making or receipt of all
necessary material governmental filings and approvals; and (f) the receipt by
Iwerks and Showscan of the Iwerks Pooling Letter and the Showscan Pooling
Letter, respectively.
The obligation of Iwerks to consummate the Merger is conditioned on the
fulfillment or waiver of the following conditions: (a) the performance by
Showscan, in all material respects, of its agreements contained in the Merger
Agreement required to be performed on or prior to the Effective Time; (b) no law
or order shall have been enacted or entered which would make the Merger illegal
or materially delay the Effective Time, require Iwerks or Showscan or any of
their respective subsidiaries to divest shares of Showscan Common Stock or a
material portion of the business, assets or properties of Iwerks or Showscan or
any of their respective subsidiaries or impose any material limitation on the
ability of either of them to conduct their respective businesses and own their
respective assets or properties, or impose limitations on the ability of Iwerks
to control in any material respect the business operations of Showscan or any of
its subsidiaries; (c) the receipt by Iwerks from its counsel of an opinion to
the effect that the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368 of the Code.; and (d) each of
the members of the Showscan Board and the boards of directors of its
subsidiaries shall have resigned.
The obligation of Showscan to consummate the Merger is conditioned on the
fulfillment or waiver of the following conditions: (a) the performance by
Iwerks, in all material respects, of its obligations required to be performed on
or prior to the Effective Time and contained in the Merger Agreement; (b) the
representations and warranties made by Iwerks in the Merger Agreement shall be
true in all material respects as of the Effective Time; (c) no change in the
business, financial condition or operations of Iwerks and its subsidiaries that
would have, or would be reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect (as defined in the Merger Agreement), shall
have occurred; (d) no law or order shall have been enacted or entered which
would make the Merger illegal or materially delay the Effective Time; and (e)
the receipt by Showscan from its counsel of an opinion to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368 of the Code.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time, before or after the approval by the
stockholders of Iwerks and Showscan, respectively, in a number of circumstances,
which include, among others: (a) by mutual written consent of Iwerks and
Showscan; (b) by either Iwerks or Showscan if (i) the Merger shall not have been
consummated by March 31, 1998, (ii) a court, agency or commission issues a
nonappealable final order permanently restraining or otherwise prohibiting the
Merger, (iii) the approval of the issuance of the Iwerks Common Stock pursuant
to the Merger Agreement by Iwerks' stockholders shall not have been obtained at
a stockholders' meeting duly held for such purpose (including any adjournment
thereof), or (iv) the approval of the Merger and the Merger Agreement by the
Showscan stockholders shall not have been obtained at a stockholders' meeting
duly held for such purpose (including any adjournment thereof), (c) by action of
the Iwerks Board if the Showscan Board withdraws or modifies in a manner
materially adverse to Iwerks its approval or recommendation to the Showscan
stockholders of the Merger Agreement or the Merger, (d) by action of the
Showscan Board if (i) Showscan receives a proposal relating to a merger,
acquisition, consolidation or similar transaction involving, or any purchase of
all or any significant portion of the assets of Showscan and its subsidiaries
taken as a whole, or 25% or more of the outstanding voting power of the Showscan
Capital Stock (an "Alternative Proposal") and the Showscan Board determines it
is necessary to terminate the Merger Agreement in order to fulfill its fiduciary
duties to the Showscan stockholders and the Showscan Board has received a
written opinion from its financial advisor that the Alternative Proposal would
result in a transaction more favorable to Showscan's stockholders from a
financial point of view than the
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Merger or (ii) the Iwerks Board withdraws or modifies in a manner materially
adverse to Showscan its approval of the Merger Agreement or the Merger or
recommendation to the Iwerks stockholders of the Merger Proposal. The Merger
Agreement may not be terminated as a result of a decline in the value of the
Iwerks Common Stock.
Termination Fees. Showscan is obligated to pay to Iwerks a termination fee of
$1,500,000 (the "Showscan Termination Fee") in the following circumstances: (a)
Showscan terminates the Merger Agreement as a result of an Alternative Proposal;
provided that the Showscan Termination Fee is not payable if the Merger
Agreement is terminated by Showscan prior to January 15, 1998 as a result of an
Alternative Proposal in which case Showscan shall reimburse Iwerks an amount
equal to all out-of-pocket expenses incurred by Iwerks up to the date of
termination of the Merger Agreement up to a maximum amount of $1,000,000, (b)
the Showscan Board withdraws or modifies in a manner materially adverse to
Iwerks its approval or recommendation to the Showscan stockholders of the Merger
Agreement or the Merger, (c) if the approval of the Merger and the Merger
Agreement by the Showscan stockholders shall not have been obtained at a
stockholders' meeting duly held for such purpose (including any adjournment
thereof) if prior to such meeting an Alternative Proposal is publicly announced
and Showscan consummates such Alternative Proposal within 12 months of the
termination of the Merger Agreement or (d) Showscan's' accountants do not
deliver the Showscan Pooling Letter because of either (i) false or inaccurate
statements made by Showscan in the representation letter delivered to its
accountants or (ii) an affiliate of Showscan transfers Showscan Capital Stock in
violation of the pooling rules or (iii) any action taken by Showscan.
Iwerks is obligated to pay to Showscan a termination fee of $1,500,000 (the
"Iwerks Termination Fee") in the following circumstances: (a) the Iwerks Board
withdraws or modifies in a manner materially adverse to Showscan its approval of
the Merger Agreement or the Merger or recommendation to the Iwerks stockholders
of the Merger Proposal or (b) Iwerks' accountants do not deliver the Iwerks
Pooling Letter because of either (i) false or inaccurate statements made by
Iwerks in the representation letter delivered to its accountants or (ii) an
affiliate of Iwerks transfers Iwerks Common Stock in violation of the pooling
rules or (iii) any action taken by Iwerks.
The Showscan Option. Under the Merger Agreement, Showscan has granted Iwerks
an option (the "Iwerks Option") to purchase up to 330,714 shares of Showscan
Common Stock at $4.14 per share in cash (the "Exercise Price"). Provided no
court order prohibiting the exercise of the Iwerks Option and subject to
compliance with applicable law, Iwerks may exercise the Iwerks Option in whole
or in part at any time or from time to time after the occurrence of both an
Initial Triggering Event and a Purchase Event but prior to an Option Termination
Event (as each term is defined below). Under the Merger Agreement, an "Initial
Triggering Event" occurs upon the occurrence of one of the following events and
a good faith determination by Iwerks that there is a reasonable likelihood that,
as a result of such event, consummation of the Merger is jeopardized: (a) any
Person as defined in Sections (a)(9) or 13(d)(3) of the Exchange Act (other than
Iwerks or any subsidiary of Iwerks) shall have commenced a bona fide offer to
purchase shares of Showscan Common Stock such that, upon consummation of said
offer, such Person would own or control 10% or more of the outstanding shares of
Showscan Common Stock, or shall have entered into an agreement to (i) merge or
consolidate or enter into any similar transaction, with Showscan, or (ii)
purchase or otherwise acquire (including by way of merger, consolidation, share
exchange or any similar transaction) securities representing 10% or more of
Showscan's voting power, (b) any Person (other than Iwerks or any subsidiary of
Iwerks) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 10% or more of the outstanding shares of Showscan Common
Stock, (c) any Person (other than Iwerks or any subsidiary of Iwerks) shall have
made a bona fide proposal to Showscan after the date of the Merger Agreement by
public announcement or written communication to (i) acquire Showscan by merger,
consolidation, purchase of all or substantially all of its assets or any other
similar transaction, or (ii) make an offer described herein, (d) any Person
shall have solicited proxies in a proxy solicitation subject to Regulation 14A
under the Exchange Act in opposition to approval of the Merger Agreement by
Showscan's stockholders, or (e) any Person shall have willfully breached any
provision of the Merger Agreement and such breach shall not have been cured
pursuant to the terms of the Merger Agreement. Under the Merger Agreement, a
"Purchase Event" shall have occurred at such time as Showscan is obligated to
pay Iwerks the Showscan Termination Fee under the Merger Agreement.
The Iwerks Option expires (an "Option Termination Event") if not exercised as
permitted under the Merger Agreement prior to the earlier of (a) the Effective
Time, (b) the termination of the Merger Agreement (i) by mutual written consent
duly authorized by the Iwerks Board and the Showscan Board, (ii) by either
Iwerks or Showscan, if the Merger shall not have been consummated by March 31,
1998, other than by any party whose failure to fulfill any obligation under the
Merger Agreement has been the cause of or a substantial contributor to the
failure of the Merger to occur on or before such date, (iii) by either Iwerks or
Showscan, if a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued a nonappealable final
order, decree or ruling or taken any other action having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger, subject
to certain conditions, (iv) by action of the Showscan Board if the Iwerks Board
shall have withdrawn or modified in a manner materially adverse to Showscan its
approval of the Merger Agreement or the Merger or recommendation of the Merger
Proposal, (v) by Iwerks or Showscan, if, at a duly held meeting of the
stockholders of Showscan (including any adjournment thereof) held for the
purpose of voting on the Merger, the Merger Agreement and the consummation of
the transactions contemplated thereby, the requisite vote of a majority of the
holders of outstanding shares of Showscan Common Stock and Showscan Preferred
Stock (voting as a single class) shall not have approved the Merger and the
Merger Agreement (unless prior to the date of such meeting an Alternative
Proposal is publicly announced), or (vi) by Iwerks or Showscan, if, at a duly
held meeting of stockholders of Iwerks (including any adjournment thereof) held
for the purpose of voting on the Merger Proposal, the requisite vote of a
majority of the holders of the outstanding shares of Iwerks Common Stock shall
not have approved the Merger Proposal, or (c) the first business day after the
365th calendar day following termination of the Merger Agreement for any of the
following reasons: (i) by action of the Showscan Board following receipt of an
Alternative Proposal if (A) the Showscan Board determines in good faith, after
advice of outside counsel, that
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such action is necessary in order to fulfill its fiduciary duties to
stockholders imposed by law, and if (B) the Showscan Board is then in receipt of
a written opinion from its financial advisor that such Alternative Proposal
would, if consummated, result in a transaction more favorable to Showscan's
stockholders from a financial point of view than the transaction contemplated by
the Merger Agreement, subject to certain notice provisions, (ii) by action of
the Iwerks Board if the Showscan Board shall have withdrawn or modified in a
manner materially adverse to Iwerks its approval or recommendation of the Merger
Agreement or the Merger or (iii) by Iwerks or Showscan, if, at a duly held
meeting of the stockholders of Showscan (including any adjournment thereof) held
for the purpose of voting on the Merger, the Merger Agreement and the
consummation of the transactions contemplated thereby, the holders of a majority
of the outstanding shares of the Showscan Common Stock and Showscan Preferred
Stock (voting as a single class) shall not have approved the Merger and the
Merger Agreement (if prior to the date of such meeting an Alternative Proposal
is publicly announced). Notwithstanding the foregoing, in the event that the
exercise of the Iwerks Option is subject to any injunction prohibiting its
exercise, the period within which Iwerks may exercise the Option shall be
extended for a period of 60 days following the removal of such injunction. In
addition, under the Merger Agreement and subject to the terms and conditions
therein, Showscan has granted Iwerks certain registration rights covering the
shares of Showscan Common Stock issued upon the exercise, if any, of the Iwerks
Option.
AMENDMENT AND WAIVER
The Merger Agreement may be amended at any time by action taken by the
respective boards of directors of Iwerks and Showscan, but after approval by the
stockholders of Showscan of the Merger Agreement and the Merger, no amendment
shall be made which changes the per share consideration to be received by such
stockholders or which by law requires further approval by such stockholders,
without such further approval. Iwerks and Showscan by action taken or
authorized by their respective boards of directors, may extend the time for
performance of the obligations or other acts of the other parties to the Merger
Agreement, may waive inaccuracies in the representations of the other parties
contained in the Merger Agreement or in any document delivered pursuant thereto,
and may waive compliance with any agreements or conditions contained in the
Merger Agreement.
BUSINESS OF IWERKS
GENERAL
Iwerks is a leading provider of high-tech software-based theatre attractions
for the out-of-home entertainment market. Iwerks' products combine advanced
theatre systems with entertainment or educational software to create high-impact
"attractions" which immerse audiences in the action. Iwerks' products include
ride simulation, giant screen, 360 degree, 3-D, and various other specialty
attractions. In addition, Iwerks owns and operates a fleet of touring ride
simulation theatres. Iwerks also produces film and video software for ride
simulators and special format theatres.
The primary markets for Iwerks' attractions are theme parks, museums, various
types of location-based-entertainment centers, visitor centers, world
expositions and special events. The popularity of entertainment attractions of
the type sold by Iwerks 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. Iwerks' 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.
Iwerks also owns and operates a fleet of 16 portable ride simulation theatres
and is exploring other potential touring opportunities. Further, an important
element of Iwerks' business strategy is the participation in the operation of
its fixed-base attractions either through direct equity ownership or through
other participation arrangements. Iwerks is currently a participant in several
joint ventures to own and operate multiple ride simulation theatres in the
United States and Australia. Iwerks continues to evaluate new opportunities to
participate in the operation of its fixed-based attractions.
Since inception in 1986 through February 12, 1998, Iwerks has installed in
excess of 250 fixed-base theatres and touring attractions in 28 countries. Of
these, 111 were ride simulation theatres, which Iwerks supports with a library
of 40 ride simulation films, the industry's largest ride simulation film
library. Iwerks' ride simulation film projects include: 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 has the largest
installed base of ride simulation theatres and the largest library of ride
simulation films in the world.
Iwerks is a Delaware corporation with principal executive offices located at
4540 West Valerio Street, Burbank, California 91505, telephone number (818) 841-
7766. In addition to its principal executive offices, Iwerks has sales offices
in Sarasota, Florida, London, England and Hong Kong.
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BUSINESS STRATEGY
Historically, Iwerks' 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 Iwerks
is to continue building a recurring revenue base. To further this goal, Iwerks
produces and licenses its entertainment and educational software for exhibition
on its installed base of attractions. Iwerks also owns and operates a fleet of
16 touring ride simulation theatres from which it derives admission and
sponsorship revenue and Iwerks is pursuing other opportunities to participate in
the operation of attractions.
A key strategy to build recurring revenues began in fiscal 1996 with Iwerks'
entry into joint venture and partnership relationships with operators of
entertainment centers. In Spring 1996, Iwerks entered into a joint venture
arrangement with Hoyt's Cinemas, an international multi-plex theatre operation,
and opened the first theatre pursuant to this joint venture arrangement 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, Iwerks opened 3 simulation theatres pursuant to this
joint venture: Bethesda, MD, Philadelphia, PA and Ontario, CA. These recent
agreements supplement Iwerks' existing partnership at PIER 39 San Francisco and
its royalty interests in Iwerks' theatre system at the Foxwoods Casino in
Ledyard, Connecticut.
IWERKS PRODUCTS
FIXED-BASE RIDE SIMULATION THEATRES. Iwerks' line of fixed-base ride
simulators is marketed as Iwerks TurboRide and combines high-resolution
projector film or video software, digital surround sound and moving seats to
fully involve the audience in a realistic, but simulated experience. Software
currently available includes a variety of live action and fantasy experiences
such as flying at supersonic speeds, riding a roller coaster, white-water
rafting and space and underwater adventures. Iwerks' ride simulation theatre
product line is the broadest in the industry, enabling Iwerks to offer its
customers seat, row and platform-based simulators in a variety of configurations
and at multiple price points. Iwerks 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. Iwerks' ride simulators are designed to
operate in theatres which typically seat 18 to 100 people, and feature screens
up to 52 feet high and six-channel surround sound. In these rides, guests watch
a high resolution film with a fast action point of view perspective while
sitting in seats that move in synchronization with the action on the screen.
Films for Iwerks' ride simulation theatres typically range between three and
five minutes. The Iwerks TurboRide can be reprogrammed to create new
adventures.
PORTABLE RIDE SIMULATION THEATRES. Iwerks also has developed a portable
ride simulation theatre called the "Reactor," which is transported by tractor
trailers. The trailers transform to create a theatre with a high definition
video projection system and digital surround sound. The Reactor incorporates
the same ride simulation technology as Iwerks Turbo Ride and can accommodate up
to 18 people per show. The Reactors can be used to exhibit Iwerks' ride
simulation films developed for its fixed-base ride simulation theatres as well
as films developed specifically for use in the Reactor at air shows, boat and
car races, state fairs and other special events. Iwerks also seeks corporate
sponsors for its touring Reactor units. Iwerks 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. Iwerks' giant screen theatres are marketed under
the name Iwerks CineDome and Iwerks Theatres, and feature screens which are much
larger than standard movie screens and projection systems that deliver a
sharper, brighter image than conventional movies. The result is a high-impact,
immersive, sensory experience for the audience. These theatres seat up to 630
people, have steeply raked seating and exhibit films typically lasting between
15 and 40 minutes.
Iwerks' giant screen theatres are available in a variety of configurations.
Its flat screen theatres use screens as large as 81 feet high by 110 feet wide,
more than five times the size of a standard movie theatre screen. Iwerks' domed
screen theatres use a dome-shaped screen up to 88 feet in diameter which wraps
around and above the audience filling the audience's field of vision. Iwerks
also offers 3D systems which use dual projectors to create a 3D image. Iwerks
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. Iwerks offers a wide range of custom film and video-based
theatre systems utilizing 70 millimeter and 35 millimeter film formats. Custom
projects range from the sale of individual projectors to complete theatre
systems.
FILM SOFTWARE. Iwerks produces film and video software for Iwerks'
attractions with a production strategy that is similar to that of a movie
studio, where a small core of executives hire supplemental production talent and
specialists on a project-by-project basis. This structure allows Iwerks to
maintain creative and budgetary control of projects without incurring
substantial, continuing overhead expenses. Iwerks also provides executive
producer and postproduction services to third parties filming in Iwerks' film or
video projection formats.
Iwerks has a film library which includes as of February 12, 1998 the
distribution rights to 40 ride simulation films, 4 giant screen films and seven
3D films. Iwerks' library of ride simulation films is the largest in the
industry. In addition to the Iwerks' film
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library, owners of Iwerks' giant screen theatres have access to a library of
over 100 films which are generally available in the marketplace. Iwerks believes
that the quality and size of its film library is a significant competitive
advantage in the markets in which it competes, particularly in the ride
simulation market. As the installed base of theatres grows, film licensing
revenue is expected to increase. Iwerks derived approximately 18%, 11% and 14%
of its revenue in fiscal 1995, 1996 and 1997, respectively, from film license
agreements and film production contracts.
Iwerks' 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 Iwerks' 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. Iwerks also
won the prestigious Image Award for Best Overall Presentation this year.
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.
Typically, a film produced for exhibition on a theatre system is sold or
licensed to a customer as part of the sale of the theatre system. Where sold,
the customer pays all or most of the production cost; Iwerks attempts to retain
limited distribution rights beyond an exclusive exhibition territory retained by
the customer. Where licensed, Iwerks typically licenses the film for a one-year
period for a flat fee which varies based upon the film. In limited cases,
Iwerks will accept its fees as a percentage of the ticket sales. Film rentals
vary according to the quality of the film, the initial price paid for the
theatre systems and other factors.
Marketing and Customers
Iwerks distributes its theatre systems, software and services through
multiple distribution channels including a direct sales and marketing force as
well as independent sales agents in selected areas. The sales and marketing
staff consists of 21 employees. A foreign sales office located in Hong Kong
provides support to Iwerks' 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,
Iwerks has sales professionals located in Burbank, California and Sarasota,
Florida. Iwerks 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.
Iwerks markets its attractions, including theatre systems and film
software, mainly to theme parks, museums, visitor centers, casinos, world
expositions, location-based-entertainment centers and special event venues.
Iwerks' theatre systems include projection and audio equipment, show control
systems, film handling equipment and, in most instances, ride simulation
systems. The customer supplies its own theatre space and other necessary site
improvements to operate the theatre. Iwerks provides installation, training,
design, maintenance and other support services.
The primary market for Iwerks' 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. Iwerks 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. Iwerks sells its ride simulation theatres at
prices which are separately negotiated, depending upon the product, the number
of motion bases, the configuration of the theatre space, optional components
selected and the level of design service provided. Iwerks licenses its ride
simulation films for a range of prices depending on the film and the license
term.
Iwerks tours its Reactor units at a variety of special events, primarily
air shows, boat and car races, state fairs, trade shows and other outdoor
events. Revenue is generated through admission tickets of between $3 and $5 per
person or through lease of the system to corporate sponsors who may use the
system for promotional campaigns in connection with new product introductions
and other promotional purposes.
The primary markets for Iwerks' 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. Iwerks sells its giant screen and 360 degree theatres
at prices which are separately negotiated.
One of Iwerks' 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.
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Iwerks' sales typically are made pursuant to written contracts, and are
denominated in United States dollars. International sales are generally backed
by letters of credit. Consequently, Iwerks' operations have not historically
been subject to risks attendant to currency fluctuations. During fiscal 1995,
1996 and 1997, 55%, 49% and 55% of Iwerks' revenues, respectively, were derived
from sales outside the United States. Iwerks' sales contracts typically provide
for progress payments which are timed to match related expenditures by Iwerks.
The customer generally has the right to terminate the contract before completion
by paying Iwerks its nonrecoverable costs plus a termination fee. Iwerks offers
a warranty on sales of its products, generally for a period of 12 months.
Iwerks believes that its material contract terms are consistent with industry
practices.
ENABLING TECHNOLOGIES
With limited exceptions, the underlying technologies employed by Iwerks are
in the public domain and generally available in the marketplace. However,
Iwerks possesses substantial expertise in the design, modification and
engineering of projection, film-handling, camera and audio technologies which it
believes to be an important competitive factor.
IMAGING SYSTEMS. Iwerks offers a variety of technologically advanced
imaging systems.
Iwerks Quatro(TM) is a 70-millimeter projection system designed to offer
small ride simulation venues high-clarity film quality in locations which were
previously limited to video systems. The Iwerks Quatro(TM) houses four ride
simulation films on one reel, reduction printed from the larger format 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 Iwerks' patent application on
certain features of the Quatro(TM) projection system and the Quatro(TM) is now a
patented proprietary projection technology.
Iwerks 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 Iwerks 8/70 a brighter
and sharper image without the flicker and stroboscopic effects common with
conventional 35- and 70-millimeter film systems. Iwerks 8/70 is used in Iwerks'
array of ride simulation systems and destination theatres common to museums and
visitors centers where screen sizes smaller than 60' high and 80' wide or dome
screens of 75' or less in diameter are suitable.
Iwerks 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. Iwerks 15/70
is capable of achieving the screen sizes up to 81' high and 110' wide and dome
screens up to 88' in diameter that are generally found in high capacity theatres
at world expositions and larger museums and visitor centers. Iwerks 8/70 and
15/70 are used in the Iwerks CineDome and Iwerks Theatres.
In fiscal 1997 Iwerks 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 projection 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 projection available.
Iwerks 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 VideoDrome 360, the video imaging and show control systems allow real-
time manipulation of the projected image to allow a variety of special effects.
MOTION BASES. Iwerks' ride simulation theatres utilize seat-based and
platform-based ride simulation technologies with per-base capacities ranging
from two to thirty. The Turbo Tour is a compact and highly responsive three-
axis system, allowing a multitude of combinations of pitch (tilt from front to
rear), vertical (move up and down) and roll (tilt from side to side) movements,
which keep passengers in constant motion with the image. Each motion base is a
self-contained system, requiring only electronic communications and electrical
power connections. The Motion 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 bases 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. Iwerks' film-based systems are offered with specially
designed film loop cabinets. These cabinets allow the film to be spliced into
an endless loop more fully automating the projection system and providing the
fastest possible recycle time for maximum theatre throughput. The loop cabinet
also includes other important features: the film is housed in a dust-free
humidity-controlled environment; the film is cleaned twice on each trip through
the system so that dust picked up during projection doesn't accumulate; and the
film picture area never rubs on itself or any other surface, eliminating
degradation common on reel to reel and platter systems.
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<PAGE>
MANUFACTURING
Iwerks manufactures and assembles its theatre systems at its facilities in
Burbank, California. A majority of the components for Iwerks' theatre systems
are purchased from outside vendors. Iwerks' manufacturing operations consist of
assembly, testing, quality control and system integration of its theatre system
components, subassemblies and final assemblies, including modifications and the
programming of the show-control and motion-control components, and installation
of the completed theatre systems. Iwerks' manufacturing operations utilize a
wide variety of electrical and mechanical components, raw materials and other
supplies and services. Iwerks has developed multiple commercial sources for
most components and materials, but it does use single sources for a limited
number of standard and custom components. While delays in delivery of such
single source components could cause delay in shipments of certain products by
Iwerks, at this time, Iwerks has no reason to believe that any of the single-
source vendors present a serious risk. Consistent with industry practice,
Iwerks generally purchases components of its theatre systems upon receipt of an
order. Certain components used by Iwerks, including lenses, hydraulic power
sources and motion bases must be ordered up to four months in advance to assure
timely delivery. Iwerks maintains an inventory of these items as it deems
appropriate to service forecasted demand. Research and development costs are
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 these expenses, 49%, 32% and 23% in 1995, 1996 and 1997,
respectively, were for improvements to existing products and the remainder was
for the development of new products.
Iwerks recently acquired the technology and patents to produce the Linear
Loop Projector ("LLP") which is a new technology in film handling and
projection. Iwerks is currently building its first 25 LLP projectors and will
utilize them not only in its Large Format Theaters, but also as its projector of
choice in larger ride simulation installations. The LLP is manufactured by
Iwerks 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 proceeded it.
Ballantyne of Omaha, a leading manufacturer of professional motion picture
projectors, supplies Iwerks with its 8/70 projectors. Iwerks makes substantial
modifications to the projectors to make them suitable for Iwerks' use. Lenses
and lamphouses incorporated in the projection systems are supplied to Iwerks by
third parties. If the Ballantyne projectors were for any reason to become
unavailable, Iwerks believes that it would be able to substitute other
projectors.
Iwerks 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, Iwerks owns all rights in and to
the seats. Vickers continues as the sole manufacturer of these motion bases on
behalf of Iwerks; however, Iwerks has the right under its agreement with Vickers
to secure alternate sources of manufacturing at any time. The metal fabrication
portion of the Motion Master is performed by a third party. To the extent that
the outside supplier may be unable to produce acceptable quality or produce
within acceptable lead times, Iwerks may experience a temporary reduction in its
ability to deliver this product. This could have a material adverse impact on
Iwerks' business.
PATENTS AND TRADEMARKS
Iwerks has been issued US Patents on features of Iwerks' motion base and
motion control system used in its ride simulation theatres and all claims have
been allowed on its patent applications on certain features of its new
Quatro(TM) projection system. Additionally, Iwerks recently acquired the patents
to produce the LLP. Iwerks has registered its principal trademarks in the United
States and selected other countries.
EMPLOYEES
At February 12, 1998 Iwerks employed 134 persons, of whom 20 employees were
employed in management, finance and administration, 21 were employed in sales
and marketing, and 93 were employed in operations. Although Iwerks has not
experienced difficulties in obtaining qualified personnel and anticipates that
it will be able to continue to recruit qualified personnel for its operations,
there can be no assurance that such personnel will be available when required.
None of Iwerks' employees are represented by a collective bargaining agreement.
Iwerks believes that its relations with its employees are good.
PROPERTIES
Iwerks maintains its principal facility in Burbank, California where it
leases space under four separate leases on adjacent facilities consisting of
36,000, 23,460, 7,596 and 5,184 square feet each, expiring between September
30, 1999 and September 30, 2001. Iwerks leases the space for an aggregate lease
payment of approximately $41,000 per month. Iwerks believes that its current
facilities are adequate to meet its needs for the immediate future. If Iwerks'
operations were to expand, Iwerks may require additional office, warehouse and
manufacturing facilities. Iwerks believes that suitable facilities nearby
Iwerks' principal facility in Burbank, California are generally available.
LEGAL PROCEEDINGS
On or about February 5, 1998, Iwerks received notice of a complaint filed
in the U.S. District Court of New York by Ridefilm Corporation, a
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<PAGE>
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 but, to date,
has not made such a motion. Iwerks believes that the suit is without merit and
intends to vigorously defend itself.
There are no other material legal proceedings to which Iwerks 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 Iwerks' financial condition; however, there can be no
assurance that Iwerks will not become a party to other lawsuits in the future,
and such lawsuits could potentially have a material adverse effect on Iwerks'
financial condition and results of operations.
EXECUTIVE OFFICERS AND DIRECTORS OF IWERKS
The following table sets forth certain information with respect to the
nominees, continuing directors and executive officers of Iwerks as of February
23, 1998:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Charles Goldwater 46 Chairman of the Board, Chief Executive Officer and President
Bruce C. Hinckley 50 Executive Vice President, Chief Financial Officer and Secretary
Daniel R. Griesmer 49 Senior Vice President, General Manager
Donald W. Iwerks 68 Founder of Iwerks, Vice Chairman Board of Directors
Gary Matus 50 Director of Iwerks
Dag Tellefsen 55 Principal, Glenwood Ventures and Director of Iwerks
Roy A. Wright 54 Director of Iwerks
</TABLE>
The executive officers of Iwerks are appointed by and serve at the
discretion of the Iwerks Board. There is no family relationship between any
director and any executive officer of Iwerks.
Charles Goldwater joined Iwerks as its Chairman of the Board, Chief
Executive Officer and President on February 23, 1998. From September 1995 to
December 1997, Mr. Goldwater served as Chief Executive Officer and President of
Mann Theatres (Cinamerica Theatres L.P.). Prior thereto from 1990 to 1995, Mr.
Goldwater was Senior Vice President and General Manager of Sony/Loews Theaters.
Bruce C. Hinckley joined Iwerks as its Executive Vice President and Chief
Financial Officer in September 1996. Between September 1995 and when he joined
Iwerks he was a financial consultant. Between November 1985 until September
1995 he was the Vice President, Controller and Chief Accounting Officer of
Caesars World, Inc., a casino and hotel company. He is a certified public
accountant.
Daniel R. Griesmer joined Iwerks as its Senior Vice President, General
Manager in March 1998. From November 1995 to February 1998, Mr. Griesmer served
as Vice President, Theater Planning and Development of Mann Theatres (Cinamerica
Theatres, L.P.). Prior thereto, from 1990 to 1995, Mr. Griesmer held various
positions at Sony/Loews Theaters, the most recent of which was Director of
Facilities Management.
Donald W. Iwerks is a co-founder of Iwerks and has been a Director and Vice
Chairman since Iwerks' inception. Mr. Iwerks served as Chief Technical Officer
of Iwerks until his retirement in December 1995. From 1950 to 1985, Mr. Iwerks
was employed by the Walt Disney Studios, where from 1965 to 1985 he was head of
the Technical Engineering and Manufacturing Division, which was responsible for
the design and manufacture of all film projection systems used in the Disney
theme parks.
Gary J. Matus has been a director of Iwerks since July 1996. Mr. Matus was
an Executive Vice President of the Bank of America, N. T. & S. A., and was Chief
Marketing Officer responsible for the bank's marketing operations from 1994
through February 1998. Prior thereto, from 1990 through 1994 Mr. Matus served
as Head of the Entertainment and Media Industries Group at Bank of America,
N.T.&S.A.
Dag Tellefsen has been a director of Iwerks since March 1993. Mr.
Tellefsen has been a principal of Glenwood Ventures, a Northern California
venture capital firm since 1982. Mr. Tellefsen also serves or has served as a
director of ARIX Corp., KLA Instruments and Octel Communications, Inc.
Roy A. Wright joined Iwerks as its Chief Operating Officer in December 1994
and was named Chief Executive Officer and President of Iwerks in July 1995. He
has served as a Director of Iwerks since May 1995 and as Chairman since April
1997. Effective February 23, 1998, Mr. Wright's position as Chairman of the
Board, Chief Executive Officer and President terminated. Mr. Wright will
continue to provide consulting services to Iwerks during the transition period
and will continue as a member of the Iwerks Board through the expiration of his
current term at the Iwerks Annual Meeting. Prior to joining Iwerks and since
June 1993, Mr. Wright provided senior level management and consulting services
to a variety of companies. From April 1992 to May 1993, Mr. Wright served
53
<PAGE>
as President and Chief Executive Officer of RDI Computer Corporation, a
manufacturer of portable SPARC computer workstations. From July 1989 to December
1991, Mr. Wright served as Chief Executive Officer of Unison Technologies, Inc.
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. 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 either
before or after the date of the Iwerks Annual Meeting. 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 Effective Time.
Pursuant to the terms of the Amendment, Iwerks has agreed to appoint,
immediately after the Effective Time, Charles B. Moss, Jr., a current member of
the Showscan Board, to serve as a Class I director on the Iwerks Board. In
addition, Iwerks also has agreed, as soon as practicable following the Effective
Time, to expand the number of directors to serve on the Iwerks Board to seven
and to commence a search for two additional qualified candidates to serve as a
Class II and a Class III director, respectively, who shall be elected by a
majority of the then existing Iwerks Board.
BOARD MEETINGS AND COMMITTEES
The Iwerks Board held a total of seven meetings during the fiscal year
ended June 30, 1997. The Iwerks Board has an Audit Committee, a Compensation
Committee and a Nominating Committee. During the fiscal year ended June 30,
1997, each director attended all of the meetings of the Iwerks Board held while
he or she was a director and of the Committees of the Iwerks Board on which he
or she served.
The Audit Committee's functions include recommending to the Iwerks Board
the engagement of Iwerks' independent auditors, reviewing and approving the
services performed by the independent auditors and reviewing and evaluating
Iwerks' accounting policies and internal accounting controls. The Compensation
Committee reviews and approves the compensation of officers and key employees,
including the granting of options under Iwerks' various stock incentive plans.
See " -- Report of Compensation Committee." The Nominating Committee is
responsible for proposing potential candidates for the Iwerks Board. Currently,
the members of the Audit Committee are Messrs. Iwerks and Matus, the member of
the Compensation Committee is Mr. Tellefsen and the members of the Nominating
Committee are Messrs. Iwerks and Tellefsen.
COMPENSATION OF DIRECTORS
Each director who is not an officer of or otherwise employed by Iwerks as
either an employee or as a consultant (each an "Outside Director") receives a
non-qualified option to purchase 10,000 shares of Iwerks Common Stock on the
date that such Outside Director attends his or her first meeting of the Iwerks
Board. Each Outside Director is also entitled to receive annual grants on the
date of Iwerks' Annual Meeting of Stockholders of non-qualified options to
purchase additional shares of Iwerks Common Stock. The number of shares which
are subject to each such annual grant is determined by dividing $50,000 by the
fair market value of the Iwerks Common Stock on the date of such grant. All of
the above-described options vest over four years. In addition, each Outside
Director receives an annual retainer fee of $8,000, which fee is paid quarterly.
Further, each Outside Director is entitled to receive $1,000 for Board
Meetings, $500 for committee meetings and reimbursement for travel expenses
incurred on behalf of Iwerks.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last fiscal year, executive compensation for Iwerks was
administered by the Compensation Committee of the Board. Mr. Tellefsen served
as the Compensation Committee during the last fiscal year. Mr. Tellefsen is
not, and has never been, an officer or employee of Iwerks.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The following report of the Compensation Committee to the Iwerks Board
shall not be deemed to be incorporated by reference into any filing by Iwerks
under either the Securities Act or the Exchange Act that incorporates future
Securities Act or Exchange Act filings in whole or in part by reference.
GENERAL
The Compensation Committee of the Iwerks Board (the "Committee") is
responsible for establishing and administering the policies that govern
executive compensation and benefit practices. All decisions of the Committee
are subject to the approval of the Iwerks Board. The Committee is currently
comprised solely of Mr. Tellefsen.
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<PAGE>
COMPENSATION PHILOSOPHY
Iwerks' executive compensation program is designed to (1) provide levels of
compensation that integrate pay and incentive plans with Iwerks' strategic
goals, so as to align the interests of executive management with the long-term
interests of Iwerks' stockholders, (2) attract, motivate and retain executive
talent capable of achieving the strategic business goals of Iwerks, (3)
recognize outstanding individual contributions, and (4) provide compensation
opportunities which are competitive to those offered by other entertainment
technology companies of similar size and performance. To achieve these goals,
Iwerks' executive compensation program consists of three main elements: (i)
base salary, (ii) annual cash bonus and (iii) long-term incentives. Each
element of compensation has an integral role in the total executive compensation
program.
BASE SALARY
Base salaries for executive officers are determined on an annual basis by
evaluating each executive officer's position, duties, responsibilities, tenure,
performance and potential contributions to Iwerks. This determination also
takes into account the compensation practices of similarly situated companies
for comparable positions. The financial performance of Iwerks is also
considered. Finally, factors consistent with Iwerks' overall compensation
policy are taken into account. During fiscal 1997, Mr. Wright was Chief
Executive Officer of Iwerks. Mr. Wright's annual base salary rate of $230,000
was determined based upon Mr. Wright's services to Iwerks, the financial
performance of Iwerks in the fiscal year ended June 30, 1996 and the salaries
received by similarly situated executives at other companies. Iwerks also
provides to its employees (including the chief executive officer and other
officers of Iwerks) medical, dental, and long-term disability insurance and
other customary employee benefits.
ANNUAL CASH BONUSES
Executive officers are eligible for annual incentive bonuses in amounts
determined at the discretion of the Committee. The Committee considers an award
of an annual bonus subjectively, taking into account factors such as the
financial performance of Iwerks, increases in stockholder value, the achievement
of corporate goals and individual performance.
LONG-TERM INCENTIVES
The Committee provides Iwerks' executive officers with long-term incentive
compensation through grants of stock options. The Committee is responsible for
selecting the individuals to whom grants should be made, the timing of grants,
the determination of the per share exercise price and the number of shares
subject to each option awarded. The Committee believes that stock options
provide Iwerks' executive officers with the opportunity to purchase and maintain
an equity interest in Iwerks and to share in the appreciation of the value of
the Iwerks Common Stock. The Committee believes that stock options directly
motivate an executive to maximize long-term stockholder value. The options
incorporate vesting periods in order to encourage key employees to continue in
the employ of Iwerks. All options granted in fiscal 1997 were granted at the
fair market value of the Iwerks Common Stock on the date of grant. The
Committee considers the grant of each option subjectively, considering factors
such as the individual performance of executive officers and competitive
compensation packages in the industry.
SUMMARY
The Committee believes that its executive compensation philosophy of paying
its executive officers by means of base salaries, annual cash bonuses and long-
term incentives, as described in this report, serves the interest of Iwerks and
Iwerks' stockholders.
COMPENSATION COMMITTEE: Dag Tellefsen
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, as to the Chief Executive Officer and as to each
of the other most highly compensated executive officers whose salary plus bonus
exceeded $100,000 during the last fiscal year (the "Iwerks Named Officers"),
information concerning all compensation paid for services to Iwerks in all
capacities during the last three fiscal years.
55
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
--------------------------------------------------- ------------
Other Stock
Annual Option All Other
Name & Principal Position Year Salary Bonus Compensation Awards(1) Compensation
- ------------------------- --------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Roy A. Wright (2)..................... 1997 214,192 -- 22,320 (3) -- 3,090 (4)
Former Chairman and Chief Executive 1996 200,000 200,000 18,822 (3) 300,000 shares 3,090 (4)
Officer 1995 10,492 33,000 -- 210,000 shares 3,030 (4)
William J. Battison (5)............... 1997 165,385 -- -- -- --
Former Executive Vice President 1996 150,000 140,000 -- 150,000 shares --
1995 75,115 -- 60,000 111,500 shares --
Bruce C. Hinckley (6)................. 1997 110,769 37,000 -- 130,000 shares --
Executive Vice President,
Chief Financial Officer
and Secretary
Guy L. Heyl (7)....................... 1997 17,308 -- -- -- 12,049 (8)
Acting Chief Financial Officer
</TABLE>
____________________
(1) All numbers reflect the number of shares of Iwerks Common Stock subject to
options granted during the fiscal year.
(2) Mr. Wright joined the company as Chief Operating Officer in December 1994.
Mr. Wright was appointed Chief Executive Officer and President of Iwerks
effective July 1, 1995. Effective November 1997, Mr. Wright's annual base
salary was increased to $300,000. Mr. Wright was succeeded by Mr. Charles
Goldwater as Chairman of the Board, Chief Executive Officer and President
effective February 23, 1998.
(3) Represents a stipend to defray a portion of Mr. Wright's commuting
expenses.
(4) Represents the dollar value of term life insurance premiums paid by Iwerks.
(5) Mr. Battison provided consulting services in early fiscal 1995, and joined
Iwerks as an executive officer in January 1995. Mr. Battison's employment
with Iwerks was terminated effective January 23, 1998.
(6) Mr. Hinckley joined Iwerks as Executive Vice President and Chief Financial
Officer as of September 23, 1996 and was appointed Secretary on October 21,
1996. Effective January 1998, Mr. Hinckley's annual base salary was
increased to $200,000.
(7) Mr. Heyl was Acting Chief Financial Officer between June 8, 1996 and
September 20, 1996, at which time he resigned. Prior to such time he was
not an executive officer.
(8) Represents payment of accrued vacation upon termination.
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<PAGE>
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended June 30, 1997 to the Iwerks
Named Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------- Potential Realizable Value at
Percent Assumed Annual Rates of
of Total Stock Price Appreciation for
Options Option Term(1)
Granted to -----------------------------
Number of Employees Exercise or
Options In Fiscal Base Price Per Expiration
Name Granted(2) Year(3) Share(4) Date 5% 10%
---------- ------------- ------------ -------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Roy A. Wright (5)........... -- -- -- -- -- --
Bruce C. Hinckley........... 100,000 15.15% $6.625 9-18-06 $416,500 $1,055,900
30,000 4.55% 5.375 2-19-07 $101,400 $ 256,980
William J. Battison III (6) -- -- -- -- -- --
Guy L. Heyl (7)............. -- -- -- -- -- --
</TABLE>
________________
(1) The potential realizable value is based on the assumption that the Iwerks
Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the option term. These
amounts are calculated pursuant to applicable requirements of the
Commission and do not represent a forecast of the future appreciation of
the Iwerks Common Stock.
(2) Each of the option grants set forth on this chart are exercisable with
respect to one-fourth (3) of the total shares of such grant, rounded up to
the nearest whole share, on the first anniversary of the date of grant, and
thereafter exercisable with respect to one-forty-eighth (1/48) of the total
shares, rounded up to the nearest whole share, on the first day of each
month until all shares have become exercisable. The options may, at the
discretion of the Administrator, become immediately exercisable upon
certain change of control events. All of the options set forth in this
chart were granted for a term of 10 years.
(3) Options covering an aggregate of 659,955 shares were granted to eligible
employees during the fiscal year ended June 30, 1997.
(4) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares, subject to certain conditions.
(5) Mr. Wright was succeeded by Mr. Charles Goldwater as Chairman of the Board,
Chief Executive Officer and President effective February 23, 1998.
(6) Mr. Battison provided consulting services in early fiscal 1995, and joined
Iwerks as an executive officer in January 1995. Mr. Battison's employment
with Iwerks was terminated effective January 23, 1998.
(7) Mr. Heyl was Acting Chief Financial Officer between June 8, 1996 and
September 20, 1996, at which time he resigned. Prior to such time he was
not an executive officer.
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTIONS
The following table sets forth, for each of the Iwerks Named Officers,
certain information regarding the exercise of stock options during the year
ended June 30, 1997, and the value of options held at fiscal year end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
Value of All Unexercised
Shares Number of Unexercised In-the-Money Options at
Acquired Options at Fiscal Year-End Fiscal Year End(1)
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------- --------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Roy A. Wright (2)................... -- -- 253,333/256,667 0/0
William J. Battison III (3)......... -- -- 134,416/127,083 0/0
Bruce C. Hinckley................... -- -- 0/130,000 0/0
Guy L. Heyl (4)..................... 7,644 26,529 0/0 0/0
</TABLE>
________________
(1) Based upon the last reported sale price of the Iwerks Common Stock on The
Nasdaq National Market on June 30, 1997, none of the options held by the
Iwerks Named Officers were "in-the-money."
(2) Mr. Wright was succeeded by Mr. Charles Goldwater as Chairman of the Board,
Chief Executive Officer and President effective February 23, 1998.
(3) Mr. Battison provided consulting services in early fiscal 1995, and joined
Iwerks as an executive officer in January 1995. Mr. Battison's employment
with Iwerks was terminated effective January 23, 1998.
(4) Mr. Heyl was Acting Chief Financial Officer between June 8, 1996 and
September 20, 1996, at which time he resigned. Prior to such time he was
not an executive officer.
CERTAIN TRANSACTIONS WITH MANAGEMENT
Donald W. Iwerks, Iwerks' Chief Technical Officer, retired from full time
employment with Iwerks' effective December 31, 1995. At that time, Mr. Iwerks
was 65 years of age. In this connection, Mr. Iwerks and Iwerks entered into a
Severance Agreement and General Release (the "Agreement"), dated as of June 30,
1995. The Agreement provides that Iwerks will provide Mr. Iwerks upon his
resignation with, among other things, (a) $200,000 in severance payments in
full satisfaction of all of Iwerks' obligations to Mr. Iwerks, and (b) effective
upon the date of Mr. Iwerks' resignation, the full vesting of all stock options
then held by Mr. Iwerks and the extension of the exercise date of such options
until December 31, 1996. The Agreement also obligates Iwerks, during the
eighteen-month period commencing on July 1, 1995, to purchase or arrange for the
purchase of up to $250,000 of the Iwerks Common Stock held by Mr. Iwerks. Mr.
Iwerks did not exercise any portion of the options which expired on December 31,
1996. Pursuant to the Agreement, Mr. Iwerks has provided Iwerks with a full
release of all claims he may have against it arising from his current and prior
affiliation with Iwerks. Beginning January 1, 1997, Mr. Iwerks began receiving
"outside director" fees. Mr. Iwerks continued to work on a part-time basis,
generally two or three days a week, and as compensation for this work he
received a $50,000 advisory fee for services rendered through June 30, 1997 and
continued to receive company health benefits coverage until September 1, 1997.
Beginning July 1997, in addition to his director fees, Mr. Iwerks will receive a
monthly consulting fee of $5,000.
Iwerks has entered into an employment agreement with Mr. Charles Goldwater
effective February 23, 1998 pursuant to which Mr. Goldwater shall serve as
Chairman of the Board, Chief Executive Officer and President for an initial
three year term (the "Initial Term"). Iwerks may extend the term of the
agreement for an additional two year period (the "Additional Term") upon the
same terms and conditions as during the Initial Term. Mr. Goldwater's base
salary for the period ending June 30, 1998 is payable at an annual rate of
$330,000. Commencing on the first day of the fiscal year ending June 30, 1999,
Mr. Goldwater's base salary for each fiscal year during the Initial Term and the
Additional Term shall be increased by an amount equal to 5% of the base salary
prevailing during the prior fiscal year. Commencing in fiscal 1999, Mr.
Goldwater is entitled to a performance based bonus, the amount of which will
vary depending upon the performance of Iwerks as compared to the goals
established by the Compensation Committee of the Iwerks Board on an annual
basis. Mr. Goldwater was granted options to purchase 250,000 shares of Iwerks
Common Stock upon commencement of his employment. Of the 250,000 options,
150,000 were priced at $2.25, the closing sale price of the Iwerks Common Stock
on February 19, 1998 (the "Closing Price"), the date prior to the execution of
the employment agreement. Of the remaining options, 50,000 are priced at $2.81,
125% of the Closing Price, and 50,000 are priced at $3.38, 150% of the Closing
Price. Of the options granted to Mr. Goldwater, 50,000 vested on February 23,
1998 with the remaining options vesting in equal monthly installments over four
years from the date of grant.
58
<PAGE>
Iwerks has entered into an employment agreement with Mr. Daniel Griesmer
effective March 2, 1998 pursuant to which Mr. Griesmer shall serve as Senior
Vice President - General Manager for an initial two year term (the "Initial
Term"). Iwerks may extend the term of the agreement for an additional two year
period (the "Additional Term") upon the same terms and conditions as during the
Initial Term. Mr. Griesmer's base salary for the period ending June 30, 1998 is
payable at an annual rate of $130,000. Commencing on March 2, 1999, Mr.
Griesmer's base salary for each fiscal year during the Initial Term and the
Additional Term shall be increased by an amount equal to 4% of the base salary
prevailing during the prior fiscal year. Commencing in fiscal 1999, Mr. Griesmer
is entitled to a performance based bonus, the amount of which will vary
depending upon the performance of Iwerks as compared to the goals established by
the Compensation Committee of the Iwerks Board on an annual basis. Mr. Griesmer
was granted options to purchase 100,000 shares of Iwerks Common Stock upon
commencement of his employment. Of the 100,000 options, 60,000 were priced at
$2.63, the closing sale price of the Iwerks Common Stock on February 27, 1998
(the "Closing Price"), the trading day prior to the effective date of the
employment agreement. Of the remaining options, 20,000 are priced at $3.28, 125%
of the Closing Price, and 20,000 are priced at $3.94, 150% of the Closing Price.
Of the options granted to Mr. Griesmer, 25,000 vest on March 2, 1999 with the
remaining options vesting in equal monthly installments over the following three
years.
Iwerks has entered into agreements with Messrs. Goldwater, Hinckley and
Griesmer and with four other officers of Iwerks that would protect each such
officer in the case of a termination other than "for cause," a "defacto
termination" or a "change in control" of Iwerks, each as defined below. These
agreements are intended to provide certain benefits to the officers upon the
occurrence of any of these events. "For cause" is defined to mean (a) an act of
fraud, embezzlement or similar conduct by the officer involving Iwerks, (b) any
action by the officer involving the arrest of such officer for violation of any
criminal statute constituting a felony or a misdemeanor involving moral
turpitude if the Iwerks Board reasonably determines that the continuation of the
officer's employment after such event would have an adverse impact on the
operations or reputation of Iwerks in the financial community, (c) gross
misconduct or habitual negligence in the performance of the officer's duties,
(d) an act constituting a breach of the officer's fiduciary duty to Iwerks under
the Delaware General Corporation Law, or (e) a continuing, repeated and willful
failure or refusal by the officer to perform his duties. A "defacto termination"
is defined to include any of the following events: (a) Iwerks reduces the
officer's base salary in an aggregate amount in excess of 10% from that paid in
the prior fiscal year, except as part of a general reduction of compensation of
executive officers, (b) Iwerks fails to cause the officer to remain an executive
officer of Iwerks, (c) the officer was not afforded the authority, powers,
responsibilities and privileges customarily accorded to an executive with his or
her title, or (d) Iwerks requires the officer's primary services to be rendered
in an area other than Iwerks' principal offices in the greater Los Angeles
metropolitan area. A "change in control" is defined to mean (a) the acquisition
by any individual, entity or group (within the meaning of the Exchange Act) of
25% or more of the combined voting power of the then outstanding voting
securities of Iwerks entitled to vote in the election of directors, (b) a
liquidation, dissolution, reorganization, merger or consolidation of Iwerks,
except where (i) more than 60% of the combined voting power of the then
outstanding voting securities of the resulting corporation entitled to vote in
the election of directors shall be owned by substantially all of the persons who
were owners immediately prior to such event in substantially the same
proportions as their respective ownership immediately prior to such event, (ii)
no person owns 25% or more of the combined voting power of the resulting
corporation, or (iii) at least a majority of the members of the Iwerks Board
shall have been members of the Iwerks Board at the time of the execution of the
initial agreement providing for such event, or (c) a change in the membership of
the Iwerks Board such that the directors sitting on the Iwerks Board on the date
of each respective agreement referred to herein cease to constitute at least a
majority of the Iwerks Board following the event. The Merger will not constitute
a change in control under these agreements.
In the event of a termination not for cause or a defacto termination, (a)
Mr. Goldwater will receive (i) a cash amount equal to the base salary which
would have been payable to him over the remaining term of his employment
agreement, but not less than 18 months (24 months if termination occurs during,
or upon the expiration of, the initial term of Mr. Goldwater's employment
agreement), as computed based on Mr. Goldwater's base salary at the date of
notice of termination, (ii) a cash amount equal to the pro rated portion, based
on time served, of the performance bonus (100% of the performance bonus if
Iwerks achieves 100% of its scheduled performance goals in the fiscal year in
which termination occurs) which would have been paid to him under Iwerks'
performance bonus plan for the fiscal year in which the termination occurs if
his employment had continued through the end of the fiscal year and Iwerks had
achieved 100% of its scheduled performance goals, (iii) his automobile
allowance, (iv) paid up COBRA benefits for him and his family for the 18 months
(24 months if termination occurs during, or upon the expiration of, the initial
term of Mr. Goldwater's employment agreement) following the date of termination,
and (v) other applicable benefits under Iwerks' operative employee benefit and
welfare plans then in effect; (b) Mr. Hinckley will receive (i) a cash amount
equal to the base salary which would have been payable to him over 12 months,
(ii) a cash amount equal to the pro rated portion of the performance bonus which
would have been paid to him under Iwerks' performance bonus plan for the fiscal
year in which the termination occurs, if any such plan is in effect, if his
employment had continued through the end of the fiscal year and Iwerks had
achieved 100% of its scheduled performance goals, and (iii) paid up COBRA
benefits for himself and his family for the 12 months following the date of
termination; (c) Mr. Griesmer will receive (i) a cash amount equal to the base
salary which would have been payable to him over the remaining term of his
employment agreement, but not less than 15 months (18 months if termination
occurs during, or upon the expiration of, the initial term of Mr. Griesmer's
employment agreement), as computed based on Mr. Griesmer's base salary at the
date of notice of termination, (ii) a cash amount equal to the pro rated
portion, based on time served, of the performance bonus (100% of the performance
bonus if Iwerks achieves 100% of its scheduled performance goals in the fiscal
year in which termination occurs) which would have been paid to him under
Iwerks' performance bonus plan for the fiscal year in which the termination
occurs if his employment had continued through the end of the fiscal year and
Iwerks had achieved 100% of its scheduled performance goals, (iii) his
automobile allowance, (iv) paid up COBRA benefits for him and his family for 15
months (18 months if termination occurs during, or upon the expiration of, the
initial term of Mr. Griesmer's employment agreement) following the date of
termination, and (v) other applicable benefits under Iwerks' operative employee
benefit and welfare plans then in effect; and (d) each of the other three
officers will receive (i) a cash amount equal to the base salary and which would
have been payable to him over six months, (ii) a cash amount equal to the pro
rated portion of the performance bonus which would have been paid to him under
Iwerks' performance bonus plan for the fiscal year in which the termination
occurs, if any such plan is in effect, if his employment had continued through
the end of the fiscal year and Iwerks had achieved 100% of its scheduled
performance goals, and (iii) paid up COBRA benefits for himself and his family
for the 12 months following the date of termination. Each of the benefit
packages described above shall be referred to herein as a "Separation Package."
Additionally, all of the stock options held by these officers which are not
vested as of the date of termination (and in the case of Messrs. Goldwater and
Griesmer, during the 12 month period following termination) shall become vested
and immediately exercisable and shall remain exercisable for a period of (a)
with respect to Messrs. Goldwater and Griesmer, three years following the date
of termination, (b) with respect to Mr. Hinckley, 15 months following the date
of termination, and (c) with respect to the other three officers, 12 months
following the date of termination.
In the event of a change in control, each of Messrs. Goldwater and Griesmer
may terminate their employment commencing with the third month anniversary of
the change in control and terminating on the six month anniversary of the change
in control and receive (a) in the case of Mr. Goldwater, (i) a cash amount equal
to the base salary which would have been payable to him over the remaining term
of his employment agreement, but not less than 24 months, as computed based on
Mr. Goldwater's base salary at the date of notice of termination, (ii) a cash
amount equal to the pro rated portion, based on time served, of the performance
bonus which would have been paid to him under Iwerks' performance bonus plan for
the fiscal year in which the termination occurs, if his employment had continued
through the end of the fiscal year and Iwerks had achieved 100% of its scheduled
performance goals, (iii) his automobile allowance, (iv) paid up COBRA benefits
for him and his family for 18 months (24 months if termination occurs during, or
upon the expiration of, the initial term of Mr. Griesmer's employment agreement)
following the date of termination and (v) other applicable benefits under
Iwerks' operative employee benefit and welfare plans then in effect for the
remaining term of his employment agreement, but not less than 24 months, and (b)
in the case of Mr. Griesmer, (i) a cash amount equal to the base salary which
would have been payable to him over the remaining term of his employment
agreement, but not less than 18 months, as computed based on Mr. Griesmer's base
salary at the date of notice of termination, (ii) a cash amount equal to the pro
rated portion, based on time served, of the performance bonus which would have
been paid to him under Iwerks' performance bonus plan for the fiscal year in
which the termination occurs, if his employment had continued through the end of
the fiscal year and Iwerks had achieved 100% of its scheduled performance goals,
(iii) his automobile allowance, (iv) paid up COBRA benefits for him and his
family for 15 months (18 months if termination occurs during, or upon the
expiration of, the initial term of Mr. Griesmer's employment agreement)
following the date of termination and (v) other applicable benefits under
Iwerks' operative employee benefit and welfare plans then in effect for the
remaining term of his employment agreement, but not less than 18 months. In
addition, upon the occurrence of a change in control, all options then held by
Messrs. Goldwater or Griesmer, as applicable, which are not yet vested shall
vest as of the date of a change in control and shall become immediately
exercisable and remain exercisable for a three year period following the change
in control.
59
<PAGE>
In the event of a change in control, each of Mr. Hinckley and the other
three officers may terminate his or her employment with Iwerks at any time
commencing with the sixth month anniversary of the change in control and
terminating on the one year anniversary of the change in control and receive his
or her Separation Package. Also, if Iwerks terminates the officer's employment
for any reason at any time within the one year period following the date of a
change in control, then the officer shall receive his or her Separation Package.
In addition to the Separation Package and without regard to whether the
officer's employment is terminated following a change in control, upon the
occurrence of a change in control, all options then held by the officer which
are not yet vested shall vest as of the date of a change in control and shall
become immediately exercisable. These options shall remain exercisable (a) with
respect to Mr. Hinckley, for 15 months following the date of the change in
control, and (b) with respect to the other three officers, for 12 months
following the date of the change in control.
Effective February 23, 1998, Mr. Wright's position as Chairman of the
Board, Chief Executive Officer and President terminated. Pursuant to Mr.
Wright's severance agreement with Iwerks, Mr. Wright received $672,000, which
amount reflects Mr. Wright's base salary and annual stipend which would have
been payable to him for the 24 month period following termination. Mr. Wright
also received paid up group medical, supplemental life and disability and other
insurance benefits for himself and his family for the 24 months following the
date of termination. Finally all options held by Mr. Wright on the date of
termination that were not vested became vested and immediately exercisable for a
period of 36 months following the date of termination. In addition to the
foregoing, Mr. Wright's severance agreement provides that Mr. Wright shall be
paid a one time bonus payment in the amount of $250,000 if Iwerks realizes net
income per share in an amount which equals or exceeds $0.20 for the six months
ended June 30, 1998. As a condition to payment, Mr. Wright shall provide
continued employment services to Iwerks for a minimum period of three months and
a maximum period of six months from the date of notice of termination to assist
in an orderly transition to his successor. During such period, Mr. Wright shall
receive base salary in an amount equal to twice that of the base salary he was
being paid prior to the termination plus his annual stipend.
Effective January 23, 1998, Mr. Battison's employment with Iwerks
terminated. Pursuant to Mr. Battison's severance agreement with Iwerks, Mr.
Battison has received $200,000, which amount reflects Mr. Battison's base salary
which would have been payable to him for the 12 month period following
termination. Mr. Battison also received paid up COBRA benefits for himself and
his family for the 12 months following the date of termination. Finally, all
options held by Mr. Battison on the date of termination that were not vested
became vested and immediately exercisable for a period of 15 months following
the date of termination.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Iwerks' executive officers,
directors and persons who own more than ten percent of a registered class of
Iwerks' equity securities to file reports of ownership and changes in ownership
with the Commission. Executive officers, directors, and greater-than-ten
percent stockholders are required by Commission regulations to furnish Iwerks
with copies of all Section 16(a) forms they file. Based solely on its review of
the copies of such forms received by it and written representations from certain
reporting persons that they have complied with the relevant filing requirements,
Iwerks believes that, during the year ended June 30, 1997, all relevant Section
16(a) filing requirements were complied with.
60
<PAGE>
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the stockholders of the Iwerks Common Stock with the
cumulative return of The Nasdaq Stock Market (US and Foreign Companies) Index
and the Index for NASDAQ Miscellaneous Amusement and Recreation Service Index
for the period commencing July 1, 1992 and ending on June 30, 1997. The
information contained in the performance graph shall not be deemed "soliciting
material" or to be "filed" with the Securities and Exchange Commission, nor
shall such information be incorporated by reference into any future filing under
the Securities Act or Exchange Act, except to the extent that the Iwerks
specifically incorporates it by reference into such filing. The stock price
performance on the following graph is not necessarily indicative of future stock
price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG IWERKS ENTERTAINMENT, INC., NASDAQ STOCK MARKET AND NASDAQ STOCKS
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
IWERKS NASDAQ
Measurement Period ENTERTAINMENT STOCK NASDAQ
(Fiscal Year Covered) INC. MARKET STOCK
- ------------------- ------------- --------- ----------
<S> <C> <C> <C>
Measurement Pt- 06/30/92 72.5 37.9
FYE 06/30/93 91.5 96.1
FYE 06/30/94 19.8 91.9 56.2
FYE 06/30/95 11.9 121.9 51.6
FYE 06/28/96 29.5 155.6 52.3
FYE 06/30/97 13.1 189.1 41.6
</TABLE>
61
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of February 25, 1998 certain information
relating to the ownership of Iwerks Common Stock by (a) each person known by
Iwerks to be the beneficial owner of more than 5% of the outstanding shares of
the Iwerks Common Stock, (b) each of the directors of Iwerks, (c) each of the
Iwerks' Named Officers, and (d) all of the executive officers and directors of
Iwerks as a group. Except as may be indicated in the footnotes to the table and
subject to applicable community property laws, each of such persons has the sole
voting and investment power with respect to the shares owned. Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this Rule, certain shares may be deemed to be beneficially owned by
more than one person (such as where persons share voting power or investment
powers). In addition, shares are deemed to be beneficially owned by a person if
the person has the right to acquire the shares (for example, upon exercise of an
option) within 60 days of the date as of which the information is provided; in
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by such
person (and only such person) by reason of these acquisition rights on or before
April 26, 1998. As a result, the percentage of outstanding shares of any person
as shown in the following table does not necessarily reflect the person's actual
voting power at any particular date. Unless otherwise indicated, the address of
each person is c/o Iwerks Entertainment, Inc., 4540 West Valerio St., Burbank,
CA.
<TABLE>
<CAPTION>
Number Percent
of of Class
Name and Address Shares Owned
- ---------------- -------- --------
<S> <C> <C>
Roy A. Wright (1).................................. 540,000 4.3%
Charles Goldwater (2).............................. 68,333 1.0
William J. Battison III (3)........................ 301,500 2.4
Donald W. Iwerks (4)............................... 941,809 7.7
Bruce C. Hinckley (5).............................. 63,332 1.0
Guy L. Heyl (6).................................... 300 *
Gary J. Matus...................................... 7,212 1.0
Dag Tellefsen (7).................................. 596,195 4.9
Heartland Advisors, Inc. (8)....................... 3,009,100 24.7
790 North Milwaukee Street
Milwaukee, WI 53202
Dimensional Fund Advisors, Inc. (9)................ 850,720 7.0
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
All executive officers and directors as
a group (6 persons) (10)......................... 2,518,381 19.3%
</TABLE>
- ------------------------------
* Less than one percent.
(1) Includes 510,000 shares of Iwerks Common Stock underlying options which are
or will become exercisable on or before April 26, 1998. Mr. Wright was
succeeded by Mr. Charles Goldwater as Chairman of the Board, Chief
Executive Officer and President effective February 23, 1998. Pursuant to
Mr. Wright's severance agreement with Iwerks, all unvested options as of
February 23, 1998 became vested and immediately exercisable.
(2) Consists of 58,333 shares of Iwerks Common Stock underlying options which
are or will become exercisable on or before April 26, 1998.
(3) Includes 261,500 shares of Iwerks Common Stock underlying options which are
or will become exercisable on or before April 26, 1998. Mr. Battison
provided consulting services in early fiscal 1995, and joined Iwerks as an
executive officer in January 1995. Mr. Battison's employment with Iwerks
was terminated effective January 23, 1998. Pursuant to Mr. Battison's
severance agreement with Iwerks, all unvested options as of January 23,
1998 became vested and immediately exercisable.
62
<PAGE>
(4) Includes 938,970 shares of Iwerks Common Stock held by the Donald and Betty
Iwerks 1995 Family Trust and 2,839 shares of Iwerks Common Stock underlying
options which are or will become exercisable on or before April 26, 1998.
Mr. Iwerks resigned as Chief Technical Officer of Iwerks effective as of
December 31, 1995. Mr. Iwerks currently serves on the Iwerks Board and is
a consultant to Iwerks.
(5) Includes 48,332 shares of Iwerks Common Stock underlying options which are
or will become exercisable on or before April 26, 1998.
(6) Mr. Heyl was Acting Chief Financial Officer between June 8, 1996 and
September 20, 1996, at which time he resigned. Prior to such time he was
not an executive officer.
(7) Includes 27,006 shares of Iwerks Common Stock underlying options which are
or will become exercisable on or before April 26, 1998. Includes 530,031
shares of Iwerks Common Stock owned by Meriken Nominees Limited as nominee
for Glenwood Ventures, 37,408 shares owned by Glenwood Management and 1,750
shares owned by Dag Tellefsen and Associates, all of which Mr. Tellefsen
disclaims beneficial interest. Mr. Tellefsen is a principal of Glenwood
Ventures, Glenwood Management and Dag Tellefsen and Associates.
(8) Based on information contained in a Schedule 13G dated January 29, 1998.
(9) Based on information contained in a Schedule 13G dated February 9, 1998.
(10) Includes 915,222 shares of Iwerks Common Stock underlying options which are
or will become exercisable on or before April 26, 1998.
63
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF IWERKS
GENERAL
Iwerks is engaged in the business of designing, engineering, manufacturing,
marketing and servicing specialty theatre systems which employ a variety of
projection, show control, ride simulation and software technologies. Iwerks is
currently in the business of: (a) selling and installing ride simulation
attractions in specialty theaters, (b) selling and installing giant screen
theaters (generally such theaters 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 theaters previously
sold by Iwerks, (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 theater profits, and (f) operating
a fleet of 16 mobile ride simulation attractions which it owns. In addition,
during March 1997, Iwerks acquired the technology and patents for a state-of-
the-art movie projector which Iwerks uses to manufacture and sell projectors
used primarily on theater systems designed by Iwerks. The selling and
installation of both ride simulation theaters and large screen theaters includes
providing all or part of the design of such theaters, sale of the projector
screens, show control systems, motion simulators and sound systems.
RECENT ACQUISITION
On March 4, 1997 two newly formed wholly-owned subsidiaries of Iwerks
acquired all of the stock of Pioneer Marketing Corporation ("Pioneer"), a
company engaged in the design and manufacture of motion picture projectors, in
exchange for 299,101 shares of Iwerks Common Stock. Concurrently, Iwerks
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 Iwerks from March 4, 1997.
RECENT DEVELOPMENTS
Developments Affecting Financial Results
The first quarter of fiscal 1998 was 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. 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 in 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 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 September 30, 1997, which
are estimated to be approximately $4.7 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 $19.2 million cash balance of Iwerks at September 30,
1997. The estimated non-recurring Merger related costs of $6.9 million (which
includes amounts expected to be accrued in each of the fourth quarter of fiscal
1997 and the first three quarters of fiscal 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.
Iwerks believes that the primary reasons for the decline in sales to the
Asia Pacific region is a result of the decrease in the Asian currency as
compared to the U.S. dollar. Many of the Asian projects which were to include
Iwerks' attractions have been slowed or have halted development.
In light of reduced revenues and earnings which are largely attributable to
the weakened sales in the Asia Pacific region, on January 28, 1998, Iwerks
reduced its workforce by approximately 13% in order to align staffing levels
with expected revenues going forward. Iwerks anticipates that the layoffs will
result in annual savings in selling, general and administrative savings of more
than $1.0 million. In an unrelated event effective February 23, 1998 Charles
Goldwater was appointed Chairman of the Board, Chief Executive Officer and
President succeeding Roy A. Wright. Iwerks anticipates accruing approximately
$1.7 million in the third quarter of fiscal 1998 for severance and related
expenses with respect to the foregoing.
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<PAGE>
Developments Affecting Management
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 either
before or after the date of the Iwerks Annual Meeting. 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 Effective Time.
In addition, the Iwerks Board has determined to expand the number of
directors to serve on the Iwerks Board to seven, one of which will be Charles B.
Moss, Jr., a current member of the Showscan Board. Iwerks intends to commence a
search for two additional qualified candidates who shall be elected by a
majority of the then existing Iwerks Board.
RESULTS OF OPERATIONS
Iwerks derives its revenues primarily from three sources: sales of hardware
systems, owned and operated (primarily portable simulation theatres), and
licensing of films. To a lesser extent, revenues are also earned from service to
existing theatre owners and production of films for third parties.
Revenues for the fiscal year ended June 30, 1995, 1996 and 1997 and the
three and six month periods ended December 31, 1996 and 1997 are analyzed in the
following table (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
Fiscal Year Ended June 30 December 31 December 31
------------------------------------------------------------------ ---------------------------------------
1995 % 1996 % 1997 % 1997 1996 1997 1996
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hardware sales &
service $24,745 55% $27,998 58% $25,829 65% $3,620 $7,366 $7,092 $12,358
Owned and operated 9,279 21% 13,469 28% 8,072 20% 860 1,278 4,040 4,547
Film licensing 4,096 9% 4,800 10% 5,358 14% 1,415 1,277 2,759 2,506
Film production
and other 6,855 15% 2,249 4% 325 1% 94 102 150 207
------- --- ------- --- ------- --- ------ ------- ------- -------
$44,975 100% $48,516 100% $39,584 100% $5,989 $10,023 $14,041 $19,618
======= === ======= === ======= === ====== ======= ======= =======
</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.
Iwerks 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.
Iwerks 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. Iwerks typically realizes a smaller
margin from the sale of custom films in comparison to its theatre system sales.
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A significant portion of Iwerks'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>
Percent Percent
of Total of Total Percent of
1995 Revenue 1996 Revenue 1997 Total Revenue
--------- ------------ -------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Canada 417 0.9% 1,131 2.3% 516 1.3%
Europe 1,185 2.6% 4,409 9.1% 2,085 5.3%
Asia 23,029 51.3% 17,311 35.7% 13,682 34.6%
South America (including
Mexico) 47 0.1% 972 2.0% 5,375 13.6%
------ ---- ------ ---- ------ ----
TOTAL EXPORT REVENUES 24,678 54.9% 23,823 49.1% 21,658 54.8%
====== ==== ====== ==== ====== ====
</TABLE>
Iwerks expects the percentage of international sales to total sales may
fluctuate significantly in the next twelve months primarily as a result of
significantly weakened sales in the Asia-Pacific region experienced by Iwerks in
the first and second quarters of fiscal 1998. See " -- Recent Developments."
Iwerks 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 Iwerks with respect to certain markets in which it competes. There can be no
assurance that these factors will not result in customers of Iwerks defaulting
on payments due to Iwerks, or in the reduction of potential purchases of Iwerks'
products. Typically, sales are denominated in United States dollars and are
backed by letters of credit, which reduce the risks attendant 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 Iwerks's 17 touring ride simulators (Reactors),
due primarily to the loss of AT&T Corp. as a major sponsor 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 Iwerks 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
Iwerks 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. Iwerks's results of operations may vary
significantly from quarter to quarter depending on the timing of theatre system
shipments, the mix of theatre system contracts, the completion of custom film
sales, the amount of revenue attributable to portable ride simulation theatres
and film licensing agreements.
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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 ($2.3 million), legal and accounting expenses ($.6 million) and
travel and entertainment expenses ($.6 million). These reductions were
partially offset by an increase in the provision for doubtful accounts ($.8
million), increased research and development expenses ($.4 million), increased
accrued expenses related to a regulatory audit ($.4 million) and expenses
related to the proposed Merger ($.2 million). (See Note 14 to Notes to
Consolidated Financial Statements).
Loss on Impairment of Assets
Due to Iwerks being unable to replace the major sponsorship revenue from AT&T
Corp. for its portable simulation theater business and the resulting excess
capacity this generated during the winter months as described above in the
"Revenue" section, Iwerks recognized a non-cash charge of $5.6 million in fiscal
1997 primarily for its portable simulation theaters 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 theater assets over the estimated future discounted cash flow from
these theaters 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 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 Iwerks has significant net operating
loss carry forwards, the income tax provisions are primarily for foreign taxes
and state taxes.
Net Income (Loss)
Iwerks 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.
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<PAGE>
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. Iwerks 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 Iwerks' theatre systems. Other revenues have various sources including
exclusivity agreements, distribution rights, forfeited deposits and settlements
on canceled contracts.
Cost of Sales
The gross profit margin improved in fiscal 1996 compared to fiscal 1995 from
26% to 41% primarily because of Iwerks' 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 Iwerks had significant net operating
loss carry forwards, the income tax provisions are primarily for foreign taxes
and state taxes.
Net Income (Loss)
Iwerks 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.
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<PAGE>
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1997 TO THREE MONTHS ENDED
DECEMBER 31, 1996
Revenues
Hardware sales and service revenue decreased by approximately $3.7 million as
compared to the same period last year. Sales recognized from Asian customers
decreased by approximately $3.8 million as compared to the prior year. Iwerks
has experienced a decline in the signing of new sales contracts in Asia, which
may adversely impact simulation hardware revenue in future periods. Management
believes this decline is primarily due to the Asian economic crisis. Typically,
sales are denominated in U.S. dollars and are backed by letters of credit, which
reduce the risks attendant to international sales.
Owned and operated revenue decreased by approximately $481,000 as compared to
the same period last year, primarily due to a reduction in sponsorship revenue
relating to the portable simulation theatres. Iwerks expects the lower Asian
hardware and touring sales trends to continue to adversely affect results for
the remainder of fiscal 1998.
Film licensing revenue increased as a result of the increasing base of
installed theaters that license Iwerks film software.
Cost of Sales and Gross Profit
The total gross profit margin percentages for the three months ended December
31, 1997 and 1996 were 13.7% and 30.6%, respectively. The decrease in gross
profit margin is primarily related to the portable simulation theatre business.
This business segment has significant fixed cost of sales regardless of revenue
fluctuations. Therefore, given that sales decreased, due to a decline of
sponsorship revenue, and costs of sales remained relatively constant, the gross
margin was negatively impacted. The gross profit margin on the other revenue
sources were generally consistent with the prior year's quarter and may continue
into future periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the three months
ended December 31, 1997 by approximately $989,000 over the same period in the
prior year. This increase was primarily due to increased research and
development efforts, additional bad debt expense, higher insurance costs and
more trade show expenses recognized.
Interest Income & Expense
Interest income for the three months ended December 31, 1997 and 1996 was
$272,000 and $296,000, respectively, and is derived from Iwerks' investments,
primarily in U.S. Treasury Notes. The decrease in interest income resulted
primarily from the decrease in the invested balances in the comparable periods.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 TO SIX MONTHS ENDED DECEMBER
31, 1996.
Revenues
Hardware sales and service revenue decreased by approximately $5.3 million as
compared to the same period last year. Sales recognized from Asian customers
decreased by approximately $5.4 million as compared to the prior year. The
trend of lower sales in Asia is expected to continue in the foreseeable future.
Owner and operated revenue decreased by approximately $507,000 as compared to
the same period last year, primarily due to a reduction in sponsorship revenue
relating to the portable simulation theatres.
Film licensing revenue increased as a result of the increasing base of
installed theatres that license Iwerks' film software.
Cost of Sales and Gross Profit
The total gross profit margin percentages for the six months ended December
31, 1997 and 1996 were 29.1% and 32.8%, respectively. The decrease in gross
profit margin was primarily related to the portable simulation theatre business.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the six months
ended December 31, 1997 by approximately $1.2 million over the same period in
the prior year. This increase was primarily due to increased research and
development efforts, additional bad debt expense, higher insurance costs and
more trade show expenses recognized.
Merger Related Expenses
The Merger will be accounted for as a pooling of interest. Consequently all
transaction related costs are to be expensed in the period incurred. During the
quarter and six months ended December 31, 1997, Iwerks incurred $218,000 and
$531,000 of transaction expenses. Iwerks expects to incur additional
transaction expenses in the next quarter (regardless of whether the Merger is
consummated).
IMPACT OF YEAR 2000
Some of Iwerks older computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Iwerks has completed an assessment of its existing software systems and after
reviewing various factors, one of which being the year 2000 issue, has decided
to replace its key manufacturing and financial software systems. The new
systems will function properly with respect to dates in the year 2000 and
thereafter. The total project cost is estimated at approximately $400,000 which
includes $300,000 for the purchase and implementation of new software and
hardware that will be capitalized and approximately $100,000 that will be
expensed as incurred. To date, Iwerks has incurred approximately $25,000.
The project is estimated to be completed not later than June 30, 1999, which
is prior to any anticipated impact on its operating systems. Iwerks believes
that with conversions to new software, the Year 2000 Issue will not pose
significant operational problems for its computer systems.
The costs of the project and the date on which Iwerks believes it will
complete the conversion are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.
SEASONALITY AND FLUCTUATING QUARTERLY RESULTS
The following tables set forth unaudited data regarding operations for each
quarter of fiscal 1996 and 1997 and the first and second quarters of fiscal 1998
and the percentage of Iwerks'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.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1997 Fiscal 1998
----------------------------------------- ---------------------------------------- -----------------
(Dollars in First Second Third Fourth First Second Third Fourth First Second
Thousands) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------ ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $10,096 $13,207 $13,825 $11,388 $ 9,594 $10,023 $11,042 $ 8,924 $ 8,052 $ 5,989
Cost of sales 5,720 8,239 7,642 7,074 6,236 6,955 7,335 8,422 4,789 5,168
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross Margin 4,376 4,968 6,183 4,314 3,358 3,068 3,707 502 3,263 821
Selling, general
and administrative 4,331 4,648 5,031 3,366 3,381 3,322 3,582 5,338 3,605 4,311
Merger related
expenses -- -- -- -- -- -- -- -- 313 218
Loss on impairment
of assets -- -- -- -- -- -- -- 5,586 -- --
Interest (income)
expense, net (96) (284) (226) (177) (197) (197) (145) (195) (149) 208
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
before provision
for taxes 141 604 1,378 1,125 174 (57) 270 (10,226) (506) (3,500)
Provision for taxes -- -- -- 149 -- -- -- 117 -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
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Iwerks'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 Iwerks'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
Iwerks typically ranges between six and eighteen months. Iwerks 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 an account which
was 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, Iwerks 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 Iwerks Common Stock
in fiscal 1994, and cash flow from operations. Iwerks 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.
Iwerks' operating activities for the six months ended December 31, 1997
generated positive cash flow of $2.9 million. This was mainly due to the net
loss of $4.0 million offset by non-cash charges of $2.3 million for depreciation
and amortization along with changes in operating assets and liabilities of 4.7
million. Investing activities for the six months ended December 31, 1997
consisted primarily of investments in film inventory and purchases of property
and equipment partially offset by investments in debt securities. Cash used in
financing activities consisted primarily of payments for notes payable and
capital leases.
In fiscal 1997, approximately $1.0 million was provided by operating
activities. Iwerks'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 December 31, 1997, Iwerks had cash and short-term investments of
approximately $17.4 million. In addition, Iwerks maintains a bank line of
credit in the amount of $5 million. During the fiscal year ended June 30, 1997
and the interim period to date, there were no amounts outstanding on the line of
credit. At December 31, 1997, as a result of the loss in the second quarter of
fiscal 1998, Iwerks is not in compliance with certain financial covenants of its
line of credit. Iwerks is in discussions with representatives of the bank
regarding a waiver from and revisions to these financial covenants. However,
there can be no assurance that the bank will waive compliance with, or revise,
these covenants or maintain this line of credit in the future. Iwerks
anticipates that its investment activities, financing activities, along with the
proposed Merger related costs will use cash and expects that its cash balance
will decline in fiscal 1998. If the Merger is consummated, it is anticipated
that the transaction costs associated with the Merger after December 31, 1997,
which affect its cash balances, would be approximately $4.5 million which would
be offset by any cash balances of Showscan acquired as a result of the Merger.
However, Iwerks believes that its existing cash balances, the proceeds of the
debt securities it owns
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as they mature, and cash flow from operations will be sufficient to meet its
cash requirements through at least the next twelve months, after which time it
may be required to raise additional cash through the sale of equity or debt
securities, 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, Iwerks may be required to obtain additional sources of
cash.
Iwerks has reviewed the provisions of SFAS 130 and 131 and does not believe
that they will have a material impact on its financial statements and relative
disclosures.
BUSINESS OF SHOWSCAN
General
Showscan is a leading provider of movie-based motion simulation theatre
attractions to the rapidly expanding out-of-home entertainment market.
Showscan's motion simulation theatre attractions ("Showscan Attractions")
combine the exhibition of a short action film with multi-channel sound systems
and synchronized theatre seat movement to produce an immersive entertainment
experience in which the theatre patron has the perception of actually
participating in the on-screen action. The entertainment creates a "thrill
ride" or action entertainment experience (such as riding a run-away train or
racing through outer space). Showscan's attractions incorporate various
proprietary technologies, including the award winning and patented 70mm filming
and projection process known as Showscan(R). Showscan believes that films made
and exhibited in the Showscan process create a visual effect of depth, clarity
and realism that is superior to any other film format. The Showscan process is
also used for the exhibition of films in large screen special format movie
theatres. Showscan's films have been exhibited in such specialty theatres at
world fairs, tourist destinations, trade conventions and other locations where
the operator desires the impact of the large-screen, intense image that a
Showscan film provides.
As of February 12, 1998, Showscan had 61 Showscan Attractions screens
operating around the world. Showscan had 10 additional Showscan Attractions
screens in its delivery and installation backlog, and has contractual
commitments for an additional 28 Showscan Attractions screens. Showscan
includes in its backlog all sales for which it has a signed agreement or letter
of intent, in each case supported by a letter of credit, cash deposits or damage
provisions. Until November 1993, all Showscan Attractions were owned and
operated by unaffiliated third parties. Since then, ventures in which Showscan
has a 15% to 50% ownership interest have opened motion simulation theatres ("O&O
Theatres") at Universal CityWalk, Universal City, California; in the Trocadero
Arcade at Piccadilly Circus, in London, England; at General Cinema's 14-screen
theatre multiplex in Framingham, Massachusetts (now closed); on the Riverwalk in
San Antonio, Texas (now closed) and at the Asian Trade Center in Osaka, Japan.
As part of its business, Showscan produces and licenses specialty films in
the Showscan process which are then exhibited in conventional theatres equipped
to show Showscan films. Showscan also markets all of the cameras, projectors,
motion bases and other equipment necessary to establish and operate Showscan
Attractions and Showscan specialty theatres. Showscan has 6 permanent specialty
theatres operating as of February 12, 1998.
Showscan was incorporated in Delaware in August 1984 under the name
Showscan Film Corporation. In August 1990, Showscan's name was changed to
Showscan Corporation, and in August 1994 the name was changed again to Showscan
Entertainment Inc. Showscan's principal executive office is located at 3939
Landmark Street, Culver City, California 90232. Showscan's telephone number at
its executive office is (310) 558-0150.
BUSINESS STRATEGY
Showscan believes that there is a rapidly increasing worldwide consumer
demand for a variety of out-of-home entertainment options. Showscan plans to
capitalize on its position as a leader in the entertainment motion simulation
attraction business and on the growing demand for entertainment alternatives by
making its movie-based products available to consumers worldwide at high-
visibility and high-traffic locations, such as urban entertainment complexes,
tourist destinations, family entertainment centers, amusement/theme parks, movie
theatre complexes, gaming casinos, and shopping centers.
Showscan has focused its primary business strategy on the development of
high-margin recurring revenues from the licensing and distribution of its motion
simulation and specialty films. Showscan is also committed to enhancing the
recognition of the Showscan(R) brand name worldwide. Showscan's current
strategies to achieve this objective are as follows:
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INCREASE FILM LICENSING REVENUES. Showscan seeks to increase the recurring
revenues derived from licensing its films by increasing the number of motion
simulation attractions and specialty theatres. As this installed base grows,
each film will be licensed to a greater number of exhibitors thereby increasing
revenue, while also amortizing the fixed film production costs of Showscan owned
films over a larger revenue base. To increase this recurring revenue, Showscan
is:
(a) Marketing to a wide range of potential customers worldwide while
maintaining reasonable profit margins;
(b) Distributing Showscan films to simulation attractions previously
installed by competitors of Showscan;
(c) Enhancing and expanding its film library by producing internally or
with third parties new films while also obtaining distribution rights
to motion simulation films produced by others;
(d) Enhancing its proprietary projection and motion base technology;
(e) Entering into additional strategic sales arrangements to supplement
existing strategic agreements which cover Japan, USA, Australia,
Taiwan, Hong Kong and selected portions of China; and
(f) Emphasizing sales having multi-location possibilities. (To date,
Showscan has sold 18 Showscan Attractions to Imagine Japan, 10
Showscan Attractions to Kings Entertainment Co., Ltd., four Showscan
Attractions in China to Jenor International, 24 Showscan Attractions
to United Artists Theatre Circuit, Inc. ("UA"), five Showscan
Attractions to Auscinemagic/Reality Cinema in Australia, two Showscan
Attractions to Lotte World in Korea and two Showscan Attractions to
Parc du Futuroscope in France.)
INVESTMENTS IN SHOWSCAN ATTRACTION THEATRES. Showscan has historically
participated directly in the recurring revenues from ticket sales and film
distribution and licensing by having an ownership interest in certain Showscan
Attractions ranging from 25% to 50%. Although the start-up and the pre-opening
marketing and advertising costs of O&O Theatres are sometimes high (which costs
Showscan has defrayed in part through strategic alliances), the variable costs
of ticket sales are low. In the fourth quarter of the fiscal year ended March
31, 1997, Showscan revised its O&O Theatre strategy so that it will now
generally limit its ownership interest to between 10% and 15%; although there
may be specific locations where Showscan would invest up to 50%. Showscan
intends to selectively continue its investment in Showscan Attractions on this
basis. Showscan has entered into several alliances that provide Showscan with
the capability of participating in the ownership of Showscan Attractions with
other investors. See " -- Motion Simulation Attractions -- Owned and Operated
Theatres," below.
The first O&O Theatre opened at Universal City Walk in Universal City,
California in late November 1993; the second O&O Theatre (which contains two
separate screens) opened in late September 1994 at the Trocadero Arcade at
Piccadilly Circus, London, England; the third O&O Theatre (which contains two
separate screens) opened in late May 1995 at a General Cinema 14-screen theatre
multiplex in a suburb of Boston, Massachusetts; the fourth O&O Theatre (a joint
venture with Imagine Japan) opened in August 1995 at the Asian Trade Center in
Osaka, Japan; and the fifth O&O Theatre opened in March 1996 on the Riverwalk in
San Antonio, Texas. UA has agreed to offer to the UA Venture (as defined below)
up to 24 sites at anytime prior to August 19, 1999 as locations for O&O
Theaters. On behalf of the UA Venture, Showscan has the right to accept or
reject any such potential site. Showscan also has entered into an agreement
with UA that gives Showscan (on behalf of the UA Venture) the right of first
negotiation with respect to any additional Showscan Attraction to be installed
in any UA theatre complexes. See " -- Motion Simulation Attractions -- Owned
and Operated Theatres -- The United Artists Venture," below. As of March 31,
1997, UA has offered eight sites of which the UA Venture declined seven sites as
they did not meet the criteria of the UA Venture. The UA Venture had accepted
the offer by UA of the Showscan Attraction site in Austin, Texas, which
acceptance was to be effective July 1, 1997. During the process of finalizing
documentation relating to the acquisition of the Austin site, however, UA
entered into a merger transaction with other large theatre chains and the
circumstances surrounding the merger transaction created uncertainty with
respect to the Austin site. Accordingly, the UA Venture has terminated its
plans to acquire ownership of the Showscan Attraction at the Austin site. In
addition, Showscan was to acquire (effective October 1997) a 15% investment in a
Showscan Attraction in Darling Harbour, Sydney, Australia. During the process
of finalizing documentation relating to such investment, however, disputes arose
regarding both the valuation of costs associated with the Showscan Attraction
used to calculate the price of the 15% investment as well as the remaining
payment obligations owed to Showscan by Reality Cinema Pty. Ltd., the co-
investor which was to own an 85% interest in the Showscan Attraction.
Accordingly, Showscan has advised Reality Cinema Pty. Ltd. that it will not
proceed with its plans to acquire any ownership of a Showscan Attraction at the
Sydney site until such disputes are satisfactorily resolved.
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PURSUE OTHER BUSINESS OPPORTUNITIES. In addition to increasing its
recurring film revenue, another objective of Showscan is to explore and exploit
other commercial and entertainment opportunities and revenue sources.
During the fiscal year ended March 31, 1996, Showscan introduced a new
product line, a 15/70 film format giant screen theatre package that includes
state-of-the-art rolling loop projectors, surround-sound systems,
synchronization, show control and theatre design. The 15/70 film format differs
from other film formats such as 8 perf/70 and 5 perf/70 by providing a larger
frame size which in turn allows projection onto a larger screen. This film
format system is also big enough to use in a dome application, whereas this is
not recommended with other formats. The 15/70 format film library is also the
largest giant screen film library existing today. On May 2, 1997, Showscan
settled all litigation that it had with Imax regarding this product line. See "
- -- Legal Proceedings," for a more detailed explanation of this litigation.
In addition, Showscan believes that its current and future library of
motion simulation and specialty films will become increasingly more valuable.
Accordingly, Showscan plans to significantly increase the number of films it
offers by producing and/or acquiring for distribution three to five new films
annually. During the past fiscal year, Showscan released three motion
simulation films, has another film in post-production and has ten additional
simulation films under active development. For the fiscal year ending March 31,
1998, Showscan has acquired 12 films that were not filmed using the Showscan
process but will be converted so that they can be shown in Showscan's theatres.
In addition, Showscan also is actively pursuing various financing alternatives,
including limited partnerships and other similar arrangements to finance the
production of additional Showscan motion simulation films.
Showscan believes that the Showscan process can also be used to enhance the
effectiveness, appeal and commercial potential of other filmed products,
including feature-length motion pictures, specialty films, commercial and
corporate presentations, educational films, documentaries and other forms of
entertainment, such as interactive and virtual reality attractions. In
addition, Showscan is exploring potential additional entertainment applications
of the Showscan process, including the development of video games based on its
existing and future film products.
Showscan plans to enter into additional strategic alliances, joint ventures
and other similar arrangements (a) to facilitate the production of its motion-
simulation software, (b) to expand the out-of-home entertainment venues in which
its products can be exhibited, (c) to reduce financial risks, and (d) to expand
Showscan's access to distribution networks, urban entertainment locations and
destination centers, and technological innovations. Showscan is currently
considering alliances with motion picture exhibitors, retail shopping center
developers and operators, and others for the establishment of additional
Showscan Attractions and specialty theatres in motion picture multiplexes,
shopping malls, casinos and other gaming venues, and other high-traffic
locations and destinations. Furthermore, Showscan may consider the acquisition
of motion simulation film libraries and/or other companies in its line of
business or in other businesses.
THE MOTION SIMULATION AND SPECIALTY FILM LIBRARY
Showscan derives revenues in the following ways from its film library: (a)
a royalty fee for use of the patented Showscan filming and projection process,
(b) a distribution fee based on the revenues derived from all films that are not
solely owned by Showscan; and (c) receipt of all or a percentage of the
licensing revenues remaining after the payment of any distribution fees or
expenses. The amount Showscan receives from co-owned films varies, and is based
on the participation agreements negotiated with the other owners of the films.
Showscan's film library consists of a motion simulation film library and a
specialty film library. The motion simulation film library is one of the
world's largest entertainment motion simulation film libraries and currently
contains 38 action/thrill-ride films. The specialty film library contains 16
Showscan specialty films available for exhibition in specialty theatres.
Showscan is the sole owner of 16 of the motion simulation films, a joint owner
of seven motion simulation films and the distributor of 15 motion simulation
films owned by unaffiliated companies. Of the 16 Showscan specialty films,
seven are owned by Showscan.
Showscan initiated distribution of the live-action motion simulation film
Street Luge (a new high-speed downhill ride just inches from the asphalt) and
the computer-animated/special effects Storm Rider (the rider becomes a raindrop
that falls to Earth) during the past fiscal year. The film library also
consists of such films as Cosmic Pinball (depicting a race through a giant,
futuristic pinball park), and the highly-acclaimed Devil's Mine Ride (a ride
through an abandoned mine on a runaway rail car). Showscan has obtained certain
distribution rights through May 1, 2002 to two films (Funhouse Express and
Asteroid Adventure) which were produced by Imax. These two films may be
distributed to Showscan's existing installed base and contractual backlog of
Showscan Attractions as of April 30, 1997 (an aggregate of approximately 100
sites).
The films that Showscan produces are either fully financed by third parties
or co-produced and financed by Showscan and third parties. When Showscan
produces films, it typically hires a production company or team of specialists
on a project-by-project basis,
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similar to the major movie studios. This allows Showscan to retain creative and
quality control without the burden of significant ongoing production overhead
expenses. As the film's producer, Showscan typically has control over the
creative and technical aspects of the production and is designated as the film's
exclusive distributor.
Showscan has obtained the exclusive, perpetual worldwide right to
distribute in the Showscan format certain of the Showscan motion simulation
films and specialty films that are not owned by Showscan, except that in certain
circumstances Showscan does not own the right to distribute such films in the
country in which the owner of the distributed film is located. On some films,
Showscan only has the right to distribute the film to its network of simulation
attractions.
Showscan has or is transferring 31 of the Showscan motion simulation films
to high-definition video for exhibition in HD Simulation Attractions.
Showscan's specialty film library consists of such films as Niagara
Wonders, a 23-minute Showscan film produced for exhibition in a permanently
erected 300-seat theatre in Niagara Falls, New York; France, a 40-minute
Showscan film that was produced by Source Perrier for the 1989 bicentennial
celebration of the French revolution and exhibited in a first-run theatre in
Paris, France; and Discovery, a 16-minute Showscan film produced by the
government of British Columbia and exhibited in a temporary specialty theatre at
the Expo '86 World's Fair in Vancouver, Canada. Two Showscan specialty films,
Nature Rediscovered and Concerto for the Earth, were in exhibition at temporary
Showscan specialty theatres at the Expo '92 World's Fair in Seville, Spain. Both
films explore biodiversity, ecological awareness and the fragile balance of
nature. Concerto for the Earth is the first Showscan film in 3D; however, the
film can be exhibited in the standard 2D format.
MOTION SIMULATION ATTRACTIONS
A Showscan Attraction is a theatre (typically 18 to 84 seats) in which the
on-screen action of a short action film is synchronized with the motion of the
theatre seats to simulate various realistic or action experiences. The Showscan
Attraction "rides" are short, approximately four-to-five-minute entertainment
experiences. Each Showscan Attraction is equipped with a high-quality, multi-
channel sound system and a seat motion system (motion base). Motion bases are
available in various theatre configurations to suit the needs of the various
locations, and are manufactured by Intamin, A.G., McFadden Systems, Inc.,
Shostar Ltd., and others. The potential market for motion simulation theatre
attractions includes any location with high pedestrian traffic, including
tourist attractions, amusement parks, theme parks, resorts, large regional
shopping centers, motion-picture multiplexes, urban entertainment centers, and
hotel casinos.
Showscan Attractions are either the standard film-based theatres in which
Showscan's 70mm motion simulation films are exhibited using Showscan's patented
projector, or are HD Simulation Attractions in which the motion simulation films
are projected using standard, commercially available high-definition video
projection equipment. To date, most Showscan Attractions have exhibited
Showscan motion simulation films using 70mm film and Showscan's projectors.
However, Showscan has seen increasing demand for its HD Simulation Attractions
in which the Showscan films are transferred to a high-definition video format on
laser discs and projected using high definition video projectors. See " --
Equipment," below. Because the Showscan film is transferred directly from
frame-to-field to high-definition video, Showscan believes that the image
projected is the sharpest image available in that format. The HD Simulation
Attractions, when combined with any of the available motion bases, utilize less
space than the standard film-based Showscan Attractions. Due to the lesser
space requirements of HD Simulation Attractions, such Showscan Attractions can
be installed in locations previously not feasible.
Showscan licenses its films and, in standard film-based motion simulation
theatre attractions, sells its Showscan projection equipment to third party
owners and operators of Showscan Attractions. Showscan is the sole source of
both the film projectors used to exhibit Showscan motion simulation films and
the show control system. In addition, Showscan generally sells the motion
bases, control panels, video equipment and other equipment used in the Showscan
Attractions and assists in installing the attraction. Licensees of Showscan's
motion simulation films are not obligated to purchase the motion bases or the
other equipment and services offered by Showscan. Other than the patented
Showscan film projectors and Showscan's show control system, all motion
simulation equipment, including the various motion bases, the sound system and
the video projection equipment, can be purchased by the third party
owner/operator from other sources. The initial term of Showscan's licensing
agreements generally range from two to five years (normally with fixed or
minimum annual royalty payments and film rental obligations).
Historically, Showscan Attraction installations outside North America have
represented a significant portion of Showscan's revenues (constituting 69%, 61%
and 62% of Showscan's revenues for the fiscal years ending March 31, 1995, 1996
and 1997, respectively).
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As of February 12, 1998, Showscan Attractions have been sold or licensed in
the United Kingdom, Australia, Saudi Arabia, Spain, Hong Kong, People's Republic
of China, United States, Canada, Japan, South Korea, Taiwan, Indonesia,
Singapore, France, Belgium, Italy, South Africa, United Arab Emirates, New
Zealand, Germany, Kuwait and Austria. The Showscan Attractions sold in Japan
have been purchased or distributed by Imagine Japan, Inc. ("Imagine"), which has
exclusive distribution rights to Showscan Attractions in Japan through December
31, 1999. See " -- Sales and Marketing," below.
OWNED AND OPERATED THEATRES.
In 1993, Showscan began developing and operating Showscan Attractions in
which Showscan has an ownership interest. These O&O Theatres have, to date,
been established through the various strategic alliances described below. For
certain financial information regarding these strategic alliances, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SHOWSCAN."
The United Artists Venture. Under the terms of a Joint Venture
--------------------------
Agreement dated as of August 19, 1994 (the "Joint Venture Agreement"), Showscan
and UA have agreed to be equal partners in a venture called Showscan/United
Artists Theatres Joint Venture (the "UA Venture"). The dates for the capital
contributions are to be agreed upon by the venture partners, which dates will
depend on the actual build-out schedule of each project. UA and Showscan are
required to equally contribute additional capital as necessary for all projects
undertaken by the UA Venture.
Showscan is managing partner of the UA Venture while UA is the
administrative partner. Showscan, as managing partner, will implement all
decisions of the UA Venture and, together with UA, develop the business plan and
long-term strategic plans for the UA Venture. UA, as administrative partner,
will be responsible for all financial aspects of the UA Venture, including
overseeing record keeping and other financial matters.
Pursuant to a Theater Rights Agreement dated as of August 19, 1994, as
amended (the "Theater Rights Agreement"), UA has agreed to offer to the UA
Venture for ownership and operation by the UA Venture, up to 24 theatre sites at
any time prior to August 19, 1999 for the installation of Showscan Attractions
in existing or to-be-built UA theatre complexes. If the UA Venture declines to
acquire a particular location, then UA must install a Showscan motion simulation
attraction theatre at the first 24 sites that the UA Venture declines to
acquire. Whenever UA or the UA Venture builds a Showscan Attraction theatre,
such entity will have the exclusive rights to exhibit Showscan motion simulation
attraction films within a pre-agreed area surrounding such location. Also,
pursuant to a Master Management and Development Agreement, dated as of August
19, 1994, by and among Showscan, UA and the UA Venture (the "Master Management
Agreement"), UA will develop and coordinate the construction of new and/or the
conversion of existing theatres to Showscan Attractions and will manage each
theatre pursuant to pre-negotiated terms. The Master Management Agreement
expires on August 19, 1999, unless the Theater Rights Agreement is extended, in
which case the Master Management Agreement will be extended for the same period.
The UA Venture, in turn, has agreed to accept prior to August 19, 1999 at least
one of the theatre sites offered to it by UA. Showscan has agreed to pre-
negotiated terms for the sale of Showscan equipment, installation, servicing and
the licensing of Showscan motion simulator films. Showscan will also make
available to both the UA Venture and UA its library of specialty films which
utilize the patented Showscan process, to the extent that either the UA Venture
or UA builds or converts existing theatres into specialty theatres for the
exhibition of specialty films. The Theater Rights Agreement contains certain
provisions that require UA to make payments to Showscan if UA is unable to meet
its obligations and that require Showscan to make payments to UA if the UA
Venture is unable to meet certain of its obligations.
To date, UA has offered to the UA Venture eight sites at new or existing UA
movie theatre multiplexes. The UA Venture has declined seven of these sites
because they did not meet the criteria of the UA Venture and therefore, UA has
completed construction for its own account Showscan Attractions at those seven
sites. On July 1, 1997, the UA Venture exercised its rights under the Theater
Rights Agreement to accept the offer by UA of the Showscan Attraction site in
Austin, Texas. This site was completed by UA and was already open prior to
acceptance by the UA Venture. Subsequently, however, UA entered into a merger
transaction with other large theatre chains and the circumstances surrounding
the merger transaction created uncertainty with respect to the Austin site.
Accordingly, the UA Venture has terminated its plans to acquire ownership of the
Showscan Attraction at the Austin site.
Moss/DiBenedetto Ventures. Showscan and affiliates of certain of its
-------------------------
directors entered into (a) the Showscan CityWalk Venture (the "CityWalk
Venture"), a venture formed solely to own and operate an O&O Theatre in
Universal City, California and (b) the Showscan Attractions Venture, a venture
formed for the purpose of, directly or through other jointly-owned entities,
developing, owning and operating additional O&O Theatres throughout the world
(the "Attractions Venture", and together with the CityWalk Venture, the
"Moss/DiBenedetto Ventures").
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The CityWalk Venture. The first O&O Theatre opened in November 1993
--------------------
at Universal CityWalk, adjacent to Universal Studios in Universal City,
California. This O&O Theatre is owned by the CityWalk Venture, a venture 50%
owned by Showscan CityWalk, Inc. (a wholly owned subsidiary of Showscan), 25%
owned by Moss Family LA Corp., a California corporation, and 25% owned by
DiBenedetto CityWalk Limited Partnership, a Delaware limited partnership
(collectively, the "Investors"). Moss Family LA Corp. and DiBenedetto CityWalk
Limited Partnership are controlled by Mr. Charles B. Moss, Jr. and Mr. Thomas R.
DiBenedetto, respectively. Mr. Moss and Mr. DiBenedetto are directors and
stockholders of Showscan. See "MANAGEMENT OF SHOWSCAN -- Directors and
Executive Officers of Showscan," below. The term of the CityWalk Venture
expires on December 31, 2050.
Universal CityWalk is a diversified-use entertainment/shopping facility
that is controlled by Universal Studios Recreation Group ("Universal"). The
facilities are leased from Universal pursuant to a profit sharing lease (the
"Lease") entered into with MCA Inc., the predecessor of Universal, under which
Universal paid approximately one-half of the total tenant costs of the theatre
(as defined), which costs included the projection equipment and the motion
bases. The Lease expires in November 2002, subject to options to extend the
Lease for three five-year periods. In general, the CityWalk Venture is
obligated to pay a base rent plus 50% of the cash flow (as defined) from the
operations of the theatre. Accordingly, the CityWalk Venture will retain 50% of
the cash flow from the theatre's operations. The base rent will be adjusted
annually based on the percentage increase in the consumer price index up to a
maximum of 5% per year. Of the 50% of cash flow retained by CityWalk Venture,
50% will be retained by Showscan and 50% will be paid to the Investors. Thus,
Showscan's share of the total cash flow from the theatre's operations will be
25% plus the annual film rentals, royalties and management fees that the
CityWalk Venture is separately required to pay Showscan, each of which is
subject to annual increases based on the consumer price index up to a maximum of
5% per year.
The Attractions Venture. The parties to the Attractions Venture are
-----------------------
(a) Showscan Attractions, Inc., a wholly owned California subsidiary of Showscan
and the managing partner of the Attractions Venture, (b) Moss Family O&O Corp.,
a California corporation controlled by Mr. Moss (the "Moss Partner"), and (c)
DiBenedetto O&O Limited Partnership, a Delaware limited partnership controlled
by Mr. DiBenedetto (the "DiBenedetto Partner").
The Attractions Venture agreement states that the parties intend to
develop, own and operate O&O Theatres through the Attractions Venture or through
other corporations, joint ventures, partnerships or other entities to be owned
by the parties to the Attractions Venture. The agreement further provides that
if any O&O Theatre is owned by any such other corporation, venture, partnership
or other entity, the partners to the Attractions Venture shall own and operate
such other entity on the same terms and conditions as the agreement of the
Attractions Venture.
Pursuant to a Proprietary Property Acquisition and Management Agreement,
dated as of September 27, 1993, between Showscan and the Attractions Venture,
Showscan granted to the Attractions Venture rights to utilize proprietary
property and rights of Showscan in connection with the development and operation
of additional O&O Theatres. Under the terms of this agreement, Showscan will
manage any and all Showscan Attractions developed and operated by the
Attractions Venture. The Attractions Venture is required to purchase simulation
equipment and license Showscan motion simulation films from Showscan on terms
and conditions that are substantially the same as those offered to unaffiliated
third parties, except that the Attractions Venture receives a discount on
certain equipment prices and film rental and royalty fees. Moss Entertainment
Corp., a corporation controlled by Moss, and DiBenedetto Corp., an affiliate of
DiBenedetto, were retained by the Attractions Venture to provide certain
services in connection with the acquisition of properties for the additional O&O
Theatres and the disposition of those theatres. For such services, Moss
Entertainment Corp. and DiBenedetto Corp. are to receive fees upon the sale or
other disposition of certain of the O&O Theatres developed by the Attractions
Venture. The term of the Attractions Venture expires on December 31, 2050.
The Attractions Venture agreement further provides that neither Showscan,
the Moss Partner, nor the DiBenedetto Partner may develop, own or operate any
additional Showscan Attractions without first offering all of the other parties
to the Attractions Venture the opportunity to invest in such additional Showscan
Attractions in proportion to each party's Percentage Interest (as defined
below). No party is, however, obligated to invest in any such additional
Showscan Attractions. If the parties to the Attractions Venture do not
collectively contribute all funds necessary to establish and operate any such
additional Showscan Attraction, the parties may admit additional unaffiliated
investors as part owners of the additional Showscan Attraction.
Showscan Attractions, Inc. currently owns a 50% interest in the Attractions
Venture, and each of the Moss Partner and the DiBenedetto Partner owns a 25%
interest in the Attractions Venture (the "Percentage Interests"). In the event
that Showscan and the Moss Partner and/or the DiBenedetto Partner elect to
jointly invest in any additional Showscan Attraction, the parties will share all
profits, loss and distributions of cash, if any, derived from the operation and
ultimate disposition of each additional Showscan Attraction in proportion to the
capital contributions made by the partners (and any unaffiliated investor) into
the account established for the additional Showscan Attraction.
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The first O&O Theatre owned by the parties to the Attractions Venture is
the twin O&O Theatre that opened in late September 1994 in the Trocadero Arcade
at Piccadilly Circus, London, England. As permitted by the Attractions Venture
agreement, the London O&O Theatre is owned by the partners of the Attractions
Venture through a corporation formed under the laws of England rather than
directly through the Attractions Venture. Cinemania (U.K.) Limited, the
corporation formed to own the London O&O theatre, is owned by Showscan
Attractions, Inc., the Moss Partner and the DiBenedetto Partner in proportion to
their Percentage Interests.
In connection with the UA Venture, the Attractions Venture agreement was
amended to exclude from the territories in which the Attractions Venture can
operate certain specific areas that are made available to UA under the Theater
Rights Agreement. In exchange for such amendment, Showscan agreed to pay each
of Messrs. Moss and DiBenedetto a specified amount upon the opening of each new
O&O Theatre that is owned by the UA Venture in the specific excluded areas and
to pay Messrs. Moss and DiBenedetto a percentage of certain profits (as defined)
from Showscan's share of profits from each such Showscan Attraction owned by the
UA Venture.
The Framingham Venture. In April 1995, Showscan Framingham, Inc., a
----------------------
wholly owned Delaware subsidiary of Showscan, and General Cinema of Framingham
Inc. ("GCF"), a wholly owned Massachusetts subsidiary of General Cinema Corp. of
Massachusetts ("GCC"), entered into a venture (the "Framingham Venture") to own
and operate twin Showscan Attractions at a newly opened, 14-screen movie theatre
multiplex owned and operated by GCC in Framingham, Massachusetts, a suburb of
Boston.
Showscan Framingham, Inc. and GCF agreed to be equal partners in the
Framingham Venture and to manage the venture by a four-person management
committee composed of two representatives from each party. Day-to-day
management of the twin theatres owned by the Framingham Venture is handled by
GCF as operating partner, for which it receives a management fee. Showscan
receives film rentals and royalties from the Framingham Venture based on a
formula tied to the gross box office receipts from the twin Showscan Attractions
against a minimum.
The partners of the Framingham Venture closed the twin Showscan motion
attraction simulation theatres on October 5, 1997 and are liquidating the assets
of the Framingham Venture. The partners have further agreed to distribute the
simulation attraction equipment back to Showscan, and Showscan has contracted to
sell the equipment to a non-affiliated third party. The remainder of the assets
will be allocated, as defined in the Venture agreement, back to the partners.
The Osaka Venture. In June, 1995, Showscan Entertainment B.V., a
-----------------
wholly owned subsidiary of Showscan, organized under the laws of the
Netherlands, and Imagine Japan, Inc., a company organized under the laws of
Japan, entered into a venture (the "Osaka Venture") in which Showscan holds a
50% economic interest in a Showscan Attractions theatre at the Asia Trade Center
in Osaka, Japan.
Showscan Entertainment B.V. and Imagine Japan, Inc. agreed to share equally
in the proceeds from the Osaka Venture. Day-to-day operations of the theatre
are managed by Sega Enterprises, Ltd. As theatre manager, Sega receives a
percentage of the gross box office receipts of the theatre as a combined
rent/management fee, as well as reimbursement of its operating expenses.
Showscan separately receives film rental and royalty fees from the Osaka
Venture. The term of the Osaka Venture is for five years from June, 1995 and
can be extended for an additional five years at the option of Showscan
Entertainment B.V. at the end of the initial term. Because of the structure of
the Osaka Venture under Japanese law, ownership and title of all property is
held by Imagine Japan.
The Maloney Venture. In August, 1995, the Attractions Venture and
-------------------
Maloney Development Partnership Ltd. ("Maloney"), an unaffiliated Texas limited
partnership, formed a Texas limited liability company called Showscan Maloney,
LLC to own and operate a Showscan Attraction theatre in the San Antonio
Riverwalk District, in San Antonio, Texas.
The Attractions Venture and Maloney own equal interests in Showscan
Maloney, LLC, thus Showscan's share in the cash flow from the theatre is 25%
plus the annual film rentals, royalties and management fees that Showscan
Maloney, LLC is separately required to pay to Showscan. Day-to-day management
of the theatre is handled by Showscan as the sole manager of Showscan Maloney,
LLC.
The partners of Showscan Maloney, LLC closed the theatre on September 7,
1997 and are liquidating its assets. The partners have further agreed to
distribute the theatre equipment to Showscan, which is in the process of
negotiating to sell the equipment to a non-affiliated third party. Showscan
expects to fully realize the carrying value of its investment in this venture
upon the completion of the liquidation and subsequent sale.
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Universal Agreement. Pursuant to the Lease entered into with
-------------------
Universal in connection with the CityWalk Venture, Universal has the right,
exercisable at Universal's election, to participate in Showscan's share of any
future O&O Theatres located in California. If Universal makes any such
election, Universal will be entitled to receive one-half of Showscan's rights in
such O&O Theatre and will assume one-half of Showscan's obligations related to
such O&O Theatre. To date, Universal has not exercised its option to
participate in any additional O&O Theatres.
SPECIALTY THEATRES
Showscan also receives revenues from the production, licensing and
exhibition of specialty films. These films are typically 15 to 40 minutes in
duration, are produced in the Showscan process and are exhibited at expositions,
theme parks, major fairs and festivals and other larger tourist areas. Specialty
theatres are either theatres permanently dedicated to the exhibition of Showscan
specialty films or temporary theatres erected for such purposes. Often,
specialty theatres exhibit Showscan specialty films that are produced
specifically for the theatre or the exhibition. Examples of specialty theatres
and specialty films include the two films produced for and exhibited at the Expo
'92 World's Fair held in Seville, Spain.
Typically, Showscan finances its specialty film production through a third
party who usually is the owner and operator of the specialty theatre venue.
Showscan receives production fees for its services, revenues from the sale of
Showscan projector equipment (and possibly the theatre installation, sound
system and seats, etc.) and worldwide distribution rights to the specific films.
As of February 12, 1998, nine permanent and twelve temporary specialty theatres
had been sold by Showscan. Of the nine permanent theatres, six are currently
operating and the remaining three theatres are permanently closed.
Showscan has agreed to make available, for a fee, to both the UA Venture
and UA its library of specialty films which utilize the patented Showscan
process, to the extent that either the UA Venture or UA builds or converts
existing theatres into specialty theatres for the exhibition of specialty films.
THE SHOWSCAN PROCESS
Standard films are currently projected at 24 frames per second (fps) on
35mm film with each frame being shown twice. In contrast to conventional
filming and projection systems, a Showscan motion picture is photographed on
65mm film at a rate of 60 fps and is projected using 70mm film at a rate of 60
fps and at a higher illumination level (the 65mm film is projected using 70mm
film in order to accommodate the sound track, which occupies approximately 5mm
of the film strip). In addition, each frame in a Showscan film is shown only
once. Showscan believes that the bigger image and increased visual cues
perceived by the viewer of a Showscan film result in greater picture clarity and
an enhanced sense of depth and realism.
Photography of 65mm film at a frame rate of 60 fps offers a number of
improvements to the quality of a motion picture image and permits the screen
size to be substantially enlarged without significant degradation of the image.
The images are significantly brighter with more saturated and vibrant colors.
Because of the frame rate of Showscan film, the motion of the cameras and the
subject can be substantially increased without noticeable distortion, greatly
heightening the impact of action scenes. The larger 70mm format and faster
exposure time also greatly reduce blurring, thus recording images more
accurately and in finer detail. To enhance the visual impact, and to take
maximum advantage of the realism and detail of the Showscan process, Showscan
film is usually projected onto a specially designed, curved screen.
Showscan motion pictures can be transferred to conventional 35mm/24 fps
format for use in conventional movie theatres to other large film formats and to
all standard video formats. Showscan motion pictures can also be directly
transferred (one frame to each field) to high-definition video for exhibition
with standard high-definition video projectors. Although a Showscan film
transferred to alternative formats, including to the high-definition laser
projection system used by Showscan, does not contain the clarity, depth and
realism of the original Showscan film projected in 70mm film at 60 fps, Showscan
believes that the visual quality of Showscan film transferred to such
alternative film formats (such as the 8/70 - 30 fps and 24 fps, 5/70 - 30 fps
film formats) exceeds the quality that could be obtained in such formats using
conventional films.
SALES AND MARKETING
Showscan's sales and marketing activities are coordinated by Showscan's
Vice President of Worldwide Sales and Marketing, and effected through Showscan's
employees, its independent sales representatives worldwide and its strategic
sales alliances. Showscan participates in trade shows and regularly advertises
in trade periodicals. The companies that provide Showscan with motion bases
also market motion simulation theatre attractions worldwide that license
Showscan's motion simulation attraction films and equipment.
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Effective January 1997, Showscan extended its agreement with Imagine Japan,
Inc. ("Imagine") through December 31, 1999, which included an extension of
Imagine's exclusive right to sell and acquire Showscan Attractions and specialty
theatres in Japan. The price and other terms on which the Showscan Attractions
are sold to Imagine are substantially the same as the price and terms offered by
Showscan to other Showscan Attraction customers. Imagine is permitted to resell
in Japan any and all of the Attractions it purchases from Showscan on terms
established by Imagine. However, notwithstanding such resales, Imagine remains
liable to Showscan for all annual film licensing obligations related to all of
the Showscan Attractions sold to Imagine. Showscan has also granted Imagine a
non-transferable license to exhibit Showscan films in Showscan's motion
simulation library for a rental fee that is based on the number of Showscan
Attractions operating in Japan and on the films exhibited at the various
attractions. This exclusive agreement with Imagine expires on December 31, 1999
although Imagine will continue to remain liable thereafter for all annual film
rental and royalty obligations.
Historically, the majority of Showscan's revenues have been derived from
export sales. These sales by geographic region for each of the three fiscal
years ended March 31, 1997, 1996 and 1995 consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Africa $ 215,000 $ 281,000 $ 851,000
Australasia 1,976,000 2,574,000 1,031,000
Europe 1,206,000 1,992,000 3,531,000
Far East 6,048,000 5,628,000 4,982,000
Middle East 1,340,000 48,000 41,000
Other 159,000 125,000 184,000
----------- ----------- -----------
TOTAL EXPORT REVENUES $10,944,000 $10,648,000 $10,620,000
=========== =========== ===========
</TABLE>
Showscan sells internationally through independent sales representatives
and its own worldwide sales and marketing staff. Showscan's international sales
are subject to customary restrictions on foreign operations, including
restrictions on imports and exports, longer collection periods for accounts
receivable and risks associated with fluctuations in foreign exchange rates.
Showscan's contracts for the sale of equipment generally provide for payment in
United States dollars and for letters of credit as the means of payment.
Showscan's policy is to require annual film rental and royalty payments to be
made in United States dollars. Showscan does not engage in any hedging
activities. See "RISK FACTORS -- International Operations."
EQUIPMENT
The photography and exhibition of Showscan motion pictures require
specially equipped or modified cameras and projectors. In addition, certain
other products and equipment are needed to produce Showscan motion pictures and
to convert Showscan film to the conventional 35mm/24 fps format.
Cinema Products Corporation ("Cinema Products"), a manufacturer and
supplier of professional motion picture cameras and equipment, has developed and
built 65mm high speed cameras for Showscan. The camera, known as the CP-65, is a
high-speed, crystal-synchronized spinning mirror reflex studio camera. The
camera is available with a full complement of film magazines, lenses and
associated support equipment and is compatible with standard motion picture
industry equipment. The camera can be operated at various speeds from 2 fps to
72 fps and is crystal-synchronized at 24, 30 and 60 fps. In 1993, the Academy
of Motion Picture Arts and Sciences awarded the CP-65 camera the Scientific and
Engineering Award. The CP-65 allows the synchronous recording of sound while
filming at 60 fps and can be used in the same manner as standard 35mm/24 fps
cameras. Cinema Products has manufactured and delivered to Showscan five CP-65
camera systems, all of which have been used in filming and are available for
use. Although the CP-65 camera was specially designed for filming Showscan
motion pictures, a number of existing cameras manufactured by others can be
modified to film in Showscan.
Showscan and Intamin, A.G., a Liechtenstein corporation and a leading
manufacturer of amusement park rides, jointly developed the hydraulically-
actuated seats that are used in the bench motion simulation attractions marketed
by Showscan. Showscan and Intamin jointly own three United States patents on
various elements of the motion simulation seats. A similar patent was approved
under the European Patent Convention, which resulted in the issuance of patents
in those European countries in which Showscan elected to seek patent protection.
See " -- Patents and Other Intellectual Property," below. In addition to the
Intamin bench motion bases, Showscan markets the two-passenger and four-
passenger pod, including a six-axis motion base manufactured by Intamin.
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Showscan, in conjunction with McFadden Systems, Inc., jointly designed and
developed a four-person, six-axis motion system (the "Quadra Motion System") as
well as an 18-seat, six-axis dynamic platform. Showscan currently markets the
Quadra Motion System, the 18-person dynamic platform as well as six and 15-
person platforms and a 12-seat self-contained capsule manufactured by McFadden
Systems, Inc.
Showscan also markets an electromagnetically-driven (as opposed to
hydraulically-driven) motion base called the AEM4." The AEM4" has several
advantages over a hydraulically-driven motion base including lower electrical
consumption, lower noise levels, lower operating costs and a decrease in
construction costs due to elimination of hydraulic pump rooms, less air
conditioning requirements and elimination of environmental concerns as no
hydraulic fluids are used.
Films made in Showscan can be projected with certain conventional 70mm
projectors that are modified to project a motion picture at 60 fps. The
modification does not entail significant expense or effort and does not have an
adverse effect on the reliability of the projector. In order to facilitate the
projection of Showscan motion simulation films, however, Showscan has developed
an automatic electronic projector that uses low-inertia motors to achieve the
intermittent projection of frames of film rather than the conventional use of
gears and geneva-drive sprockets. Film storage is contained within the projector
which eliminates the need for complicated film loop cabinets. The projector
permits computer-controlled automatic cuing, synchronization and rewinding
necessary for the continuous showing of a variety of short films without
requiring that the film be changed or a projectionist used. Showscan owns a
patent on certain circuitry included in this projector.
The HD Simulation Attractions use standard, commercially available high
definition video projectors and laser disc players. The video projectors and
laser disc players are manufactured by a number of companies, including NEC,
Sony Corp., Hughes JVC, and Barco Inc.
RESEARCH AND DEVELOPMENT
Showscan, directly or in conjunction with other companies, has from time to
time been engaged in a limited program of research and development. During the
fiscal year ended March 31, 1997, Showscan's research and development program
did not, however, require a significant expenditure of funds. For the fiscal
years ended March 30, 1996 and 1995, research and development expenses were
$113,000 and $365,000, respectively.
Showscan's research and development efforts are currently directed at
creating new simulation attractions for specific world markets, 2D, 3D and dome
theatre systems to be used in the 15/70 giant-screen theatres. Also, Showscan
is actively developing theatre computer control system software programs to
further enhance the ease by which simulation attractions can be operated and
maintained by a minimum number of on-site personnel.
COMPETITION
Showscan faces intense competition in all of its business activities. Some
of Showscan's competitors and potential competitors are well-established, have
substantially greater financial and other resources than Showscan, and have an
established reputation for success in the development and marketing of filmed
products. There can be no assurance that Showscan will be able to compete
successfully with such other companies.
In addition to competing directly against other firms in the marketplace of
Showscan's products, Showscan also generally competes for customers with other
location-based entertainment alternatives. The entertainment business in
general is undergoing significant changes in technology and in consumer demands
for more stimulating entertainment both within the home and outside of the home.
As the demand for increasingly sophisticated forms of technology increases,
Showscan competes for customers to some extent with theme parks, traditional
motion pictures and other forms of filmed or computer-related entertainment. As
a result of technological advances and the increased availability of alternative
forms of leisure entertainment, including expanded pay and cable television
service and advanced home audio and video systems, consumer demands and tastes
may continue to change. Computer simulation, interactive and virtual reality
products are improving rapidly and could become competitive with Showscan's
products. Showscan is unable to predict what effect technological and other
changes will have on the future success of Showscan's products and services.
MOTION SIMULATION THEATRE ATTRACTIONS. Although Showscan is aware of a
number of other distributors of entertainment motion simulation equipment
worldwide, including Iwerks and Imax, both of which compete directly with
Showscan in the motion simulation attraction market, Showscan believes that it
is one of the leading companies in the sale of motion simulation attractions.
Both Iwerks and Imax have significantly greater financial resources than
Showscan and are both substantially larger than Showscan. Because of the
significant costs involved in the development and promotion of motion simulation
attractions, companies with superior financial
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resources may have an advantage. However, Showscan also believes that Showscan's
record of motion simulation attraction operations to date, the size of its film
library and the quality and enhanced sense of depth and realism of its Showscan
motion simulation films permits Showscan to effectively compete in the motion
simulation attractions market.
The most widely-recognized motion simulation theatre attractions are Star
Tours in Disneyland, and Back to the Future in a Universal Studios theme park.
Showscan is not aware of any plans by The Walt Disney Company or Universal
Studios, which operate these parks, to make these motion simulation theatre
attractions available outside of their respective theme parks. In fact, in May
1992, MCA entered into a participating lease with Showscan in connection with
Showscan's first O&O Theatre located at MCA's City Walk complex at Universal
City near Hollywood, California. However, any decision by The Walt Disney
Company or MCA, Inc. to market their own motion simulation theatre attractions
outside their respective theme parks could have a material adverse effect on
Showscan's business.
SPECIALTY THEATRES. With the introduction of Showscan's 15/70 giant-screen
equipment products in January, 1996, Showscan now competes with companies that
distribute other well-established large and giant-screen and special projection
systems, including Imax, the developer of IMAX (for flat-screen projections) and
IMAX Dome (for "domed" theatre projections), and Iwerks. Imax is well-
established in the specialty film markets and has significantly more theatres
currently exhibiting films produced in these formats. In addition, Imax has
substantially greater financial and other resources and an established
reputation for developing and marketing products competitive with Showscan's
specialty theatres. See A -- Legal Proceedings."
PATENTS AND OTHER INTELLECTUAL PROPERTY
Showscan owns two United States patents on the Showscan process. These
patents cover the combined process of filming and projecting 35mm or larger
negative film having high resolution images, at a constant frame rate of at
least 50 fps, with the film being projected at a high illumination level. Both
patents expire in October 2001. The patents are important to Showscan because it
believes that a frame rate of 50 fps or more is necessary to achieve the desired
degree of depth and realism, and that enforcement of these patents could prevent
others from achieving the same result. Although Showscan believes that its
existing patents are valid, there can be no assurance that Showscan's patents,
if challenged, will be upheld, nor can there be any assurance that competitors
will not develop a different technology that offers comparable or better visual
effects. Moreover, Showscan may elect, for financial or commercial reasons, not
to enforce its rights under its patents.
Showscan has obtained additional patents for the Showscan process in
Australia, Canada and Japan. Showscan's patent on the Showscan process has been
approved under the European Patent Convention, which resulted in the issuance of
patents in those European countries in which Showscan elected to seek patent
protection. To date, most of Showscan's motion simulation attraction sales have
been outside the United States and no assurance can be given that Showscan's
patents will adequately protect Showscan's exclusive rights to the Showscan
process outside the United States or that any additional foreign patents will be
granted.
Showscan also has obtained U.S. patents on its electronic projector, the
rapid start-up feature of the CP-65 camera, a system for projecting a 360-degree
motion picture image, and a process for converting high frame-rate film to
standard frame-rate film. In addition, Showscan, in conjunction with Intamin,
has obtained three U.S. patents on certain aspects of the Showscan motion
simulation attractions and has a joint interest with another party in another
motion simulation patent. The patents expire between the years 2004 and 2006.
Showscan and Intamin have also obtained a patent under the European Patent
Convention covering certain aspects of the Showscan motion simulation
attractions, which has resulted in the issuance of patents in those European
countries in which Showscan elected to seek patent protection. However, there
can be no assurance that these patents, if challenged, will be upheld, nor can
there be any assurance that competitors will not develop a different or more
effective competing technology.
Although Showscan believes that its patented and non-patented products and
processes have been independently developed and do not infringe the patents of
others, third parties could claim that Showscan's products and processes
infringe the rights of others. If it were determined that Showscan's products or
processes did infringe the property rights of third parties, Showscan may be
required to modify its design or obtain a license. No assurance can be given
that Showscan will be able to do so in a timely manner or upon acceptable terms
and conditions; and the failure to do either could have a material adverse
effect upon Showscan's business. There are no claims that Showscan's products
and processes infringe the rights of others.
The mark "Showscan(R)" has been registered with the United States Patent
and Trademark Office for use with the Showscan process and Showscan products.
Showscan has also registered "Showscan's The Edge", "Cinemania" and "Emaginator"
for use as the name of motion simulation theatres. Showscan has registered other
marks in connection with certain of its products such as the AEM4" and the
"Quadra 6." See " -- Legal Proceedings," regarding the mark 'ShowMax'.
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Royalty Arrangements
Showscan acquired all of the rights to the Showscan process from Paramount
Pictures Corporation ("Paramount") and its subsidiary, FGC, Douglas Trumbull and
WLS Partners ("WLS") in consideration for, among other things, agreements to pay
royalties on future revenues from the exploitation of the Showscan process. The
terms of such royalties are described below.
WLS. Pursuant to a royalty agreement (the "Royalty Agreement") with WLS,
---
Showscan is required to pay WLS a royalty based, in general, on the gross
receipts (as defined) of Showscan from the worldwide exploitation of Showscan
motion pictures and any other use of the Showscan process. The royalty is 3% of
such gross receipts until August 31, 1999, or until WLS has been paid an
aggregate of $3,500,000. Showscan has paid a total of $2,689,000 in royalties
under the Royalty Agreement through February 12, 1998.
Future General Corporation/Paramount. Pursuant to the agreement with
------------------------------------
Paramount and FGC (the "FGC Agreement"), Showscan is obligated to pay FGC a
royalty, in perpetuity, equal to 2% of Showscan's gross receipts (as defined)
from the worldwide exploitation of the Showscan technology in excess of 180% of
the sum of (a) $21,100,000, (b) actual cash contributions for debt or equity of
Showscan during the period from June 27, 1985 to June 27, 1987, (c) Showscan's
actual cost, if any, of converting and equipping theatres for exhibition of
Showscan motion pictures, and (d) any Showscan feature-length motion picture
production costs incurred by Showscan. For the purpose of determining FGC's
royalty, "gross receipts" are defined as all monies received by Showscan from
the exploitation of the Showscan technology, provided that if Showscan is the
exhibitor of a Showscan feature-length motion picture, gross receipts will be
deemed to be one-half of box office receipts less taxes paid. When gross
receipts reach the $65 million level, FGC will begin to earn royalties. The
current level of gross receipts (as defined) is $32 million at March 31, 1997,
so no royalties have been earned under the FGC Agreement as of yet. Showscan
projects royalties to FGC will begin accruing in approximately five to seven
years.
If Showscan produces feature-length motion pictures in Showscan and grants
distribution rights to such a film to a third-party distributor, Paramount will
have the right of first negotiation with respect to distribution of the first
three of the Showscan motion pictures produced by Showscan. However, Showscan
does not currently intend to produce any feature-length motion pictures itself.
Douglas Trumbull. Pursuant to its agreement with Douglas Trumbull,
----------------
Showscan is required to pay royalties to Mr. Trumbull until the year 2015,
subject to the maintenance of certain levels of working capital as established
by the Showscan Board. In general, the payments equal 1% of revenues (as
defined) received by Showscan from the worldwide exploitation of the Showscan
technology, except that if Showscan operates a full-length motion picture
theatre, Mr. Trumbull is entitled to 1% of the box office receipts of that
theatre. Showscan does not currently intend to operate any full-length motion
picture theatres.
EMPLOYEES
As of February 12, 1998, Showscan had 37 employees, six of whom were
employed in management, three in sales and marketing, twelve in engineering,
assembly and installation, and seven in production, film licensing and
distribution. The remaining full-time employees are administrative and support
staff. Although Showscan 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.
Showscan considers its relationship with its employees to be satisfactory.
PROPERTIES
Showscan leases a 37,000-square-foot building in Culver City, California,
pursuant to a lease expiring on June 30, 2003. Under the lease, the current
monthly rental is $34,303 subject to annual cost-of-living adjustments. The
maximum annual rental increase is 7%. Showscan is responsible for all costs and
expenses of maintaining the building, including the payment of all property
taxes and insurance premiums. Showscan's corporate headquarters, demonstration
theatre and film studio are located at this site.
Showscan considers its facilities adequate to meet its current needs.
LEGAL PROCEEDINGS
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In January 1996, Showscan launched a new product line of 15/70 format
projection systems which it called ShowMax. Showscan filed for and registered
the name "ShowMax" in the United States, Canada and several other countries.
Soon after the launch of this product line, four lawsuits were brought against
either Showscan or its supplier of 15/70 format projectors. Three of the
lawsuits involved the use of the name "ShowMax" in connection with the product
line. Imax sued Showscan on February 8, 1996 in both the United States District
Court for the Southern District of New York and in the Federal Court of Canada
alleging that the ShowMax trademark infringes upon its "IMAX" trademark and
certain other trademarks owned by it. In the third lawsuit involving the name
"ShowMax", a small California corporation named Showmax, Inc. sued Showscan on
June 12, 1996 in the United States District Court for the Central District of
California alleging that Showscan's ShowMax trademark infringes upon its alleged
use of the name. All three of these lawsuits sought unspecified damages and
asked that Showscan be enjoined from any continued use of the ShowMax trademark.
Showscan disputed each of these claims.
Imax also brought a fourth lawsuit on February 6, 1996 against World
Odyssey Inc. and N.J. Engineering Inc. in the United States District Court for
the Northern District of California. This suit alleged, among other things,
trade secret misappropriation and that the relationship between World Odyssey
Inc. and Showscan violated certain provisions of a 1994 Settlement Agreement
between Imax, World Odyssey Inc. and N.J. Engineering Inc. In this lawsuit,
Imax sought unspecified damages and injunctive relief. Showscan, World Odyssey
Inc. and N.J. Engineering Inc. disputed each of these claims.
Due to the foregoing actions by Imax, as well as other alleged acts of
anticompetitive conduct, Showscan and World Odyssey Inc. filed a lawsuit against
Imax on March 4, 1996 in the United States District Court for the Central
District of California alleging various antitrust and unfair competition claims
including a claim that the lawsuits brought by Imax constitute sham litigation
brought solely to obstruct Showscan's entry into the market for 15/70 format
products and services. Showscan and World Odyssey sought treble damages, costs
and injunctive relief.
On May 2, 1997, Showscan and Imax settled all claims and actions between
the companies without the admission by either party of wrongdoing. The parties
agreed to dismiss all lawsuits pending between them. As part of the settlement,
Showscan agreed, among other things, to abandon its registrations of the name
"ShowMax" in each jurisdiction where it had been filed, to abandon the marketing
and sale of "ShowMax" products, and to terminate its present relationship with
World Odyssey Inc. In exchange, Showscan received a cash payment from Imax,
together with the right to distribute two Imax motion simulation films to
Showscan's installed base and contracted backlog of Showscan Attractions
(approximately 100 screens) as of April 30, 1997. In turn Showscan gave Imax
the right to distribute two Showscan motion simulation films to Imax's installed
base and contracted backlog (approximately 37 screens). The settlement does not
limit Showscan's ability to re-enter the 15/70 format giant screen theatre
market.
In addition, on June 3, 1997 Showscan and Showmax, Inc. settled all claims
and actions between the companies without the admission by either party of
wrongdoing. The parties also agreed to dismiss all lawsuits between them. This
settlement also does not limit Showscan's ability to compete in the 15/70 format
giant-screen theatre market.
MANAGEMENT OF SHOWSCAN
DIRECTORS AND EXECUTIVE OFFICERS OF SHOWSCAN
Set forth below is certain information with respect to the directors and
executive officers of Showscan:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE TITLE SINCE
- ------------------------------ --------- ----------------------------------------------- -------------------
<S> <C> <C> <C>
William D. Eberle 74 Chairman of the Board of Directors 1988
William C. Soady 54 Director 1994
Charles B. Moss, Jr. 53 Director 1993
Thomas R. DiBenedetto 48 Director 1993
Kurt C. Hall 38 Director 1994
Dennis Pope 53 President, Chief Executive Officer and
Director 1997
W. Tucker Lemon 36 Senior Vice President, General Counsel
and Secretary --
Gregory W. Betz 49 Vice President and Director of Finance --
Michael B. Ellis 46 Vice President-Engineering and
Product Development --
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Russell H. Chesley 40 Vice President-Worldwide Sales --
Rui C. Guimarais 37 Vice President-Film & Theatre
Operations --
</TABLE>
The Showscan Board has an Audit Committee, a Nominating Committee and a
Compensation Committee. The members of the Audit Committee currently are Mr.
Eberle, Mr. Moss, Mr. DiBenedetto and Mr. Hall. The duties of the Audit
Committee are to review and act or report to the Showscan Board with respect to
various audit and accounting matters, including the annual audits of Showscan
(and their scope), the annual selection of the independent auditors of Showscan,
the nature of the services to be performed by and the fees to be paid to the
independent auditors of Showscan, and making "fairness" determinations
concerning transactions between Showscan and its directors and officers. The
members of the Audit Committee do not receive any meeting fees.
The Nominating Committee currently is composed of Mr. Eberle and Mr. Pope.
The Nominating Committee makes recommendations to the full Showscan Board
concerning nominees for election as directors of Showscan. The members of the
Nominating Committee do not receive any meeting fees.
The Compensation Committee currently consists of Mr. Eberle, Mr. Moss, Mr.
DiBenedetto and Mr. Hall. The Compensation Committee administers Showscan's
stock option plans and establishes the compensation of Showscan's executive
officers. The members of the Compensation Committee do not receive any meeting
fees.
William D. Eberle was elected Chairman of the Showscan Board in May 1993.
Mr. Eberle has been a private investor in various companies for more than five
years and is Of Counsel to Kaye, Scholer, Fierman, Hays & Handler. From 1993,
he was Of Counsel to Donovan, Leisure, Newton & Irvine. He currently is also
the Chairman of Manchester Associates, Ltd., American Service Group and Barry's
Jewelers, Inc. and is Deputy Chairman of Mid-States plc. He is a director of
Ampco Pittsburgh Corp., Mitchell Energy & Development Corp., FAC Realty Trust,
Inc. and Sirrom Capital Corporation. Mr. Eberle served as the U.S. Trade
Representative for President Nixon and President Ford. In addition, he served
as the President's Special Representative for Trade Negotiations from 1971
through 1975, and as the executive director of the Cabinet Council on
International Economics from 1974 to 1975. Other positions previously held by
Mr. Eberle include Chairman of the Board, President and Chief Executive Officer
of American Standard, Inc. and officer and director of Boise Cascade Corp.
William C. Soady has been the President of Distribution for PolyGram Filmed
Entertainment Distribution, Inc. since March 1997. Previously, Mr. Soady served
as the President and Chief Executive Officer of Showscan since March 1994, and
was elected as a director of Showscan in April 1994. He is also currently a
director of Jalate, Inc. Prior to joining Showscan, Mr. Soady served as
Executive Vice President of Distribution at Tri Star Pictures, Inc. from
September 1988 to July 1992, at which time he was promoted to President of
Domestic Distribution of Tri-Star Pictures, Inc., the position he held
immediately prior to joining Showscan. Mr. Soady has been involved in motion
picture distribution in various capacities for over 20 years, including serving
as President of Universal Pictures Distribution.
Charles B. Moss, Jr. has been the President and Chief Executive Officer of
B.S. Moss Enterprises, Inc. since 1979. Mr. Moss is also a director of Robins
Cinemas, Ltd., a United Kingdom corporation, and a director of Cinemania (UK)
Limited since 1994.
Thomas R. DiBenedetto has served as the President of Junction Investors,
Ltd. since 1991 and as the President of Boston International Group since 1983.
He is also currently a director of National Wireless Inc. and of Alexander's,
Inc.
Kurt C. Hall was appointed Chief Operating Officer of United Artists
Theatre Circuit, Inc. ("UA") in February 1997, after holding the positions of
Executive Vice President and Chief Financial Officer of UA since 1992. Mr. Hall
held several positions with United Artists Entertainment Company, the
predecessor to UA, since joining that company in 1988, including Director of
Finance from 1988 to 1990 and Vice President and Treasurer from 1990 to 1992.
Dennis Pope was appointed the President and Chief Executive Officer of
Showscan in March 1997. Mr. Pope had been the Executive Vice President and
Chief Financial Officer of Showscan since May 1994. From January 1993 until May
1994, Mr. Pope was the Managing Partner - Entertainment Business Group with
Kenneth Leventhal & Co. Prior to joining Kenneth Leventhal, Mr. Pope had served
as a consultant to that firm on entertainment industry matters in November and
December 1992.
W. Tucker Lemon was appointed Senior Vice President, General Counsel and
Secretary of Showscan in March 1997. Previously, Mr. Lemon was the Vice
President, General Counsel and Secretary, the position he held since he joined
Showscan in August 1994. From February 1993 until he joined Showscan, Mr. Lemon
was of counsel to Corey, Croudace, Dietrich & Dragun and prior thereto, Mr.
Lemon was associated with Latham & Watkins.
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Gregory W. Betz joined Showscan as Controller in June 1986, was promoted to
Vice President-Controller in December 1990, and became Showscan's Vice President
and Director of Finance in October 1993.
Michael B. Ellis joined Showscan as its Vice President-Engineering and
Product Development in July 1994. From February 1993 until he joined Showscan,
Mr. Ellis was a consultant providing technical support to entertainment and
commercial construction industries. Prior thereto, Mr. Ellis was the Corporate
Director-Engineering and Project Development of Knott's Berry Farm from May 1989
through February 1993.
Russell H. Chesley joined Showscan as Vice President-Worldwide Sales in
August 1995. From March 1994 until he joined Showscan, Mr. Chesley was Director
of Marketing and Sales at Westrex, an entertainment technology and equipment
manufacturer. From November 1992 until February 1994, Mr. Chesley was Sales and
Marketing Director and an Executive Producer at Starfax/The Editing Company, a
post production facility. Prior thereto, Mr. Chesley was an independent
producer and consultant.
Rui C. Guimarais has held several management positions since joining
Showscan in February 1993, including Controller, Director-Film Licensing and
Distribution and Director-Theatre Operations. In January 1996, Mr. Guimarais
was promoted to Vice President-Film Licensing while retaining his
responsibilities as Director-Theatre Operations. From 1992 until he joined
Showscan, Mr. Guimarais was a partner in a joint venture engaged in wholesale
distribution.
Showscan has five wholly owned subsidiaries (Showscan Productions, Inc.,
Showscan CityWalk, Inc., Showscan Attractions, Inc., Showscan Framingham, Inc.
and Showscan Entertainment B.V.). Showscan Attractions, Inc. currently owns 50%
of the outstanding capital stock of Cinemania (UK) Limited. Mr. Pope is the
sole director and President of Showscan Productions, Inc., Showscan CityWalk,
Inc., Showscan Attractions, Inc. and Showscan Framingham, Inc. Mr. Soady
currently is director and President of Showscan Entertainment B.V.; however, the
process is under way to replace Mr. Soady with Mr. Pope in each such capacity.
Mr. Lemon is the Secretary of these subsidiaries. Mr. Pope, Mr. Moss, Mr. Lemon
and Mr. Guimarais are the directors of Cinemania (UK) Limited.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires Showscan's directors and
executive officers, as well as persons who own more than ten percent of
Showscan's Common Stock, to file with the Commission initial reports of
beneficial ownership and reports of changes in beneficial ownership of the
Showscan Common Stock. Directors, executive officers and greater-than-ten-
percent stockholders are required by SEC regulations to furnish Showscan with
copies of all Section 16(a) forms they file.
Based solely on a review of copies of reports filed with the SEC and
submitted to Showscan since April 1, 1996 and on written representations by
certain directors and executive officers of Showscan, Showscan believes that,
with the exception of the following, all persons subject to the reporting
requirements of Section 16(a) filed all required reports on a timely basis
during the past fiscal year: William C. Soady, Dennis Pope and W. Tucker Lemon
each failed to timely file a Statement of Changes in Beneficial Ownership (Form
4) upon receiving additional options from Showscan.
EXECUTIVE COMPENSATION
The following tables set forth certain information concerning the annual
and long-term compensation for services rendered to Showscan in all capacities
for the fiscal years ended March 31, 1997, 1996 and 1995 of (a) all persons who
served as the Chief Executive Officer of Showscan during the fiscal year ended
March 31, 1997 and (b) each of the other executive officers of Showscan whose
total annual salary and bonus during the fiscal year ended March 31, 1997
exceeded $100,000. (The Chief Executive Officer and the other named officers
are collectively referred to as the "Named Executives.")
86
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------------------- Award
Name and Principal Position Year Salary ($) Bonus ($) Options (#)
---------------------------- --------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
William C. Soady, President 1997 $ 323,078(1)(2) $ -0- 50,000
and Chief Executive Officer...... 1996 $ 350,000 $ -0- -0-
1995 $ 350,000(1) $50,000 -0-
Dennis Pope, President 1997 $ 220,000(2) $ -0- 115,000
and Chief Executive Officer....... 1996 $ 213,846 $ -0- -0-
1995 $ 152,308 $ -0- 150,000
W. Tucker Lemon, Senior Vice 1997 $ 127,501 $ -0- 35,000
President, General Counsel and 1996 $ 125,000 $ -0- -0-
Secretary......................... 1995 $ 79,326 $ -0- 30,000
Michael B. Ellis, Vice President- 1997 $ 115,442 $ -0- -0-
Engineering and Product 1996 $ 115,000 $ -0- -0-
Development....................... 1995 $ 78,192 $ -0- 17,500
J. Chuck Allen, Vice 1997 $ 100,384(1) $ -0- -0-
President-Theatre 1996 $ 100,000(1) $ -0- -0-
Operations........................ 1995 $ 79,999(1)(3) $ -0- 17,500
Russell H. Chesley, Vice President- 1997 $ 124,458(4) $ -0- -0-
Worldwide Sales................... 1996 $ 66,346(4) $ -0- 17,500
Rui C. Guimarais, Vice 1997 $ 101,397 $ -0- -0-
President-Film 1996 $ 102,278 $ -0- 10,000
and Theatre Operations............ 1995 $ 70,000 $ -0- 7,500
</TABLE>
- ------------------------------------
(1) In addition to the amounts shown in the table, certain of the Named
Executives received an automobile allowance. While each Named Executive may
derive personal benefit from this perquisite, the benefit did not exceed the
lesser of $50,000 or 10% of such Named Executive's salary and bonus.
(2) Mr. Pope replaced Mr. Soady as President and Chief Executive Officer in
March, 1997. Prior to Mr. Pope assuming the office of President and Chief
Executive Officer, he served as Showscan's Executive Vice President and
Chief Financial Officer.
(3) Mr. Allen resigned from all of his positions with Showscan and its
subsidiaries in May, 1997.
(4) Mr. Chesley's compensation consisted of a base salary of $110,000 plus
commissions on certain sales of Showscan equipment and films.
87
<PAGE>
The following table contains information concerning individual grants of stock
options made during the fiscal year ended March 31, 1997 for each of the
following Named Executives.
OPTIONS GRANTED IN FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
OPTIONS GRANTED TO EXERCISE PRICE GRANT DATE
GRANTED EMPLOYEES IN OF OPTION EXPIRATION PRESENT VALUE
NAME OF OFFICER (#) FISCAL YR. ($/Share) DATE $(1)
- ------------------ ------------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
William C. Soady 35,000 17.5% $6.125 7/18/06 $108,850
William C. Soady 15,000 7.5% $3.625 1/31/07 $ 27,600
Dennis Pope 35,000 17.5% $6.125 7/18/06 $108,850
Dennis Pope 80,000 40.0% $3.625 1/31/07 $147,200
W. Tucker Lemon 20,000 10.0% $6.125 7/18/06 $ 62,200
W. Tucker Lemon 15,000 7.5% $3.625 1/31/07 $ 27,600
</TABLE>
(1) The Black-Scholes method of calculating the value of the options granted was
used and the corresponding values for each grant are shown. The expected
volatility used in this model was .361. The assumptions for the expected
life of the options granted ranged from 7 to 10 years. The risk-free
interest rate assumed ranged from 5% to 6%.
The following table contains information concerning stock options exercised in
the last fiscal year and stock options remaining unexercised on March 31, 1997
with respect to the Named Executives.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 1997
AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS HELD AT
FISCAL YEAR-END
-----------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ---------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William C. Soady -0- -0- 187,500 112,500 -0- -0-
Dennis Pope -0- -0- 75,000 190,000 -0- -0-
W. Tucker Lemon -0- -0- 15,000 50,000 -0- -0-
Michael B. Ellis -0- -0- 8,750 8,750 -0- -0-
J. Chuck Allen -0- -0- 8,750 8,750 -0- -0-
Russell H. Chesley -0- -0- 4,375 13,125 -0- -0-
Rui C. Guimarais -0- -0- 6,250 11,250 -0- -0-
</TABLE>
_____________
(1) Value is determined by subtracting the exercise price from the fair market
value (the closing price for Showscan's Common Stock as reported on The
Nasdaq National Market) as of March 31, 1997, the last trading day in the
fiscal year ($2.50 per share) and multiplying the resulting number by the
number of underlying shares of Showscan Common Stock.
Director Compensation. Members of the Showscan Board who are not officers of
---------------------
Showscan receive a fee of $500 for each Board meeting that they attend and are
also reimbursed for the travel expenses incurred to attend such meetings.
88
<PAGE>
Board of Director Interlocks and Insider Participation. The Compensation
------------------------------------------------------
Committee of the Showscan Board made all compensation determinations during the
past fiscal year for Showscan's executives. William C. Soady and Dennis Pope
were, for parts of the fiscal year ended March 31, 1997, both an officer and a
director of Showscan though neither was a member of the Compensation Committee.
Employment Contracts, Termination of Employment and Change-in-Control
---------------------------------------------------------------------
Arrangements.
- ------------
Mr. Soady had entered into an employment agreement, dated March 3, 1994, with
Showscan, Showscan CityWalk Venture, Showscan CityWalk, Inc., Showscan
Attractions Venture and Showscan Attractions, Inc. pursuant to which he agreed
to be the President and Chief Executive Officer of Showscan, Showscan CityWalk,
Inc. and Showscan Attractions, Inc. and the principal executive officer of
Showscan CityWalk Venture and Showscan Attractions Venture. This agreement was
terminated upon Mr. Soady's resignation on February 28, 1997. After his
resignation, Mr. Soady remained a member of the Showscan Board and retained his
stock options and forfeited his benefits under his change of control agreement.
Mr. Pope has entered into an employment agreement, dated May 3, 1994, and
amended on June 15, 1995, pursuant to which he agreed to be Executive Vice
President and Chief Financial Officer of Showscan. Effective March 1, 1997,
Mr. Pope was made President and Chief Executive Officer and his employment
agreement was amended so that he will receive an annual salary of $250,000. The
agreement is terminable by either Mr. Pope or Showscan upon 30 days notice to
the other party. However, if Showscan terminates the agreement without cause
(where "cause" is defined to mean conviction of a felony, commission of fraud or
embezzlement, neglect of duties, death, permanent disability or breach of duty
of loyalty to Showscan), then Showscan is obligated to pay Mr. Pope his salary
and benefits for up to one year, subject to Mr. Pope's best efforts to mitigate
such obligation. In addition, Showscan has granted Mr. Pope options to purchase
150,000 shares of Showscan's Common Stock at $8.125 per share, 35,000 shares at
$6.125 per share and 80,000 shares at $3.625 per share. Such options vest at
the rate of 25% per year, commencing on the first anniversary of the agreement
by which they were granted.
Mr. Lemon has entered into an employment agreement, dated August 15, 1994,
pursuant to which he agreed to be Vice President, General Counsel and Secretary
of Showscan. Effective March 1, 1997, Mr. Lemon was made Senior Vice President,
General Counsel and Secretary and his employment agreement was amended so that
he will receive an annual salary of $150,000. In addition, Showscan has granted
Mr. Lemon options to purchase 30,000 shares of Showscan's Common Stock at $7.75
per share, 20,000 shares at $6.125 per share and 15,000 shares at $3.625 per
share. Such options vest at the rate of 25% per year, commencing on the first
anniversary of the agreement by which they were granted. If Showscan terminates
the agreement without cause, then Showscan is obligated to pay Mr. Lemon in one
lump sum his salary for four months.
The Showscan Board entered into agreements with Messrs. Pope and Lemon and
with four other officers of Showscan that would protect each such officer in the
case of a change in control of Showscan. These agreements are intended to
provide certain benefits to the officers upon a "Change of Control" which is
defined to mean (a) the acquisition by any person of 20% or more of the Showscan
Common Stock and Showscan Common Stock equivalents of Showscan or 20% of
Showscan's voting power, (b) a liquidation, merger or consolidation of Showscan,
or (c) a change in the membership of the Showscan Board over any period of two
(2) years or less such that the directors sitting at the beginning of such
period or who were nominated by at least two-thirds of the sitting directors
cease to be a majority of the Showscan Board. The Merger will constitute a
Change of Control under this definition. These officers of Showscan are
entitled to receive certain cash payments and health benefits if they leave
Showscan, either one year before or within two years after a Change in Control,
for "Good Reason," "Disability," death or retirement or if they were terminated
without "Cause" (in each case as the foregoing terms are defined in the
agreements). Messrs. Pope and Lemon also have an additional period after a
Change in Control in which they can voluntarily leave Showscan and receive the
benefits. The cash benefits provided for Mr. Pope will equal 200% of his
annual salary on the date of termination. Mr. Lemon will receive 150% of the
greater of his average salary and bonuses over the period of three (3) fiscal
years preceding the Change in Control or the period of three (3) fiscal years
preceding his termination. The other four officers each will receive 75% of the
greater of his average salary and bonuses over the three (3) fiscal years
preceding the Change in Control or the period of three (3) fiscal years
preceding his termination. In addition, the unvested options of Messrs. Pope
and Lemon shall become vested upon a Change in Control. All such benefits shall
be in lieu of any benefits provided under any such officer's employment
agreement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of each class of Showscan's voting securities as of February 12, 1998
by (a) each of Showscan's directors and Named Executives who beneficially own
Showscan Common Stock or Showscan Preferred Stock, (b) by all directors and
officers as a group, and (c) based on reports filed by each person with the
Securities and Exchange Commission, by the known beneficial holders of more than
5% of any class of outstanding shares of Showscan's voting securities.
Beneficial ownership has been determined in accordance with Rule 13d-3 under the
Exchange Act.
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<PAGE>
Under this Rule, certain shares may be deemed to be beneficially owned by more
than one person (such as where persons share voting power or investment powers).
In addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of an
option) within 60 days of the date as of which the information is provided; in
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by such
person (and only such person) by reason of these acquisition rights on or before
April 12, 1997. As a result, the percentage of outstanding shares of any person
as shown in the following table does not necessarily reflect the person's actual
voting power at any particular date.
<TABLE>
<CAPTION>
Series C
Common Stock(2) Preferred Stock
------------------------------ ----------------------------
Number Percentage Number Percentage
Name and Address of of of of
of Beneficial Owner(1) Shares Outstanding Shares Outstanding
- ------------------------------ ------ ----------- ------ -----------
<S> <C> <C> <C> <C>
William D. Eberle 55,127(3) * -- --
Charles B. Moss, Jr. 994,362(4) 15.7% 12,000 24.5%
c/o B.S. Moss Enterprises
225 North Hill Street,
Aspen, CO 81611
Thomas R. DiBenedetto 1,014,362(5) 16.0% 12,000(6) 24.5%
c/o Junction Investors, Ltd.
84 State Street
Boston, MA 02109
DiBenedetto Showscan Limited 706,672(7) 11.1% 12,000 24.5%
Partnership
c/o Junction Investors, Ltd.
84 State Street
Boston, MA 02109
United Artists Theatre
Circuit, Inc. 946,032(8) 14.4% 25,000 51.0%
9110 East Nichols Avenue
Suite 200
Englewood, CO 80112
Kurt C. Hall(8) -- -- -- --
c/o United Artists Theatre
Circuit, Inc.
9110 East Nichols Avenue
Suite 200
Englewood, CO 80112
Neuberger & Berman 320,800(10) 5.7% -- --
605 Third Avenue
New York, NY 10158
William C. Soady(11) 202,000 3.5% -- --
Dennis Pope(12) 142,250 2.5% -- --
W. Tucker Lemon(13) 43,250 * -- --
Michael B. Ellis(14) 13,125 * -- --
J. Chuck Allen(15) -- -- -- --
Russell H. Chesley(16) 8,750 * -- --
Rui C. Guimarais(17) 8,750 * -- --
All Officers and Directors 2,513,226 33.3% 24,000 100.0%
as a Group (12 persons) (18)
</TABLE>
_______________
* Less than 1%.
(1) Except as otherwise noted, the address of each beneficial owner listed in
this table is c/o Showscan Entertainment Inc., 3939 Landmark Street, Culver
City, California 90232.
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<PAGE>
(2) Unless otherwise noted, Showscan believes that all persons named in the
table have sole voting and investment power with respect to all securities
beneficially owned by them.
(3) Consists of 55,127 shares subject to currently exercisable stock purchase
warrants.
(4) Consists of (a) 468,577 shares underlying currently exercisable stock
purchase warrants, 44,101 of which are held by Charles B. Moss, III, Mr.
Moss' son, and 44,101 of which are held by Robin H. Moss, Mr. Moss' ex-wife,
as custodian for Elizabeth H. Moss, Mr. Moss' daughter, (b) 238,095 shares
of Showscan Common Stock issuable upon conversion of Mr. Moss' Showscan
Preferred Stock, (c) 155,000 shares of Showscan Common Stock held by the
Charles B. Moss, Jr. Family Trust, (d) 6,200 shares of Showscan Common
Stock held by M. F. P., LLC, a limited liability company whose members are
Mr. Moss' children, (e) 21,900 shares of Showscan Common Stock held by Robin
H. Moss, and (f) 104,590 shares of Showscan Common Stock owned by Mr. Moss.
Robin H. Moss is the sole trustee of the Charles B. Moss, Jr. Family Trust.
Mr. Moss disclaims beneficial ownership of the shares held by the Charles B.
Moss, Jr. Family Trust, M. F. P., LLC and Robin H. Moss and the warrants
held by Charles B. Moss, III and by Robin H. Moss as custodian for Elizabeth
H. Moss.
(5) Includes (a) 238,095 shares of Showscan Common Stock issuable upon
conversion of the Showscan Preferred Stock held by DiBenedetto Showscan
Limited Partnership, a Delaware limited partnership, (b) 35,000 shares of
Showscan Common Stock owned by the DiBenedetto 1993 Family Trust, (c) 35,000
shares of Showscan Common Stock owned by the DiBenedetto Family Trust U/A/D
11/01/91 FBO Cory James DiBenedetto, (d) 35,000 shares of Showscan Common
Stock owned by the DiBenedetto Family Trust U/A/D 11/01/91 FBO Christian
Robert DiBenedetto, (e) 35,000 shares of Showscan Common Stock owned by the
DiBenedetto Family Trust U/A/D 11/01/91 FBO Thomas Austin DiBenedetto, (f)
35,000 shares of Showscan Common Stock owned by the DiBenedetto Family Trust
U/A/D 11/01/91 FBO Marc Anthony DiBenedetto, (g) 468,577 shares of Showscan
Common Stock underlying currently exercisable stock purchase warrants held
by DiBenedetto Showscan Limited Partnership, and (h) 132,690 shares of
Showscan Common Stock owned by Mr. DiBenedetto. Mr. DiBenedetto has sole
voting and dispositive power over the securities beneficially owned by
DiBenedetto Showscan Limited Partnership. Linda M. DiBenedetto, Mr.
DiBenedetto's wife, is co-trustee of the DiBenedetto 1993 Family Trust. Mr.
DiBenedetto disclaims beneficial ownership of the shares of Showscan Common
Stock held by the DiBenedetto 1993 Family Trust, the DiBenedetto Family
Trust U/A/D 11/01/91 FBO Cory James DiBenedetto, the DiBenedetto Family
Trust U/A/D 11/01/91 FBO Christian Robert DiBenedetto, the DiBenedetto
Family Trust U/A/D 11/01/91 FBO Thomas Austin DiBenedetto, and the
DiBenedetto Family Trust U/A/D 11/01/91 FBO Marc Anthony DiBenedetto.
(6) Consists of 12,000 shares of Showscan's Showscan Preferred Stock owned by
DiBenedetto Showscan Limited Partnership. Mr. DiBenedetto has sole voting
and dispositive power over these securities.
(7) Consists of 468,577 shares subject to currently exercisable stock purchase
warrants and 238,095 shares of Showscan Common Stock issuable upon
conversion of Showscan Preferred Stock.
(8) Consists of 450,000 shares subject to currently exercisable stock purchase
warrants and stock purchase warrants exercisable within 60 days and 496,032
shares of Showscan Common Stock issuable upon conversion of the Showscan
Preferred Stock.
(9) Kurt C. Hall is an executive officer of United Artists Theatre Circuit, Inc.
Mr. Hall does not have voting or investment power with respect to the
securities held by United Artists Theatre Circuit, Inc.
(10) Neuberger & Berman disclaims beneficial ownership of 57,600 shares owned by
certain of its individual partner(s) in their own personal accounts. Such
shares were purchased with personal funds and each such partner has sole
voting and dispositive power over the shares in his/her account.
(11) Includes 200,000 shares of currently exercisable stock options and options
exercisable within 60 days.
(12) Includes 141,250 shares of currently exercisable stock options and options
exercisable within 60 days.
(13) Includes 41,250 shares of currently exercisable stock options (10,000 of
which are held by Mr. Lemon's wife) and options exercisable within 60 days.
Mr. Lemon does not have voting or investment power with respect to the
securities held by his wife.
(14) Includes 13,125 shares of currently exercisable stock options and options
exercisable within 60 days.
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<PAGE>
(15) J. Chuck Allen resigned from all positions with Showscan in May, 1997. All
options held by Mr. Allen were canceled 30 days after his resignation.
(16) Includes 8,750 shares of currently exercisable stock options.
(17) Includes 8,750 shares of currently exercisable stock options and options
exercisable within 60 days.
(18) Includes 1,436,656 shares subject to stock options and stock purchase
warrants currently exercisable or exercisable within 60 days and 476,190
shares of Showscan Common Stock issuable upon conversion of Showscan
Preferred Stock.
Showscan, United Artists Theatre Circuit, Inc. ("UA"), Charles B. Moss, Jr.
("Moss"), Thomas R. DiBenedetto and DiBenedetto Showscan Limited Partnership, a
Delaware limited partnership (collectively, the "DiBenedetto Entities") are
party to that certain Voting Agreement, dated as of August 19, 1994, pursuant to
which UA, Moss and the DiBenedetto Entities have agreed to vote the securities
held by them in favor of each other's designees for the Showscan Board.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MOSS/DIBENEDETTO VENTURES. On September 27, 1993, Showscan entered into that
- -------------------------
certain Purchase Agreement (the "Purchase Agreement") with Mr. Charles B. Moss,
Jr., a director of Showscan ("Moss"), Mr. Thomas R. DiBenedetto, a director of
Showscan ("DiBenedetto"), and DiBenedetto Showscan Limited Partnership, a
Delaware limited partnership affiliated with, and controlled by, DiBenedetto
("DiBenedetto LP"), pursuant to which, among other things, Moss, DiBenedetto and
DiBenedetto LP collectively acquired the warrants to purchase an aggregate of
850,000 shares of Showscan Common Stock, 150,000 shares of Series A Preferred
Stock, and 24,000 shares of Series B Preferred Stock. So long as Moss and
DiBenedetto collectively own shares of Showscan Common Stock or securities
convertible into shares of Showscan Common Stock representing in the aggregate
5% or more of the then outstanding Showscan Common Stock, the terms of the
Purchase Agreement require that Showscan continue to nominate Moss and
DiBenedetto or their designees to the Showscan Board. Additionally, affiliates
of Moss and DiBenedetto have entered into two transactions for the purpose of
owning, operating, developing and financing Showscan motion simulation
attractions. The first transaction, a venture called the "Showscan City Walk
Venture," was formed for the purpose of operating one of Showscan's motion
simulation attractions at Universal City Walk in Universal City, California
which opened in November 1993. The parties to that venture are Showscan City
Walk, Inc., a wholly-owned California subsidiary of Showscan and the managing
partner of Showscan City Walk Venture, Moss Family LA Corp., a California
corporation controlled by Moss, and DiBenedetto City Walk Limited Partnership, a
Delaware limited partnership controlled by DiBenedetto. Initially, the Moss and
DiBenedetto affiliates together owned a 1% investment and had a right to acquire
a collective 50% investment in the venture for a price based on the cash flow of
the motion simulation attraction. The Moss and DiBenedetto affiliates exercised
the right to acquire the 50% investment in January 1994. Upon the exercise of
the option, the Moss and DiBenedetto affiliates each paid Showscan $10,000. The
balance of the purchase price ($247,772) was paid in March, 1996. See "BUSINESS
OF SHOWSCAN -- Motion Simulation Attractions -- Owned and Operated Theatres --
Moss/DiBenedetto Ventures."
The second venture, organized under the name "Showscan Attractions Venture,"
was formed for the purpose of acting as the exclusive vehicle to develop, own,
manage and operate additional Showscan motion simulation attractions throughout
the world. The scope of the Showscan Attractions Venture was subsequently
narrowed in September 1994 to accommodate the venture with United Artists
Theatre Circuit, Inc. ("UA") discussed below. The parties to this venture are
Showscan Attractions, Inc., a wholly-owned California subsidiary of Showscan and
the managing partner of Showscan Attractions Venture, Moss Family O&O Corp., a
California corporation controlled by Moss (the "Moss Partner), and DiBenedetto
O&O Limited Partnership, a Delaware limited partnership controlled by
DiBenedetto (the "DiBenedetto Partner"). Showscan Attractions, Inc., currently
owns a 50% interest in the Attractions Venture, the Moss Partner currently owns
a 25% interest in the venture, and the DiBenedetto Partner owns the remaining
25% interest.
The Showscan Attractions Venture agreement contemplates that the parties
thereto will jointly develop, own and operate Showscan motion simulator
attractions through the venture or through other corporations, partnerships or
entities formed by them. In accordance with the foregoing, the parties to the
Showscan Attractions Venture have formed Cinemania (UK) Limited for the purpose
of developing, owning and operating a Showscan motion simulator attraction in
London which opened in late September 1994 (the "London Theatre"). Showscan
Attractions, Inc. owns 50% of the outstanding capital stock of Cinemania (UK)
Limited, the Moss Partner owns 25% of the capital stock, and the DiBenedetto
Partner owns 25%. As of February 12, 1998, funding for the Attractions Venture
has been provided by Showscan Attractions, Inc. $2,404,805; Moss Partner
$571,408; and DiBenedetto Partner $571,408. The rights contributed to the
Showscan Attractions Venture included the rights to two motion simulation
attraction leases and the rights to a trademark to be used in connection with
one motion simulation attraction. The services contributed, and to be
contributed in the future, consist of development services related to the London
motion simulation attraction, including coordinating the design and construction
of the facility and the opening and subsequent on-going management of the
facility. The London Theatre is managed by Showscan Attractions,
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<PAGE>
Inc., as the managing partner of the Showscan Attractions Venture, through a
management agreement with Robins Cinemas, Ltd. ("Robins"). Moss is a 5%
stockholder and a director of Robins. See "BUSINESS OF SHOWSCAN -- Motion
Simulation Attractions-- Owned and Operated Theatres -- Moss/DiBenedetto
Ventures."
In August 1995, Showscan Attractions Venture and Maloney Development
Partnership Ltd. ("Maloney"), an unaffiliated Texas limited partnership, formed
a Texas limited liability company called Showscan Maloney, LLC to own and
operate a Showscan motion simulation attraction in the San Antonio Riverwalk
District, in San Antonio, Texas. Showscan Attractions Venture and Maloney own
equal interests in Showscan Maloney, LLC; therefore, Showscan's share in the
cash flow from the motion simulation attraction is 25% plus the annual film
rentals, royalties and management fees that Showscan Maloney, LLC is separately
required to pay to Showscan. Day-to-day management of the motion simulation
attraction is handled by Showscan as the sole manager of Showscan Maloney, LLC.
The partners of Showscan Maloney, LLC closed the theatre on September 7, 1997
and are liquidating its assets. The partners have further agreed to distribute
the theatre equipment to Showscan, which is in the process of negotiating to
sell the equipment to a non-affiliated third party. Showscan expects to fully
realize the carrying value of its investment in this venture upon the completion
of the liquidation and subsequent sale. See "BUSINESS OF SHOWSCAN -- Motion
Simulation Attractions -- Owned and Operated Theatres -- The Maloney Venture."
Pursuant to a Proprietary Property Acquisition and Management Agreement dated
as of September 27, 1993, between Showscan and Showscan Attractions Venture,
Showscan granted to the Showscan Attractions Venture rights to utilize
proprietary property and rights of Showscan in connection with the development
and operation of Showscan motion simulation attractions. Under that agreement,
Showscan has been retained to manage the motion simulation attractions developed
and operated by the venture. The venture has also retained Moss Entertainment
Corp., a corporation controlled by Moss, and DiBenedetto Corp., an affiliate of
DiBenedetto, to provide certain services in connection with the acquisition of
properties for Showscan motion simulation attractions and the potential
disposition of those attractions. Moss Entertainment Corp. and DiBenedetto
Corp. are to receive fees for providing acquisition and disposition services
upon the sale or other disposition of certain of the initial theatres developed
by the venture.
THE UNITED ARTISTS VENTURE. On August 19, 1994, Showscan entered into that
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certain Purchase Agreement (the "UA Purchase Agreement") with UA, pursuant to
which, among other things, UA purchased 25,000 shares of Showscan Preferred
Stock and warrants representing the right to purchase an aggregate of 552,000
shares of Showscan Common Stock. So long as UA owns shares of Showscan Common
Stock or securities convertible into shares of Showscan Common Stock
representing in the aggregate at least 500,000 shares of Showscan Common Stock,
the terms of the UA Purchase Agreement require that Showscan continue to
nominate a designee of UA to the Showscan Board. Kurt C. Hall, a director of
Showscan and an executive officer of UA, is the designee of UA. In connection
with the transactions effected by the UA Purchase Agreement, Showscan and UA
agreed to be equal partners in a venture called Showscan/United Artists Theatres
Joint Venture (the "UA Venture"). Showscan is managing partner of the UA
Venture while UA is the administrative partner. Pursuant to a Theater Rights
Agreement, dated as of August 19, 1994, as amended (the "Theater Rights
Agreement"), whenever UA or the UA Venture builds a Showscan motion simulation
attraction theatre, such entity will have the exclusive rights to exhibit
Showscan motion simulation attraction films within a pre-agreed area surrounding
such location. Also, pursuant to the Theater Rights Agreement, UA will develop
and coordinate the construction of new and/or the conversion of existing
theatres to Showscan motion simulation attractions and will manage each theatre
pursuant to pre-negotiated terms. Showscan, in turn, has agreed to pre-
negotiated terms for the sale of Showscan equipment, installation, servicing and
the licensing of Showscan motion simulation films. Showscan will also make
available to both the UA Venture and UA its library of specialty films which
utilize the patented Showscan process, to the extent that either the UA Venture
or UA builds or converts existing theatres into specialty theatres for the
exhibition of specialty films. See "BUSINESS OF SHOWSCAN -- Motion Simulation
Attractions -- Owned and Operated Theatres -- The United Artists Venture."
The Theater Rights Agreement contains certain provisions that require UA to
make payments to Showscan if UA is unable to meet its obligations under that
agreement. The Theater Rights Agreement provided that two motion simulation
attraction theatres be installed and in operation in Malaysia no later that
December 31, 1995. UA was unable to meet this commitment and therefore UA now
has an obligation to pay to Showscan $722,000 together with interest thereon at
the rate of 7.5% per annum (the "Obligation") from January 1, 1996 until paid in
full. The outstanding balance of the Obligation and all accrued and unpaid
interest thereon became due and payable on December 31, 1996 (the "Maturity
Date"). To date, UA has offered to the UA Venture eight sites at new or
existing UA movie theatre multiplexes. The UA Venture declined seven of these
sites because they did not meet the criteria of the UA Venture. The UA Venture
had accepted the offer by UA of the Showscan Attraction site in Austin, Texas,
which acceptance was to be effective July 1, 1997. During the process of
finalizing documentation relating to the acquisition of the Austin site,
however, UA entered into a merger transaction with other large theatre chains
and circumstances surrounding the merger transaction created uncertainty with
respect to the Austin site. Accordingly, the UA Venture has terminated its
plans to acquire ownership of the Showscan Attraction at the Austin site. In
connection with the foregoing, the Theater Rights Agreement has been amended by
Showscan and UA to eliminate certain installation requirements in Malaysia and
to add those requirements to the overall UA obligations. In connection with the
amendment, (a) UA
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relinquished its exclusivity rights to Malaysia and eliminated its rights of
first refusal in the Asia Territory (as defined in the Theater Rights
Agreement), (b) Showscan agreed to make certain payments to UA each time
Showscan sells a simulation theatre to a third party in Malaysia or the Asia
Territory, and (c) Showscan agreed to certain reduced pricing for a certain
number of its 15/70 format theatre systems.
In connection with the formation of the UA Venture and the modification to the
Showscan Attractions Venture that it necessitated, Showscan entered into a
royalty agreement with Moss and DiBenedetto Partner which provides that each
time that the UA Venture opens a Showscan motion simulation attraction theatre
in one of the areas granted to UA, each of Moss and DiBenedetto Partner will
receive a one-time cash fee and thereafter will receive an annual royalty based
on the net cash flow (as defined) received by Showscan from the operations of
such UA Venture theatre.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SHOWSCAN
RESULTS OF OPERATIONS
Showscan is a leading provider of movie-based motion simulation theatre
attractions to the rapidly expanding out-of-home entertainment market. Showscan
is presently in the business of: (a) licensing and distributing the films in
its library and the proprietary technologies necessary to produce and exhibit
Showscan films; (b) selling and installing motion simulation attractions and
specialty theatres including the equipment necessary for each (including motion
bases projectors, screens, sound systems, synchronization and show control and
theatre design packages); (c) producing films using the Showscan process; and
(d) establishing motion simulation attractions in which Showscan has an economic
interest (O&O Theatres). Showscan is also committed to the continued
recognition of the Showscan(R) brand name worldwide.
The principal sources of Showscan's revenues are the licensing of the Showscan
film library and technologies, the sale and installation of projectors, screens,
sound systems and other equipment used to exhibit Showscan films, and the sale
of motion bases and other equipment used in most Showscan Attractions. Showscan
derived, for the three years ended March 31, 1997, 60-70% of its revenues from
export sales. See Note 9 to the Consolidated Financial Statements of Showscan
and "BUSINESS OF SHOWSCAN -- Sales and Marketing." However, Showscan plans to
increase its domestic sales with its agreement with United Artist Theatre
Circuit, Inc. The agreement calls for 24 sites, eight of which are currently
installed and the remaining 16 are in Showscan's backlog. Showscan does not
believe that inflation has had a material impact on Showscan's net revenues or
on its results of operations for the three most recent fiscal years.
Comparison of Year Ended March 31, 1997 and Year Ended March 31, 1996.
Revenues for the fiscal year ended March 31, 1997 (hereafter "Fiscal 1997")
increased $246,000 or 1% from revenues for the fiscal year ended March 31, 1996
(hereafter "Fiscal 1996"). For Fiscal 1997, export revenue as compared to total
revenue remained relatively consistent with the prior year at 62% and 61%,
respectively. The most significant geographic area of export sales was the Far
East at 34% and 32% of total revenue, respectively, followed by Australasia,
with 11% and 15%, respectively.
Film licensing and production service revenues decreased $2.8 million or 31%
in Fiscal 1997. The decrease was due primarily to (a) the renewal of an
agreement with Showscan's major Japanese customer (Imagine Japan), which renewal
changed the timing of film licensing revenue recognition such that approximately
$1.1 million was recognized in Fiscal 1996 that would have been recognized in
Fiscal 1997; (b) the inclusion in Fiscal 1996 of revenues from two specific one-
time license agreements, which revenues constituted all of the revenues to be
received with respect to such agreements, in the amounts of $550,000 and
$300,000, respectively; and (c) the early renewals in Fiscal 1996 of certain
film licensing agreements, which renewals changed the timing of film licensing
revenue recognition (reflected in the fourth quarter of Fiscal 1996 rather than
in Fiscal 1997) of approximately $700,000. After adjusting for the
aforementioned items, the recurring film licensing revenues were $6.2 million in
Fiscal 1997 and $6.4 million in Fiscal 1996. Revenues from film licensing are
based on new license agreements as well as renewals of existing agreements and
results fluctuate from quarter to quarter, with such fluctuations being a result
of the seasonality in the way that licensing agreements are entered into and how
the license agreements are structured.
Revenues from equipment sales and related services increased $3 million or 36%
in Fiscal 1997. The increase is due to an increase in the number of Showscan
Attractions shipped during Fiscal 1997 as compared to Fiscal 1996. The actual
number of Showscan Attractions shipped in Fiscal 1997 increased to 16 units plus
the completion of three relocation projects compared to ten such units in Fiscal
1996. Equipment sales in Fiscal 1996 also included $360,000 of one-time
revenues recognized as a result of the expiration under
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a customer agreement of a required installation of two theatre sites. At June
20, 1997, Showscan had 61 Showscan Attractions screens with 8 additional
Showscan Attractions screens in its delivery and installation backlog and has
contractual commitments for an additional 29 Showscan Attractions screens in its
backlog, as compared to 55 Showscan Attractions screens with 11 additional
Showscan Attractions screens in its delivery and installation backlog and 27
contractual commitments for Showscan Attractions screens in its backlog at June
20, 1996. Showscan did not sell any permanent or temporary specialty theatres in
Fiscal 1997.
Showscan recognizes equipment sales under the percentage-of-completion method
of accounting, generally measured by the percentage that the labor hours
incurred to date bears to the estimated total labor hours of each contract.
This results in a disparity in the comparison of equipment sales revenues over
different time periods, as Showscan records revenues under this method rather
than on the date that the sales agreement is signed. The actual signing of a
Showscan Attraction sale precedes its delivery and installation by an average of
five to six months. Accordingly, the recognition of revenue for equipment sales
during the current and future quarters is affected by (a) the timing of such
sales; (b) the schedule of the build-out of the Showscan Attractions; and (c)
the shipment, delivery and installation of the equipment and related services.
Cost of revenues was 61% in Fiscal 1997 as compared to 48% in Fiscal 1996.
The increase was primarily the result of (a) two one-time agreements which were
recognized ($550,000 and $660,000 respectively) in Fiscal 1996, each of which
had significantly lower associated cost of revenues; and (b) a lower gross
profit percentage associated with sales to a major customer in Fiscal 1997.
Cost of revenues also increased as a percentage of total revenues because film
licensing revenues (which traditionally have a higher gross profit margin)
represented less of a percentage of total revenues in Fiscal 1997 than in Fiscal
1996. Amortization expense of the film library for Fiscal 1997 was $613,000, up
27% from the amortization expense of $481,000 in Fiscal 1996.
General and administrative expenses decreased $672,000 or 9% in Fiscal 1997.
The decrease can be primarily attributed to an overall reduction in payroll and
consultant expense due to the reduction in Showscan's staff in the fourth
quarter of Fiscal 1997 resulting from the decline in business activity.
Depreciation and amortization expense remained relatively unchanged in Fiscal
1997 from Fiscal 1996.
Showscan accounts for its ownership position in O&O Theatres using the equity
method of accounting. The equity loss of $694,000 on the operations of O&O
Theatres for Fiscal 1997 was primarily the result of the following factors: (a)
expenses incurred in connection with the acquisition and development of future
O&O Theatre locations; (b) operating losses at the Trocadero in London due to
disruptions to theatre operations and attendance caused by the major renovation
of the building and the theatre access impediments created thereby; (c)
operating losses, including start-up and marketing expenses at the Riverwalk in
San Antonio, Texas; and (d) operating losses at the Framingham theatres and at
City Walk. Although the O&O Theatre in Osaka had an operating profit, the
profit was not sufficient to offset the losses of the other O&O Theatres.
Showscan earns film licensing revenues (from all O&O Theatres) and management
fees (from some of the O&O Theatres) which are recorded separately in the
accompanying consolidated statements of operations, thereby inherently
increasing the operating expenses at the specific O&O Theatres. A formal claim
that was filed with the owner of the Trocadero building to recover damages and
lost revenues resulting from the renovation of the Trocadero building and the
related access problems has been settled, and the Showscan subsidiary which owns
the theatre will be reimbursed for a portion of the lost revenue incurred during
the renovation period.
Showscan recognized a non-cash charge of $1,771,000 in Fiscal 1997 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" by certain of its
O&O Theatres joint ventures. The loss was calculated as the excess of the
carrying value of joint venture fixed assets for each impaired O&O Theatre over
the estimated discounted cash flows or fair value of each O&O Theatre impaired.
Under the equity method of accounting, Showscan has recognized its share of the
joint venture charges.
Showscan incurred a net loss of $3,919,000 in Fiscal 1997 as compared to net
income of $101,000 recorded in Fiscal 1996, primarily due to the decrease in
film licensing and production service revenues, an increase in cost of revenues
to total revenues, and the performance of the O&O Theatres, including the effect
of the impairment loss on equity in the operations of certain O&O Theatres joint
ventures.
Comparison of Year Ended March 31, 1996 and Year Ended March 31, 1995.
Revenues for the fiscal year ended March 31, 1996 (hereafter "Fiscal 1996")
increased $2 million or 13% from revenues for the fiscal year ended March 31,
1995 (hereafter "Fiscal 1995"). For Fiscal 1996 export revenue represented 61%
of total revenue as compared to 69% in Fiscal 1995. The Far East represented
the most significant export revenue by geographic area at 32% for both periods.
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Film rentals and royalties increased $3.1 million or 51% in Fiscal 1996. The
increase was due primarily to the increase in the installed base of operating
Showscan Attractions, renewals on certain licensing contracts (which affected
the timing of revenue recognition) which accounted for $700,000 of the increase,
the renewal of the Imagine Japan agreement which increased film revenues by
approximately $1 million, and approximately $900,000 of revenues from two
specific customer agreements, which revenues constitute all of the revenues to
be received with respect to such agreements. On an annual basis, recurring film
rentals and royalties should increase over time as the number of operating
Showscan Attractions increases.
Revenues from equipment sales and related services decreased $1 million or 11%
in Fiscal 1996. Unit sales actually increased in Fiscal 1996, but revenues from
these sales decreased as a result of the lower than average sales prices. At
June 20, 1996, Showscan has 55 Showscan Attractions screens with 11 additional
Showscan Attractions screens in its delivery and installation backlog and has
contractual commitments for an additional 27 Showscan Attractions screens in its
backlog, as compared to 47 Showscan Attractions with 11 additional Showscan
Attractions in its delivery and installation backlog and 22 contractual
commitments for Showscan Attractions in its backlog at June 20, 1995. Showscan
has sold nine permanent and twelve temporary specialty theatres through June 20,
1996 and had sold eight permanent and twelve temporary specialty theatres
through June 20, 1995. Fiscal 1996 equipment sales includes $360,000 of
revenues recognized as a result of the expiration under a customer agreement of
a required installation period for two theatre sites.
Showscan recognizes equipment sales under the percentage-of-completion method
of accounting, generally measured by the percentage that the labor hours
incurred to date bears to the estimated total labor hours of each contract.
This results in a disparity in the comparison of equipment sales revenues over
different time periods, as Showscan records revenues under this method rather
than on the date that the sale agreement is signed. The actual signing of a
Showscan Attraction sale precedes its delivery and installation by an average of
five to six months. Accordingly, the recognition of revenue for equipment sales
during the current and future periods is affected by (a) the timing of such
sales, (b) the schedule of the build out of the Showscan Attractions and (c) the
shipment, delivery and installation of the equipment and related services.
Cost of revenues was 48% in Fiscal 1996 as compared to 56% in Fiscal 1995.
Royalties and film costs as a percentage of film rentals and royalties dropped
to 29% in Fiscal 1996 from 36% in Fiscal 1995 while equipment cost of sales as a
percentage of equipment sales and related services remained constant at 68% for
each of the past two fiscal years. The primary reason for the increase in film
rental gross profit is due to Showscan's purchase in Fiscal 1996 of the
interests held by certain third-party producers in two films distributed by
Showscan, so that Showscan now owns 100% of "Cosmic Pinball" and 57% of "Devil's
Mine Ride." These purchases resulted in a reduction in payments to third-party
producers (included in cost of revenues). The increase in film rental gross
profit is also attributed to more Company-owned films being licensed by the
venues in Fiscal 1996 than in the prior years. Amortization expense of the film
library for Fiscal 1996 and Fiscal 1995 was $481,000 and $502,000 respectively.
General and administrative expenses increased $2 million or 36% in Fiscal
1996. The increase was primarily the result of Showscan's hiring of additional
personnel in Fiscal 1996 to meet the anticipated levels of Showscan Attractions
sales. Showscan management also made a decision to enhance the quality of
existing product lines and to develop new product lines, both of which involved
the continuing employment and hiring of key personnel in Showscan's engineering
and technology departments. Showscan believes that there is a cost savings by
performing such projects in-house, rather than contracting projects out to
outside vendors. In addition, Showscan increased its bad debt provision by
$440,000 in Fiscal 1996, due to three Showscan Attraction accounts that became
delinquent and eventually were written off as uncollectible. The closures of
two (which are higher than Showscan's historical experience) of these Showscan
Attractions were unforeseen by Showscan at the beginning of Fiscal 1996.
Depreciation and amortization remained relatively unchanged during Fiscal 1996
from Fiscal 1995.
Showscan develops, through various financing arrangements, Showscan
Attractions in which Showscan has an ownership interest and accounts for its net
ownership position using the equity method of accounting. Showscan's loss of
$217,000 on the operations of owned and operated theatres in Fiscal 1996
decreased $285,000 or 57% from the $502,000 loss posted in Fiscal 1995. This
loss is primarily the result of the following factors: (a) expenses incurred in
connection with the acquisition and development of future owned and operated
theatre locations, (b) operating losses, including initial start-up and
marketing expenses at the Framingham theatres (opened in late May 1995) of which
Showscan has a 50% interest and The Edge theatre in San Antonio, Texas (opened
in March 1996), of which Showscan has a 25% interest, and (c) the combined
operating profits of the owned and operated Showscan Attractions at City Walk,
the Trocadero in London, and Osaka. The results of operations showed an
improvement for the City Walk and London theatre locations in Fiscal 1996 from
Fiscal 1995. Showscan earns film rentals, royalties and management fees (from
some of the owned and operated theatres), which are recorded separately in the
accompanying condensed consolidated statements of operations, thereby inherently
increasing the operating expenses at these specific theatres.
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Interest and other expense increased $427,000 or 334% in Fiscal 1996.
Showscan completed a $7 million ($6.4 million net of expenses) private placement
of convertible 8% Notes through a European financial institution on September 1,
1995. The 8% Notes bear interest at 8% per annum with a semi-annual interest
payment schedule commencing March 1, 1996. Interest expense recorded in Fiscal
1996 related to these 8% Notes was $319,024.
Operating income increased 94% in Fiscal 1996 to an operating profit of
$519,000 from an operating profit of $268,000 in Fiscal 1995. The increase in
operating profit is primarily attributed to the increase in film rentals and
royalties for Showscan offset by the increase in general and administrative
expenses. Showscan's net income increased 28% to $101,000 or $0.02 per share in
Fiscal 1996 as compared to a $79,000 net profit and $0.01 per share in Fiscal
1995.
Comparison of the Nine Months Ended December 31, 1997 and 1996
Revenues for the nine-month period ended December 31, 1997 (the "Nine Month
Period") decreased by $5.8 million or 45% from revenues for the nine-month
period ended December 31, 1996 due to a substantial decrease in revenues
recognized from equipment sales and related services.
Revenues from equipment sales and related services for the Nine Month Period
decreased 59% to $4.2 million from $10.2 million in the nine-month period ended
December 31, 1996. The decrease is due to the decrease in the number of
Showscan Attractions shipped during the Nine Month Period as compared to the
corresponding prior year nine-month period. Only five Showscan Attractions were
shipped (two of which were relocations of existing Showscan Attractions) in the
Nine Month Period as compared to the fourteen units shipped in the nine month
period ended December 31, 1996. The decrease can be attributed to the
significant slow down in new sales orders since the announcement of the Merger
on August 5, 1997. The decrease in revenues was further complicated by the
delay in timing of certain projects in the Asian market. Showscan believes this
delay is primarily due to the economic crisis currently being experienced in
Asia and that the adverse impact on revenues will continue in future periods.
Film licensing and production service revenues increased by 6% to $2.9 million
in the Nine Month Period due to the increase in the number of operating Showscan
Attractions and the addition of production service revenues from one film that
were not present in the year earlier period.
Showscan presently has four Showscan Attractions in various stages of
manufacturing, delivery and installation, and an additional four Showscan
Attractions pending installation.
Costs of revenues were 84% of revenues in the Nine Month Period as compared to
70% in the nine-month period ended December 31, 1996. Equipment cost of sales
to total equipment sales increased to 81% in the Nine Month Period from 77% in
the nine-month period ended December 31, 1996. Film licensing cost of sales to
total film licensing sales was 88% in the Nine Month Period as compared to 45%
in the nine-month period ended December 31, 1996. The increase in film
licensing cost of sales is due to the increase in film amortization in the Nine
Month Period from the nine-month period ended December 31, 1996.
Amortization of the film library for the Nine Month Period and the nine-month
period ended December 31, 1996 was $1,833,000 and $458,000, respectively. The
increase in film amortization is due to a provision of $1,150,000 to adjust the
carrying value of two films at their estimated realizable value and the
additional amortization from new films in the Nine Month Period that were in the
production process in the nine-month period ended December 31, 1996. Showscan
reviews film library estimated revenues on a quarterly basis (based on the then
current market conditions) and, where applicable, unamortized film costs are
written down to estimated net realizable value.
General and Administrative expenses increased 9% in the Nine Month Period, as
Showscan incurred expenses related to the Merger and recorded a $500,000
increase in the allowance for doubtful accounts to reflect conditions in the
general Asian market, offset by a reduction in Showscan's overhead expenses.
The loss on investment in O&O Theatres increased to $468,000 in the Nine Month
Period from $445,000 in the nine-month period ended December 31, 1996. The loss
for the Nine Month Period is primarily the result of the following factors: (i)
operating losses at the Framingham, Trocadero, San Antonio Riverwalk and
Universal CityWalk theatres, (ii) offset by the operating profits of the Osaka
theatre. Showscan earns film licensing revenues (from all O&O Theatres) and
management fees (from some of the O&O Theatres) which are recorded separately in
the accompanying consolidated statements of operations, thereby inherently
increasing the operating expenses at the specific O&O Theatres. A formal claim
that was filed with the owner of the Trocadero building to recover damages
resulting from the renovation of the Trocadero building and the related access
problems has been settled, wherein the Showscan subsidiary which owns the
theatres was reimbursed in the Nine Month Period for a portion of its damages
incurred during the
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renovation period. Showscan has ceased operations at the Framingham (closed in
October 1997) and San Antonio (closed in September 1997) theatres and has either
sold or is negotiating to sell to non-affiliated third parties the equipment
from each theatre location. The joint venture partners of each respective
theatre have agreed to these sales. Showscan expects to fully realize the
aggregate carrying value of its investment in both joint ventures upon
completion of such sales and the subsequent liquidation of the related joint
ventures.
Showscan's net loss increased in the Nine Month Period to $5,875,000 from
$2,596,000 in the nine-month period ended December 31, 1996, due to (i) the
decrease in equipment sales revenues, (ii) the performance of the O&O Theatres,
(iii) the provision of $1,150,000 to adjust the carrying value of certain films
to their estimated realizable value, and (iv) the increase in general and
administrative expenses caused by expenses related to the proposed Merger and
the $500,000 increase in the allowance for doubtful accounts, as discussed
above. Showscan does not believe that these results necessarily represent a
recurring trend.
Comparison of the Three Months Ended December 31, 1997 and 1996:
Revenues for the three-month period ended December 31, 1997 (the "1998 Third
Quarter") decreased $795,000 or 19% from revenues for the three-month period
ended December 31, 1996 (the "1997 Third Quarter") due to a decrease in revenues
recognized from equipment sales and related services in the 1998 Third Quarter.
Revenues from equipment sales and related services for the 1998 Third Quarter
decreased 26% to $2.6 million from $3.5 million in the 1997 Third Quarter.
Three Showscan Attractions were shipped (two of which were relocations of
existing Showscan Attractions) in the 1998 Third Quarter as compared to the five
units shipped in the 1997 Third Quarter. The decrease can be attributed to the
significant slow down in new sales orders since the announcement of the Merger
on August 5, 1997. The decrease in revenues was further complicated by the
delay in timing of certain projects in the Asian market. Showscan believes this
delay is primarily due to the economic crisis currently being experienced in
Asia and that the adverse impact on revenues will continue into future periods.
Film licensing and production service revenues increased 17% when comparing
the 1998 Third Quarter to the 1997 Third Quarter due to the increase in the
number of operating Showscan Attractions and the addition of production service
revenues from one film that were not present in the year earlier period.
Showscan presently has four Showscan Attractions in various stages of
manufacturing, delivery and installation and an additional four Showscan
Attractions pending installation.
Costs of revenues were 114% of revenues in the 1998 Third Quarter as compared
to 76% in the 1997 Third Quarter. Equipment cost of sales to total equipment
sales increased to 87% in the 1998 Third Quarter from 74% in the 1997 Third
Quarter. The increase was principally the result of the recognition of two
relocations of existing Showscan Attractions that provided lower profit margins
in the 1998 Third Quarter when compared to equipment sales in the 1997 Third
Quarter. These relocations, though they lower profit margins on sales, are
beneficial to Showscan in that they provide continued operations and film rental
from the theatres rather than closures. Film licensing cost of sales to total
film licensing sales was 202% in the 1998 Third Quarter as compared to 84% in
the 1997 Third Quarter. The increase in film licensing cost of sales is due to
the increase in film amortization in the 1998 Third Quarter from the 1997 Third
Quarter.
Amortization of the film library for the 1998 Third Quarter and the 1997 Third
Quarter was $1,585,000 and $266,000, respectively. The increase in film
amortization is due to a provision of $1,150,000 to adjust the carrying value of
two films to their estimated realizable value and the additional amortization
from new films in the 1998 Third Quarter that were in the production process in
the 1997 Third Quarter. Showscan reviews film library estimated revenues on a
quarterly basis (based on the then current market conditions) and, where
applicable, unamortized film costs are written down to estimated net realizable
value.
General and Administrative expenses increased 51% in the 1998 Third Quarter,
as Showscan incurred expenses related to the Merger and recorded a $500,000
increase in the allowance for doubtful accounts to reflect conditions in the
general Asian market, offset by a reduction in Showscan's overhead expenses.
The loss on investment in O&O Theatres in the 1998 Third Quarter decreased 63%
to $104,000 from the 1997 Third Quarter and was primarily the result of the
following factors: (i) operating losses at the Trocadero and Universal CityWalk
theatres, (ii) offset by the operating profits of the Osaka theatre. Showscan
earns film licensing revenues (from all O&O Theatres) and management fees (from
some of the O&O Theatres) which are recorded separately in the accompanying
consolidated statements of operations, thereby inherently increasing the
operating expenses at the specific O&O Theatres.
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Showscan's net loss increased in the 1998 Third Quarter to $3,264,000 from
$1,182,000 in the 1997 Third Quarter, due to (i) the decrease in equipment sales
revenues, (ii) the performance of the O&O Theatres, (iii) the increase in
general and administrative expenses caused by expenses related to the proposed
Merger and the $500,000 increase in the allowance for doubtful accounts (as
discussed above), and (iv) the increase in film amortization including the
provision of $1,150,000 to adjust the carrying value of certain films to their
estimated realizable value. Showscan does not believe that these results
necessarily represent a recurring trend.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Showscan's working capital decreased to $4,528,000 from
$7,936,000 at March 31, 1996. Cash, cash equivalents and short-term investments
decreased to $2,562,000 from $8,141,000 at March 31, 1996. The decrease in
working capital is primarily due to the expenditures related to the production
of three new motion simulation films and the operating loss for Fiscal 1997. At
December 31, 1997, Showscan's working capital decreased to $2,841,000 from
$4,528,000 at March 31, 1997. The decrease in working capital was primarily due
to the increase in deferred revenues (net of the associated unbilled
receivables) on uncompleted equipment contracts, the addition of films to the
film library and the operating loss of Showscan offset by the increase in
equipment sales inventory (from two of the three closed O&O Theatres which are
being held for sale).
Cash and cash equivalents at March 31, 1997 decreased by $2,493,000 from March
31, 1996. The decrease in cash was primarily due to (a) the financing of the
production of three new films in the amount of $2,420,000, (b) the decrease of
34% in accounts payable, customer advances on uncompleted equipment contracts
and accrued expenses and other current liabilities, (c) significant expenditures
in connection with the litigation with Imax discussed under "BUSINESS OF
SHOWSCAN -- Legal Proceedings" which has been settled by the parties, and (d)
offset by a $3,086,000 redemption of short-term investments. Cash and cash
equivalents at June advances, accrued expenses, and other assets are primarily
attributable to variations in the timing of Showscan Attraction sales and the
specific contract terms of such sales, which terms generally affect the timing
of collections, shipments, deliveries to customers, installations and the
related payments to vendors. The specific contract terms of each sale also
dictate when invoicing occurs. The decrease in cash and accrued expenses is also
attributable to the payment of $1,620,000 in May 1996 for the purchase of
additional interests in two films currently in the Showscan film library.
Cash and cash equivalents at December 31, 1997 decreased by $374,000 from
March 31, 1997, which was the result of $1,208,000 used in operating activities,
$166,000 used in investing activities, and $1,000,000 provided by financing
activities. Net cash used in operating activities was primarily due to (i) the
30% increase in accounts receivable, unbilled receivables and equipment sales
inventory, and (ii) a 49% decrease in accounts payable. The changes are
primarily attributable to variations in the timing of Showscan Attractions sales
and the specific contract terms of such sales, which terms generally affect the
timing of collections, shipments, deliveries to customers, installations and the
related payments to vendors. Net cash provided by financing activities was due
to a $1,000,000 ($900,000 net of expenses) promissory note from a private
institution on November 1, 1997. The note has a one year maturity and bears
interest at 11 percent per annum, with principal and interest due and payable in
full on November 15, 1998, or if earlier, the date which is six months after the
close of a merger involving Showscan. The note is secured by accounts
receivable from the distribution of Showscan's film library and the proceeds
thereof.
Net cash flow used in operations was $2,687,000 in Fiscal 1997 as a result of
changes in several categories. Accounts payable and accrued expenses and other
current liabilities decreased by 25%, while accounts receivable (net of the
$425,000 allowance) increased by 44% at March 31, 1997.
Net cash provided by Showscan's investing activities was $194,000 in Fiscal
1997. This was the result of $3,086,000 of redemptions in short-term
investments, offset by $2,652,000 of additions to Showscan's film library,
$164,000 of investments in O&O theatres and $76,000 in purchases of equipment.
Net cash used in investing activities in the Nine Month Period was primarily due
to (i) expenditures for the production and acquisition of fourteen motion
simulation films, partially offset by (ii) a decrease in other assets.
As Showscan derives 60-70% of its business from export sales, its liquidity
may be adversely affected by changes in worldwide economic or political
conditions. Such factors as changes in foreign currency exchange rates (which
can significantly affect the affordability of Showscan's products and services),
trade protection measures, and policies with respect to currency and fiscal
controls may negatively affect liquidity. The current Asian economics crisis
has already caused the delay of certain projects and Showscan believes that it
will have an adverse impact on revenues in future periods.
Showscan's business strategy includes a significant increase in the installed
base of Showscan Attractions, new film productions, the securing of distribution
rights to motion simulation films produced by other companies, new product
development and new product lines, enhancement of existing product lines,
possible investments in O&O Theatres and the reduction of overhead by 30%.
Showscan
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<PAGE>
has already achieved much of the overhead reduction. Showscan recently
obtained certain distribution rights through May 1, 2002 to two films produced
by another company. On December 10, 1997 Showscan announced the acquisition of
certain distribution rights to another eleven films produced by another company.
Showscan's business strategy includes a significant increase in the installed
base of Showscan Attractions, new film productions, the securing of distribution
rights to motion simulation films produced by other companies, new product
development and new product lines, enhancement of existing product lines,
possible investments in O&O Theatres and the reduction of overhead by 30% (which
was implemented during the fourth quarter of Fiscal 1997). Following this
business strategy, Showscan recently invested in two new O&O Theatres: a 50%
ownership interest through the Showscan/United Artists Theatre Joint Venture in
a theatre in Austin, Texas and a 15% ownership interest through an investment in
Reality Cinema Pty. Ltd. in a theatre in Darling Harbour in Australia. Showscan
also recently obtained certain distribution rights through May 1, 2002 to two
films produced by another company.
If the Merger with Iwerks should not occur, Showscan intends to finance the
foregoing business strategy by utilizing its current working capital resources,
the proceeds to be received from its existing backlog and anticipated future
product sales and film licensing agreements, together with proceeds derived from
one or more of the following financing alternatives: the sale of securities,
the obtaining of a line of credit from a banking or other type of institution,
and/or the formation of strategic alliances, joint ventures or off-balance sheet
financing. There can be no assurance that Showscan will be able to obtain any
of the aforementioned financing alternatives. If the Merger with Iwerks should
not occur and Showscan is unable to generate sufficient funds from operations or
is unable to raise additional capital through any of the aforementioned
alternatives, Showscan will need to curtail its business strategy, specifically
with regard to new film productions and investments in O&O Theatres, and its
overhead expense. Showscan believes that, given its various business
alternatives, its working capital will be sufficient to fund the cost of its
operations for the next twelve months though the $1.0 million loan due in
November 1998 would have to be refinanced. At February 1, 1998, Showscan has
reserved 4,573,573 shares of Showscan Common Stock for issuance on the exercise
of stock options, warrants, preferred stock and 8% Notes.
Management of Showscan has reviewed the provisions of SFAS 130 and 131 and
determined that the ultimate adoption of these accounting standards will not
have an impact on Showscan's financial statements and related disclosures.
IMPACT OF THE YEAR 2000
Some of Showscan's older computer software systems were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using A00"
as the year 1900 rather than the year 2000. This software could cause a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Showscan has completed an assessment of its existing software systems and
after reviewing various factors, one of which being the year 2000 issue, has
determined which systems would need to be replaced or upgraded if the Merger did
not occur. The necessary upgrades would cost approximately $25,000.
If necessary, these upgrades would be completed not later than June 30, 1999,
which is prior to any anticipated impact on the operating systems. Showscan
believes that with conversions to new software, the year 2000 issue will not
pose significant operational problems for its computer systems.
The costs of the project and the date on which Showscan believes it will
complete the conversion are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.
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 Showscan to maintain pricing at a level to maintain gross profit
margins, the level of selling, general and administrative costs, the performance
by Showscan under its existing purchase contracts and the ability to obtain new
contracts, the success of Showscan's owned and operating strategy, the ability
of Showscan to identify and successfully negotiate arrangements with joint
venture and other strategic partners, the success of Showscan's film software,
the effects of competition, general economic conditions and acts of God and
other events outside the control of Showscan. See "RISK FACTORS."
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UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed combined financial statements are
presented assuming the Merger has been consummated and accounted for as a
pooling of interests. The pro forma condensed combined statements of operations
for each of the three years in the period ended June 30, 1997 and six months
ended December 31, 1997 have been prepared as if the Merger had occurred on July
1, 1994. The pro forma condensed combined balance sheet as of December 31, 1997
has been prepared as if the Merger had occurred on December 31, 1997. The pro
forma combined data is based on the separate historical consolidated financial
statements of Iwerks and Showscan giving effect to the Merger under the
assumptions and adjustments outlined in the accompanying Notes to Unaudited Pro
Forma Condensed Combined Financial Statements. The unaudited pro forma
condensed combined financial statements are provided for comparative purposes
only and are not necessarily indicative of the results that would have been
obtained had the Merger occurred on the dates indicated or that may be achieved
in the future.
For all applicable periods presented in the unaudited pro forma condensed
combined statements of operations, shares used in the computation of earnings
per common and common equivalent share give effect to the exchange ratio of
0.62.
The unaudited pro forma condensed combined financial statements should be read
in conjunction with the separate audited consolidated financial statements of
Iwerks and Showscan included in this Joint Proxy Statement/Prospectus.
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<PAGE>
Iwerks Entertainment, Inc. and Showscan Entertainment Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------
June 30 March 31 Pro Forma
1995 1995 ------------------------------------------
Iwerks Showscan Adjustments Reference Combined
--------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue $ 44,975 $ 15,437 $ 101 (3) $ 60,513
Cost of sales 33,081 8,584 16 (3) $ 41,681
--------- --------- ----------- ---------
Gross margin 11,894 6,853 85 18,832
Selling, general and administrative
expenses 25,788 6,585 - 32,373
--------- --------- ----------- ---------
Income (loss) from operations (13,894) 268 85 (13,541)
Equity in operations of owned & operated - (502) (101) (3) (603)
Interest income 1,043 444 - 1,487
Interest expense (537) (128) - (665)
--------- -------- ----------- ---------
Income (loss) before provision for income taxes (13,388) 82 (16) (13,322)
Provision for income taxes 85 3 - 88
--------- -------- ----------- ---------
Net income (loss) $ (13,473) $ 79 $ (16) $ (13,410)
========= ======== =========== =========
Net income (loss) per common share - basic $ (1.32) $ 0.02 $ - (6) $ (1.00)
========= ======== =========== =========
Net income (loss) per common share - diluted $ (1.32) $ 0.01 $ - (6) $ (1.00)
========= ======== =========== =========
Weighted average shares outstanding - basic 10,210 5,073 - 13,355
========= ======== =========== =========
Weighted average shares outstanding - diluted 10,210 6,798 - 13,355
========= ======== =========== =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
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<PAGE>
Iwerks Entertainment, Inc. and Showscan Entertainment Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------
June 30 March 31 Pro Forma
1996 1996 ----------------------------------------------
Iwerks Showscan Adjustments Reference Combined
-------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenue $ 48,516 $ 17,465 $ (46) (3) $ 65,935
Cost of sales 28,675 8,399 91 (3) 37,165
-------- --------- ---------- ---------
Gross margin 19,841 9,066 (137) 28,770
Selling, general and administrative expenses 17,377 8,547 - 25,924
-------- --------- ---------- ---------
Income from operations 2,464 519 (137) 2,846
Equity in operations of owned & operated - (217) 46 (3) (171)
Interest income 1,164 358 - 1,522
Interest expense (380) (555) - (935)
-------- --------- ---------- ---------
Income before provision for income taxes 3,248 105 (91) 3,262
Provision for income taxes 149 4 - 153
-------- --------- ---------- ---------
Net income $ 3,099 $ 101 $ (91) $ 3,109
======== ========= ========== =========
Net income per common share - basic $ 0.28 $ 0.02 $ - (6) $ 0.22
======== ========= ========== =========
Net income per common share - diluted $ 0.26 $ 0.01 $ - (6) $ 0.19
======== ========= ========== =========
Weighted average shares outstanding - basic 10,945 5,345 - 14,259
======== ========= ========== =========
Weighted average shares outstanding - diluted 12,144 7,472 - 16,777
======== ========= ========== =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
103
<PAGE>
Iwerks Entertainment, Inc. and Showscan Entertainment Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
June 30 March 31 Pro Forma
1997 1997 --------------------------------------
Iwerks Showscan Adjustments Reference Combined
-------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 39,584 $17,711 $(355) (3) $ 56,940
Cost of sales 28,948 10,854 193 (3) 39,995
-------- ------- ----- --------
Gross margin 10,636 6,857 (548) 16,945
Selling, general and administrative expenses 15,623 7,865 - 23,488
Asset impairment 5,586 - - 5,586
-------- ------- ----- --------
Loss from operations (10,573) (1,008) (548) (12,129)
Equity in operations of owned & operated - (694) 355 (3) (339)
Impairment loss on equity in operations of
owned & operated theaters - (1,771) - (1,771)
Interest income 1,125 250 - 1,375
Interest expense (391) (692) - (1,083)
-------- ------- ----- --------
Loss before provision for
income taxes (9,839) (3,915) (193) (13,947)
Provision for income taxes 117 4 - 121
-------- ------- ----- --------
Net loss $ (9,956) $(3,919) $(193) $(14,068)
======== ======= ===== ========
Net loss per common share - basic and diluted $ (0.84) $ (0.70) $ - (6) $ (0.92)
======== ======= ===== ========
Weighted average shares outstanding - basic
and diluted 11,855 5,594 - 15,323
======== ======= ===== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
104
<PAGE>
Iwerks Entertainment, Inc. and Showscan Entertainment Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Six Months Ended
December 31, 1997 Pro Forma
-------------------------------------------------
Iwerks Showscan Adjustments Reference Combined
-------- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 14,041 $ 5,897 $ (716) (3) $ 19,222
Cost of sales 9,957 5,271 108 (3) 15,336
-------- -------- ----------- ------------
Gross margin 4,084 626 (824) 3,886
Selling, general and administrative
expenses 8,447 4,295 - 12,742
-------- -------- ----------- ------------
Loss from operations (4,363) (3,669) (824) (8,856)
Equity in operations of owned & operated - (306) 716 (3) 410
Interest income 491 46 - 537
Interest expense (134) (327) - (461)
-------- -------- ----------- ------------
Net loss $ (4,006) $(4,256) $ (108) $ (8,370)
======== ======== =========== ============
Basic and diluted net loss per common
share $ (0.33) $ (0.75) $ - (6) $ (0.53)
======== ======= =========== ============
Weighted average shares outstanding -
basic and diluted 12,160 5,642 - 15,658
======== ======= =========== ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
105
<PAGE>
Iwerks Entertainment, Inc. and Showscan Entertainment Inc.
Unaudited Pro Forma Condensed Combined Balance Sheets
Assets
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1997 Pro Forma
------------------------ ----------------------------------------------
Iwerks Showscan Adjustments Reference Combined
------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 3,662 $ 2,188 $ - $ 5,850
Short-term investments 13,718 - - 13,718
Trade accounts receivable, net of allowance
for doubtful accounts 3,040 3,789 - 6,829
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,738 695 - 3,433
Inventories and other current assets 3,899 2,149 - 6,048
--------- -------- ----------- --------
Total current assets 27,057 8,821 - 35,878
Portable simulation theaters at cost, net of
accumulated depreciation 3,711 - - 3,711
Property and equipment at cost, net of
accumulated depreciation and amortization 3,871 633 (633) (2) 3,871
Film inventory at cost, net of amortization 4,972 4,709 (463) (3) 9,218
Goodwill 15,054 - - 15,054
Investment in joint ventures and other assets 3,185 1,875 - 5,060
-------- -------- ----------- --------
Total assets $ 57,850 $ 16,038 $ (1,096) $ 72,792
======== ======== =========== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
106
<PAGE>
Iwerks Entertainment, Inc. and Showscan Entertainment Inc.
Unaudited Pro Forma Condensed Combined Balance Sheets
Liabilities and Stockholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1997 Pro Forma
-------------------------- -----------------------------------------------
Iwerks Showscan Adjustments Reference Combined
-------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 8,583 $ 2,741 $ 1,000 (2) $ 16,417
4,093 (4)
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,507 2,239 - 4,746
Deferred revenue 176 - - 176
Capital leases and notes payable,
current portion 693 1,000 - 1,693
-------- ---------- ------------- -----------
Total current liabilities 11,959 5,980 5,093 23,032
Capital lease obligations and notes payable,
excluding current portion 1,511 5,690 - 7,201
Stockholders' equity:
Common and Preferred stock 57 6 (2) (5) 61
Additional paid in capital 78,016 42,567 2 (5) 120,585
Accumulated deficit (33,693) (38,205) (6,189) (78,087)
-------- ---------- ------------- -----------
Total stockholder's equity 44,380 4,368 (6,189) 42,559
-------- ---------- ------------- -----------
Total liabilities and stockholders' equity $ 57,850 $ 16,038 $ (1,096) $ 72,792
======== ========== ============= ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
107
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements have been
prepared by combining the historical balances of Iwerks and Showscan. The
following notes describe the adjustments and other items relevant to the pro
forma statements (in thousands except per share data).
(1) ACCOUNTING PERIOD DIFFERENCES
The results of operations for Showscan included in the unaudited pro forma
condensed combined statements of operations for the three years ended June 30,
1995, 1996 and 1997 were derived from Showscan's audited consolidated financial
statements for the three fiscal years ended March 31, 1995, 1996 and 1997. The
unaudited results of operations for the quarters ended June 30, 1995 1996 and
1997 were as follows (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended
June 30
-----------------------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Net revenue $4,814 $3,244 $ 1,239
Net (loss) income $ 115 $ (989) $(1,619)
Net (loss) income per common share $ .02 $ (.18) $ (0.29)
</TABLE>
(2) RESTRUCTURING AND INTEGRATION COSTS
Certain expenses are expected to be incurred in connection with the
restructuring and consolidation of Showscan's corporate functions with those of
Iwerks. Such expenses include estimated cost to sublease the Showscan facility,
relocation costs and write-offs associated with equipment which the surviving
company will not utilize.
(3) ACCOUNTING CONFORMITY
Under the pooling of interests method of accounting, the accounting policies
followed by the combining companies must be conformed. A review of the
accounting policies of Showscan and Iwerks indicates that an adjustment is
necessary relating to film amortization. This adjustment changes Showscan's
film amortization to a useful life not to exceed 5 years on an individual
forecast method, which is expected to be the merged company's methodology. The
cumulative effect of $463,000 has been reflected on the December 31, 1997 pro
forma balance sheet. Also an adjustment was made to reclassify the equity in
operations of owned and operated for the Iwerks' joint ventures to conform to
consistent presentation.
(4) TRANSACTION FEES AND SEVERANCE
Under the pooling of interests method of accounting, direct transaction costs
are expensed in the period in which the transaction is consummated. Such costs
are estimated to be $5.3 million (of which $1,184,000 already have been
expensed) and include investment banking, legal, accounting, printing,
solicitation, filing fees, severance and similar expenses. The accrual of these
expenses, has been reflected in the unaudited pro forma condensed combined
balance sheet at December 31, 1997 but not in the unaudited pro forma condensed
combined statements of operations.
(5) STOCKHOLDERS' EQUITY
The exchanges of Showscan equity securities for Iwerks Common Stock are computed
based on the Exchange Ratio of (a) 0.62 shares of Iwerks Common Stock for
Showscan Common Stock and (b) that number of shares of Iwerks Common Stock equal
to the number of shares of Showscan Common Stock into which a share of Showscan
Preferred Stock is convertible multiplied by 0.62 for Showscan Preferred Stock.
Iwerks Common Stock and additional paid-in capital have been adjusted to reflect
the issuance of approximately 4.10 million shares of Iwerks Common Stock with a
par value of $.001 in exchange for 5.64 million issued and outstanding shares of
Showscan Common Stock and .972 million shares of Showscan Preferred Stock.
Retained earnings has been adjusted for the net effects of the aforementioned
pro forma adjustments.
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<PAGE>
(6) EARNINGS PER SHARE
The weighted average common share amounts reflected in the unaudited pro forma
condensed combined statements of operations represent the aggregate weighted
average shares of Iwerks and Showscan adjusted to reflect the Exchange Ratio of
0.62 shares of Iwerks Common Stock for Showscan Common Stock.
(7) SELLING, GENERAL AND ADMINISTRATIVE SAVINGS
It is anticipated that the Merger will provide the combined business with
significant opportunities to realize the efficiencies and synergies available by
operating with one corporate overhead and the economies of scale. The combined
companies will realize significant cost savings particularly in the areas of
purchasing, insurance, marketing, advertising, communications, general and
administrative expenses and the consolidation of facilities, employees and other
resources. It is estimated that had the companies been combined for the full
year the initial cost savings could have been $4.8 million or $0.29 per share in
1997. However, there can be no assurances that all of these savings could or
would have been realized.
(8) OTHER
Pro forma net loss and other per share amounts include provisions for impairment
($7,357,000 or $0.44 loss per share) pursuant to the adoption by both Iwerks and
Showscan of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" in the respective 1997 fiscal years.
109
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF IWERKS
The following description of Iwerks' capital stock does not purport to be
complete and is subject in all respects to applicable Delaware law and are
qualified in their entirety by reference to the provisions of the certificate of
incorporation of Iwerks (the "Iwerks Certificate") and the bylaws of Iwerks (the
"Iwerks Bylaws"), copies of which have been incorporated by reference as
exhibits to the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part.
The authorized capital stock of Iwerks consists of 1,000,000 shares of
preferred stock, par value $.001 per share (the "Iwerks Preferred Stock"), and
50,000,000 shares of Common Stock, par value $.001 per share. As of February 12
1998, 12,161,250 shares of Iwerks Common Stock are issued and outstanding, and
no shares of Iwerks Preferred Stock are issued or outstanding.
COMMON STOCK
Holders of the Iwerks Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of Iwerks Common
Stock do not have cumulative voting rights, and therefore holders of a majority
of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Subject to any restriction contained in the Iwerks Preferred Stock issued
by Iwerks, if any, holders of the Iwerks Common Stock are entitled to receive
ratably dividends when as and if declared from time to time by the Iwerks Board
out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of Iwerks, the holders of Iwerks Common Stock are
entitled, subject to any restriction contained in the Iwerks Preferred Stock
issued by Iwerks, if any, to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision is made
for each class of stock, if any, having preference over the Iwerks Common Stock.
The holders of Iwerks Common Stock, as such, have no preemptive, conversion
or other subscription rights and there are no redemption provisions applicable
to the Iwerks Common Stock. All of the outstanding shares of Iwerks Common
Stock are validly issued, fully paid and nonassessable.
Iwerks distributes periodic reports and other information, including
notices of annual meetings and special meetings of the stockholders of Iwerks,
to recordholders of Iwerks Common Stock at the addresses indicated on Iwerks'
stock records.
PREFERRED STOCK
The Iwerks' Board is authorized to issue from time to time, without
stockholder authorization, in one or more designated classes or series, any or
all of the authorized but unissued shares of Iwerks Preferred Stock with such
voting, dividend, redemption, conversion, exchange and liquidation provisions as
may be determined by the Iwerks Board. Any series of Iwerks Preferred Stock may
possess voting, dividend, liquidation and redemption rights superior to that of
the Iwerks Common Stock. The rights of the holders of Iwerks Common Stock will
be subject to and may be adversely affected by the rights of the holders of any
Iwerks Preferred Stock that may be issued in the future. In the event of
issuance, the Iwerks Preferred Stock could be utilized under certain
circumstances as a way of discouraging, delaying or preventing an acquisition or
change of control of Iwerks. Currently there are no outstanding shares of
Iwerks Preferred Stock and Iwerks does not currently intend to issue any shares
of Iwerks Preferred Stock.
CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
Iwerks is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, Section 203 prevents
an "interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock or an affiliate of such person) from
engaging in a "business combination" (as defined) with a Delaware corporation
for three years following the date such person became an interested stockholder
unless (a) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (b) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding shares owned by persons who are
both officers and directors of the corporation and shares held by employee stock
plans that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer)
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<PAGE>
or (c) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of at least two-thirds of the outstanding voting stock of
the corporation not owned by the interested stockholder. Under Section 203 of
the DGCL, the restrictions described above also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the
corporation and a person who had not been an interested stockholder during the
previous three years or became an interested stockholder with the approval of a
majority of the corporation's directors. The provisions of Section 203 of the
DGCL requiring a super majority vote of disinterested shares to approve certain
corporate transactions could enable a minority of Iwerks' stockholders to
exercise veto power over such transactions.
ANTI-TAKEOVER PROVISIONS
The Iwerks' Certificate and the Iwerks' Bylaws include a number of
provisions which may have the effect of discouraging persons from pursuing non-
negotiated takeover attempts. These provisions include a classified board of
directors, the inability of stockholders to take action by written consent
without a meeting, the inability of stockholders to call for a special meeting
of stockholders under certain circumstances without the approval of the Iwerks
Board and the inability, subject to the rights of Iwerks Preferred Stockholders,
if any, of stockholders to remove directors without cause. The Iwerks'
Certificates also contains a provisions that requires a 66 2/3 percent vote to
amend any of the previously discussed provisions. In addition, the availability
of a large number of shares of Iwerks Common stock and Iwerks Preferred Stock
for issuance by the Iwerks Board without further stockholder approval could have
the effect of making it more difficult, and thereby discouraging, a merger,
tender offer, proxy contest or assumption of control and change of incumbent
management.
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.
LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
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 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.
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. 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 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.
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TRANSFER AGENT
Iwerks' transfer agent is U.S. Stock Transfer Corporation, 1745 Gardena
Avenue, Glendale, California 91204-2991.
COMPARATIVE RIGHTS OF STOCKHOLDERS
GENERAL
At the Effective Time, the Common Stockholders and Preferred Stockholders
of Showscan will become Common Stockholders of Iwerks, and their rights will be
governed by the DGCL and Iwerks' Certificate and Iwerks Bylaws. The following
discussion is not intended to be complete and is qualified in its entirety by
reference to the DGCL, the Iwerks Certificate, the Iwerks Bylaws, the Showscan
Certificate of Incorporation (the "Showscan Certificate") and the Showscan
bylaws (the "Showscan Bylaws"). The Iwerks Certificate and Iwerks Bylaws are
incorporated by reference herein and will be sent to holders of shares of
Showscan Capital Stock.
Since both Iwerks and Showscan are organized under the laws of the State of
Delaware, any differences in the rights of holders of Iwerks Common Stock and
Showscan Common Stock will arise solely from differences in their respective
Certificates and Bylaws. The Iwerks Certificate and Iwerks Bylaws are
substantially similar to the Showscan Certificate and Showscan Bylaws,
respectively, except for certain matters as described herein.
AUTHORIZED CAPITAL
The total number of authorized shares of capital stock of Iwerks is
51,000,000 consisting of 50,000,000 shares, par value $.001 per share, of Iwerks
Common Stock and 1,000,000 shares of Iwerks Preferred Stock. The total number
of authorized shares of capital stock of Showscan is 20,000,000 shares
consisting of 10,000,000 shares of Showscan Common Stock and 10,000,000 shares
of Showscan Preferred Stock.
VOTING RIGHTS
Holders of both Iwerks Common Stock and Showscan Common Stock are entitled
to one vote per share with respect to all matters submitted to a vote of the
Iwerks Stockholders and the Showscan Stockholders, respectively. The Showscan
Preferred Stockholders are entitled to vote on all matters submitted to a vote
of the Showscan Common Stockholders. Each share of Showscan Preferred Stock is
entitled to the number of votes it would have if it were fully converted into
Showscan Common Stock. Cumulative voting is not authorized under either the
Iwerks Certificate or the Showscan Certificate.
DIRECTORS
Each of the Iwerks Bylaws and the Showscan Bylaws provide that the number
of directors shall not be less than four and no more than nine persons. The
Iwerks Certificate establishes three classes of directors, as nearly equal in
number of directors as possible, with each director elected for a term expiring
at the third succeeding annual meeting of stockholders after his or her
election. The Showscan Certificate does not provide for a classified board of
directors.
The Iwerks' Bylaws and the Showscan Bylaws provide for a quorum of a
majority of the total number of its directors.
REMOVAL OF DIRECTORS
The Iwerks Bylaws provide that any director may be removed, for cause only,
by a vote of the majority of the outstanding shares entitled to vote in
connection with the election of such director, regardless of class, voting
together as a class. The Showscan Certificate provides that any or all of the
directors of Showscan (except for directorships elected by the holders of
Showscan Preferred Stock given the right to elect additional directors) may be
removed from office by affirmative vote of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding,
entitled to vote, and voting as a single class. The Showscan Bylaws provides
that any director or the entire Showscan Board may be removed, with or without
cause, by the holders of a majority of shares entitled to vote at an election of
directors.
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FILLING VACANCIES ON THE BOARD OF DIRECTORS
The Iwerks Bylaws provide that any vacancies (including newly created
directorships) will be filled by the affirmative vote of a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director. Additionally, the Iwerks Bylaws provide that if, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Iwerks Board (as
constituted immediately prior to any such increase), the Delaware Court of
Chancery may, upon the application of any stockholder or stockholders holding
at least ten percent (10%) of the total number of shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office in
accordance with Section 211 of the DGCL.
The Showscan Certificate provides that any vacancies or newly created
directorships (but not including directorships newly created in connection
with the issuance of a series of Preferred Stock) will be filled by the
affirmative vote of a majority of the remaining directors, even if less than a
quorum or by a sole remaining director. Directors appointed to fill vacancies
will serve until the next annual election and until their successor is duly
elected. Additionally, the Showscan Bylaws provide that if, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Showscan Board (as
constituted immediately prior to any such increase), the Delaware Court of
Chancery may, upon the application of any stockholder or stockholders holding
at least ten percent (10%) of the total number of shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office.
SPECIAL MEETINGS OF STOCKHOLDERS
The Iwerks Certificate and the Iwerks Bylaws provide that special
meetings of stockholders, for any purpose or purposes prescribed in the notice
of the meeting, may only be called by the Iwerks Board (or any two Directors),
the Chairman or any Co-Chairman of the Iwerks Board or by the President of
Iwerks.
The Showscan Certificate provides that special meetings of the
stockholders for any purpose or purposes may be called at any time by the
President or Secretary at the written request of (a) a majority of the
Showscan Board or (b) by stockholders owning not less than 10% of the
outstanding stock entitled to vote at the meeting.
STOCKHOLDER ACTION BY WRITTEN CONSENT
The Iwerks Certificate provides that no action may be taken by the
stockholders except at a meeting. Pursuant to the Showscan Bylaws, unless
otherwise provided in the Showscan Certificate (which it does not), any action
required or permitted to be taken at any Annual or Special Meeting of
Stockholders of the corporation may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, are signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
LIMITATION OF LIABILITY OF DIRECTORS
The DGCL permits a corporation to include a provision in its certificate
of incorporation eliminating or limiting the personal liability of a director
or officer to the corporation or its stockholders for damages for a breach of
the director's fiduciary duty, subject to certain limitations. Each of the
Iwerks Certificate and the Showscan Certificate includes such a provision, as
set forth below, to the maximum extent required by law.
Each of the Iwerks Certificate and the Showscan Certificate provides that
a director will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty by such
director as a director, except for liability (a) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (c) under Section 174 of the DGCL, which concerns
unlawful payments of dividends, stock purchases or redemptions or (d) for any
transaction from which the director derived an improper personal benefit.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate
such duty. Accordingly, these provisions will have no effect on the
availability of equitable remedies such as an injunction or rescission based
on a director's breach of his or her duty of care. The provisions described
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above apply to an officer of the corporation only if he or she is a director of
the corporation and is acting in his or her capacity as director, and do not
apply to officers of the corporation who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL provides that indemnification may be made for
any claim, issue or matter as to which a person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation, unless and only to the extent a court determines that the
person is entitled to indemnity for such expenses as the court deems proper.
The Iwerks Certificate provides that each person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative or
otherwise, by reason of the fact that he or she is or was a director, officer,
employee or agent of the corporation, or by reason of the fact that such
director or officer, at the request of Iwerks, is or was serving any other
corporation, partnership, joint venture, employee benefit plan or other
enterprise, in any capacity, will be indemnified by Iwerks to the full extent
authorized or permitted by law. The indemnification rights conferred by the
Iwerks Certificate are not exclusive of any other right to which persons seeking
indemnification may be entitled under any law, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. Iwerks is authorized to
purchase and maintain (and Iwerks maintains) insurance on behalf of its
directors, officers, employees and agents.
The Showscan Certificate and the Showscan Bylaws contain substantially
similar provisions relating to indemnification and insurance.
ELECTION OF CLASS III DIRECTOR
In accordance with the Certificate of Incorporation and Bylaws of Iwerks,
the Iwerks Board is divided into three classes. At each annual meeting of the
stockholders of Iwerks, directors constituting one class are elected for three-
year terms. The By-Laws of Iwerks provide that the Iwerks Board shall consist of
not less than five and not more than nine members as determined from time to
time by the Iwerks Board. The Iwerks Board currently consists of two Class I
Directors, who will each stand for reelection at the 1999 Annual Meeting of
Stockholders, one Class II Director, whose term expires in 1998, and two Class
III Directors, whose terms expire in 1997. Mr. Roy Wright currently is a Class
III Director of Iwerks and his term expires at the Iwerks Annual Meeting. At the
Iwerks Annual Meeting, one Class III Director will be elected for a term
expiring at the 2000 Annual Meeting. If the number of directors is changed, any
increase or decrease is to be apportioned among the classes so as to maintain
the number of directors in each class as nearly equal as possible. Pursuant to
the terms of the Amendment, Iwerks has agreed to appoint, immediately after the
Effective Time, Charles B. Moss, Jr., a current member of the Showscan Board, to
serve as a Class I Director on the Iwerks Board. In addition, Iwerks also has
agreed, as soon as practicable following the Effective Time, to expand the
number of directors to serve on the Iwerks Board to seven and to commence a
search for two additional qualified candidates to serve as a Class II and a
Class III Director, respectively, who shall be elected by a majority of the ten
existing Iwerks Board. Directors may be removed only with cause by the vote of a
majority of the stockholders then entitled to vote.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the nominee named below. If the nominee is unable or
unwilling to serve as a director at the time of the Iwerks Annual Meeting or any
postponement or adjournment thereof, the proxies will be voted for such nominee
as shall be designated by the current Iwerks Board to fill the vacancy. Iwerks
has no reason to believe that the nominee will be unwilling or unable to
serve if elected as a director.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
NOMINEE LISTED BELOW.
The Iwerks Board proposes the election of the following nominee as the
Class III Director:
Charles Goldwater
If elected, the nominee is expected to serve until the 2000 Annual Meeting
of Stockholders. The affirmative vote of a majority of the shares of Iwerks
Common Stock present in person or represented by proxy at the Iwerks Annual
Meeting and voting on the election of the Class III Director, is required for
the election of the above named nominee.
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PROPOSAL TO AMEND THE 1994 STOCK INCENTIVE PLAN
GENERAL
The 1994 Stock Incentive Plan (the "1994 Plan") was adopted by the Iwerks
Board on February 10, 1994 and by the Iwerks stockholders on November 14, 1995.
The 1994 Plan supplements the Iwerks' 1993 Stock Incentive Plan and provides for
the issuance of options to purchase shares of Iwerks Common Stock ("Shares") to
selected directors, officers, employees and consultants of Iwerks and its
subsidiaries. Subject to adjustment for stock splits, stock dividends and other
similar events, the total number of Shares reserved for issuance under the 1994
Plan is 1,750,000 Shares. At January 9, 1998, options to purchase 1,417,153
Shares had been granted pursuant to the 1994 Plan at a weighted average exercise
price of $5.09 per Share.
PROPOSAL
At the Iwerks Annual Meeting, Iwerks' stockholders are being requested to
approve an amendment to the 1994 Plan to increase the number of shares reserved
for issuance thereunder by 750,000 shares for an aggregate of 2,500,000 shares.
The Iwerks Board believes that the ability to grant options is important to the
future successes of Iwerks. The granting of stock options can motivate high
levels of performance and provide an effective means of recognizing employee
contributions to the success of Iwerks. Iwerks believes that this policy is of
great value in recruiting and retaining highly qualified technical and other key
personnel who are in great demand as well as rewarding and providing incentives
to its current employees.
Pursuant to the provisions of Section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code"), and the regulations promulgated thereunder (as
discussed below), the 1994 Plan must provide a limit with respect to the number
of stock options or other rights that may be granted by Iwerks to any executive
or other employee in a specified period. The Board has resolved that the
maximum number of shares of Iwerks Common Stock with respect to which options or
rights may be granted under the 1994 Plan to any executive or other employee
during any fiscal year is 100,000, subject to certain adjustments to prevent
dilution.
The material provisions of Section 162(m) of the Code and the 1994 Plan are
outlined below.
SECTION 162(m) LIMITATIONS
The following is intended only as a brief summary of the federal income tax
rules relevant to the grant of options to certain officers. These rules are
highly technical and subject to change in the future.
Section 162(m) of the Code generally disallows the deduction of
compensation income in excess of $1,000,000 paid to a "covered employee." A
"covered employee," means each of the Chief Executive Officer and the other four
most highly compensated employees of Iwerks whose compensation is required to be
disclosed under the Exchange Act of 1934, as amended.
Section 162(m) of the Code does not apply, however, to compensation that
meets the following four criteria: (i) the compensation is based solely on the
attainment of performance goals; (ii) the performance goals are determined by a
compensation committee of the Board of Directors comprised solely of two or more
outside directors; (iii) the material terms of the compensation are disclosed to
stockholders and approved by a majority vote of the stockholders; and (iv)
certification by the compensation committee that the performance goals have been
met. The disclosure to the stockholders of the compensation payable must be
specific enough so that a stockholder can determine the maximum amount of
compensation that could be paid to any employee during a specific period. A
Stock Option Plan that provides a limit with respect to the maximum number of
shares underlying stock options that may be granted to any employee during a
specified period and the exercise price of those options satisfies this latter
requirement.
The 1994 Plan as previously adopted contains all provisions necessary to
satisfy the requirements of Section 162(m) of the Code, except for a provision
limiting the number of stock option grants. If this proposed amendment to the
1994 Plan is approved by the stockholders, all compensation received by a
covered employee as a result of the exercise of stock options granted under the
1994 Plan subsequent to stockholder approval will be deductible by Iwerks.
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SUMMARY OF THE 1994 PLAN
Purpose. The purpose of the 1994 Plan is to advance the interests of
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Iwerks and its stockholders by strengthening Iwerks and its subsidiaries'
ability to obtain and retain the services of the types of employees,
consultants, officers and directors who will contribute to Iwerks' long term
success and to provide incentives which are linked directly to increases in
stock value which will inure to the benefit of all stockholders of Iwerks.
Administration. The 1994 Plan may be administered by the Iwerks Board or a
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committee of the Iwerks Board, each member of which committee is a non-employee
member of the Iwerks Board and a Disinterested Person (as defined in Rule 16b-3
promulgated under the Exchange Act). The party administering the 1994 Plan is
referred to herein as the "Administrator."
Eligibility and Nondiscretionary Grants. The 1994 Plan provides that
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options may be granted to officers of Iwerks who serve as directors, non-
employee directors (subject to the limitations described below), officers,
employees and consultants of Iwerks and its subsidiaries. The Administrator
will determine the persons to be selected as optionees, the vesting of options
and the number of Shares to be subject to each option. The only options that
non-employee directors shall be entitled to receive under the 1994 Plan are (a)
the nondiscretionary grant of a non-statutory option to purchase 10,000 Shares
upon the non-employee director's election or appointment to the Iwerks Board,
(b) for so long as the non-employee director remains on the Iwerks Board, an
annual nondiscretionary grant on the date of Iwerks' annual meeting of
stockholders of non-statutory options to purchase a number of shares determined
by dividing $50,000 by the fair market value of Iwerks Common Stock on the day
of such grant, and (c) options granted to a non-employee director who is
expressly made eligible to participate in the 1994 Plan by a resolution of the
Iwerks Board. All of such options shall have an exercise price equal to 100% of
the fair market value of the Shares on the date of grant and shall vest over a
four year period.
Terms of Options. The terms of options granted under the 1994 Plan are
----------------
determined by the Administrator. In the sole and absolute discretion of the
Administrator, such options may be either "incentive stock options" within the
meaning of Section 422 of the Code ("ISOs"), or non-statutory options. However,
to the extent that the aggregate market value of the Shares with respect to
which ISOs are exercisable for the first time by any individual under the 1994
Plan and all other incentive plans of Iwerks and any Parent or subsidiary of
Iwerks during any calendar year exceeds $100,000, such options shall not be
treated as ISOs. Each option will be evidenced by an option agreement between
Iwerks and the optionee to whom such option is granted on such terms and
conditions as shall be determined by the Administrator from time to time. The
terms of the option agreements need not be identical. Each option is, however,
subject to the following terms and conditions:
Exercise of the Option. The Administrator determines when options
granted under the 1994 Plan may be exercisable. An option is exercised by
giving written notice of exercise to Iwerks, specifying the number of full
Shares to be purchased and tendering payment of the purchase price. Payment for
Shares issued upon exercise of an option may be made by cash, by cashier's check
or certified check, by surrender of previously owned Shares (if the Committee
authorizes payment in Shares and such shares have been held for at least six
months), by surrender of the numbers of Shares issuable upon the exercise of the
stock option having a fair market value on the date of exercise equal to the
option exercise price (if the Administrator authorizes such method of payment),
or by any combination thereof. The 1994 Plan provides that, upon the
recommendation of the Administrator, Iwerks may loan optionees the funds
necessary to exercise their options.
Option Price. The ISO exercise price shall equal or exceed the fair
market value of the Shares on the date the option is granted. Non-qualified
options may be granted at no less than 85% of the fair market value of the
Shares on the date the option is granted. The exercise price for ISOs granted
to individuals beneficially holding at least 10% of the outstanding securities
of Iwerks shall equal or exceed 110% of the fair market value of the Shares on
the date the option is granted.
Reload Options. The 1994 Plan provides the Administrator with
authority to automatically grant an option (a "Reload Option") to a current
optionee upon the delivery to Iwerks by such optionee of shares of Iwerks Common
Stock in payment of another option or in satisfaction of a tax withholding
requirement, up to the number of Shares delivered to Iwerks in payment of such
other option or in satisfaction of such obligation. A Reload Option shall have
a per share exercise price of not less than 100% of the per Share fair market
value on the date of grant of such Reload Option, a term not longer than the
remaining term of the original stock option at the time of exercise thereof, and
such other terms and conditions as the Administrator in its sole discretion
shall determine.
Termination of Employment. The 1994 Plan provides that if the
optionee's employment by Iwerks is terminated for any reason other than death or
disability, the option may be exercised only within 90 days after such
termination and may be exercised only to the extent the option was exercisable
on the date of termination.
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Death or Disability. If an optionee should die or become permanently
and totally disabled while in the employ of Iwerks, all options to the extent
then presently exercisable shall remain in full force and effect and may be
exercised within one year of the optionee's death or disablement.
Termination of Options. All options granted under the 1994 Plan
expire ten years from the date of grant (five years with respect to ISOs granted
to individuals beneficially holding at least 10% of the outstanding securities
of Iwerks), or such shorter period as is determined by the Administrator. No
option is exercisable by any person after such expiration. If an option
expires, terminates or is canceled in full, the Shares not purchased thereunder
may again be available for option.
Non-transferability of Options. An option is not transferable by the
optionee, otherwise than by will or the laws of descent and distribution, and is
exercisable during the optionee's lifetime only by the optionee, his or her
guardian or legal representative.
Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the 1994 Plan as may be
determined by the Administrator.
Adjustments Upon Changes in Capitalization. The 1994 Plan and each option
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granted thereunder contain provisions for appropriate adjustments in the
exercise price per share (but not the total price) and the number of Shares
subject to the option in the event of any change in the number of issued Shares
which results from a split-up or consolidation of Shares, payment of a Share
dividend, a recapitalization, or other like capital adjustment.
Amendment and Termination of the 1994 Plan. The Iwerks Board may amend the
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1994 Plan at any time, may suspend it from time to time or may terminate it
without approval of the stockholders; provided, however, that stockholder
approval is required for any amendment which materially increases the number of
Shares for which options may be granted, materially modifies the requirements of
eligibility, or materially increases the benefits which may accrue to optionees
under the 1994 Plan. However, no such action by the Iwerks Board or
stockholders may unilaterally alter or impair any option previously granted
under the 1994 Plan without the consent of the optionee. In any event, the 1994
Plan shall terminate ten years from the date of stockholder approval unless
sooner terminated by action of the Iwerks Board.
Federal Income Tax Consequences. The following general discussion of the
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principal tax considerations is based upon the tax laws and regulations of the
United States existing as of the date hereof, all of which are subject to
modification at any time. The 1994 Plan does not constitute a qualified
retirement plan under Section 401(a) of the Code (which generally covers trusts
forming part of a stock bonus, pension or profit-sharing plan funded by the
employer and/or employee contributions which are designed to provide retirement
benefits to participants under certain circumstances) and is not subject to the
Employee Retirement Income Security Act of 1974 (the pension reform law which
regulates most types of privately funded pension, profit sharing and other
employee benefit plans).
Consequences to Employees: Incentive Stock Options. No income is
recognized for federal income tax purposes by an optionee at the time an
Incentive Stock Option is granted, and, except as discussed below, no income is
recognized by an optionee upon his or her exercise of an Incentive Stock Option.
If the optionee makes no disposition of the Shares received upon exercise within
two years from the date such option was granted or one year from the date such
option is exercised, the optionee will recognize mid-term or long-term capital
gain or loss when he or she disposes of his or her Shares depending on the
length of the holding period. Such gain or loss generally will be measured by
the difference between the exercise price of the option and the amount received
for the Shares at the time of disposition.
If the optionee disposes of Shares acquired upon exercise of an Incentive
Stock Option within two years after being granted the option or within one year
after acquiring the Shares, any amount realized from such disqualifying
disposition will be taxable as ordinary income in the year of disposition to the
extent that (i) the lesser of (a) the fair market value of the shares on the
date the Incentive Stock Option was exercised or (b) the fair market value at
the time of such disposition exceeds (ii) the Incentive Stock Option exercise
price. Any amount realized upon disposition in excess of the fair market value
of the shares on the date of exercise will be treated as long-term, mid-term or
short-term capital gain, depending upon the length of time the shares have been
held.
The use of stock acquired through exercise of an Incentive Stock Option to
exercise an Incentive Stock Option will constitute a disqualifying disposition
if the applicable holding period requirement has not been satisfied.
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<PAGE>
For alternative minimum tax purposes, the excess of the fair market value
of the stock as of the date of exercise over the exercise price, of the
Incentive Stock Option is included in computing that year's alternative minimum
taxable income. However, if the shares are disposed of in the same year, the
maximum alternative minimum taxable income with respect to those shares is the
gain on disposition. There is no alternative minimum taxable income from a
disqualifying disposition in subsequent years.
Consequences to Employees: Non-statutory Options. No income is
recognized by a holder of Non-statutory Options at the time Non-statutory
Options are granted under the 1994 Plan. In general, at the time Shares are
issued to a holder pursuant to exercise of Non-statutory Options, the holder
will recognize ordinary income equal to the excess of the fair market value of
the shares on the date of exercise over the exercise price.
A holder will recognize gain or loss on the subsequent sale of Shares
acquired upon exercise of Non-statutory Options in an amount equal to the
difference between the selling price and the tax basis of the Shares, which will
include the price paid plus the amount included in the holder's income by reason
of the exercise of the Non-statutory Options. Provided the Shares are held as a
capital asset, any gain or loss resulting from a subsequent sale will be short-
term, mid-term or long-term capital gain or loss depending upon the length of
time the Shares have been held.
Consequences to Iwerks: Incentive Stock Options. Iwerks will not be
allowed a deduction for federal income tax purposes at the time of the grant or
exercise of an Incentive Stock Option. There are also no federal income tax
consequences to Iwerks as a result of the disposition of Shares acquired upon
exercise of an Incentive Stock Option if the disposition is not a disqualifying
disposition. At the time of a disqualifying disposition by an optionee, Iwerks
will be entitled to a deduction for the amount received by the optionee to the
extent that such amount is taxable to the optionee as ordinary income.
Consequences to Iwerks: Non-Statutory Options. Generally, Iwerks
will be entitled to a deduction for federal income tax purposes in the year and
in the same amount as the Optionee is considered to have realized ordinary
income in connection with the exercise of Non-statutory Options.
REQUIRED VOTE.
The approval of the amendments to the 1994 Plan require the affirmative
vote of a majority of the shares of the Iwerks' Common Stock present or
represented and entitled to vote on this subject matter at the Iwerks Annual
Meeting. An abstention is not an affirmative vote and, therefore, will have the
same effect as a vote against the proposal. A broker non-vote will not be
treated as entitled to vote on this subject matter at the meeting.
PROPOSALS OF STOCKHOLDERS
The Iwerks Bylaws provide that in order for a stockholder proposal to be
considered for inclusion in Iwerks' proxy statement and the form of proxy to be
used in connection with an Annual Meeting of Stockholders, such proposal must be
received by Iwerks not less than 120 calendar days in advance of the date that
Iwerks' proxy statement was released to Iwerks' stockholders in connection with
the previous year's Annual Meeting of Stockholders. If, however, no Annual
Meeting of Stockholders was held during the previous year, the date of the
previous year's Annual Meeting of Stockholders was changed by more than 30 days
from the date contemplated at the time of the release of the previous year's
proxy statement or if no proxy statement was released in connection with the
previous year's Annual Meeting of Stockholders, stockholder proposals must be
received by Iwerks at least 90 days before Iwerks makes a solicitation of
proxies in connection with the Annual Meeting of Stockholders. Stockholder
proposals which are to be considered for inclusion in proxy statements to be
distributed in connection with Special Meetings of Stockholders must be received
by the Iwerks at least 90 days before Iwerks solicits proxies in connection with
the Special Meeting of Stockholders. Proposals of stockholders of Iwerks which
are intended to be presented by such stockholders at Iwerks' 1998 Annual Meeting
of Stockholders must be received by Iwerks no later than December 1, 1998, in
order to be considered for inclusion in the proxy statement and form of proxy
relating to that meeting.
In the event the Merger is not consummated, Showscan stockholders are
advised that any stockholder proposal, including nominations to the Showscan
Board, intended for consideration at Showscan's 1998 Annual Meeting must be
received by Showscan no later than December 1, 1998 to be included in the
proxy materials for Showscan's 1998 Annual Meeting. It is recommended that
stockholders submitting proposals direct them to Showscan's Nominating
Committee, c/o W. Tucker Lemon, Secretary of Showscan, and utilize certified
mail, return receipt requested in order to ensure timely delivery.
118
<PAGE>
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, were selected by the Iwerks Board
to serve as independent auditors of Iwerks for the fiscal year ended June 30,
1997. The Iwerks' Board has not yet selected its auditors for the fiscal year
ending 1998. Representatives of Ernst & Young LLP are expected to be present at
the Iwerks Annual Meeting, will have an opportunity to make a statement if they
desire to do so and will be available to respond to questions from stockholders.
LEGAL OPINION
The validity of Iwerks Common Stock issuable in the Merger has been passed
upon by Troop Meisinger Steuber & Pasich, LLP, 10940 Wilshire Blvd., Los
Angeles, California 90024, as counsel to Iwerks.
EXPERTS
The consolidated financial statements of Iwerks at June 30, 1996 and 1997,
and for each of the three years in the period ended June 30, 1997 appearing in
this Joint Proxy Statement/Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Showscan at March 31, 1997 and
1996, and for each of the three years in the period ended March 31, 1997, and
the financial statements of Showscan CityWalk Venture at December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996, and
the financial statements of Showscan/General Cinema Ventures at October 31, 1996
and 1995, and for the year ended October 31, 1996 and for the period from April
24, 1995 to October 31, 1995, all of which appear in this Joint Proxy
Statement/Prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of Cinemania (UK) Limited at December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996,
appearing in this Joint Proxy Statement/Prospectus have been audited by Ernst &
Young, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
OTHER MATTERS
The Iwerks Board is not aware of any matter to be acted upon at the Iwerks
Annual Meeting and the Showscan Board is not aware of any matter to be acted
upon at the Showscan Special Meeting other than described in this Joint Proxy
Statement/Prospectus. Unless otherwise directed, all shares represented by the
persons named in the accompanying proxy will be voted in favor of the proposals
described in this Joint Proxy Statement/Prospectus. If any other matter
properly comes before the meeting, however, the proxy holders will vote thereon
in accordance with their best judgment.
119
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
IWERKS ENTERTAINMENT, INC.
Report of Independent Auditors .......................................... F-3
Consolidated Balance Sheets at June 30, 1996 and 1997 ................... F-4
Consolidated Statements of Operations for the Years
Ended June 30, 1995, 1996 and 1997 ............................. F-6
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1995, 1996 and 1997 ............................. F-7
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1995, 1996 and 1997 ............................. F-8
Notes to Consolidated Financial Statements .............................. F-10
Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1997 .............................................. F-21
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended December 31, 1997 and 1996 ... F-23
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1997 and 1996 .................... F-24
Notes to the Condensed Consolidated Financial Statements ................ F-25
Schedule II. Valuation and Qualifying Accounts ......................... F-27
SHOWSCAN ENTERTAINMENT INC.
Report of Independent Auditors .......................................... F-28
Consolidated Balance Sheets as of March 31, 1997 and 1996 ............... F-29
Consolidated Statements of Operations for the Years
Ended March 31, 1995, 1996 and 1997 ............................ F-31
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended March 31, 1995, 1996 and 1997 .............. F-32
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1995, 1996 and 1997............................. F-33
Notes to Consolidated Financial Statements............................... F-35
Consolidated Balance Sheets as of December 31, 1997 (unaudited) and
March 31, 1997.................................................. F-48
Consolidated Statement of Operations for the Three Months and
Nine Months Ended December 31, 1997 and 1996 (unaudited)........ F-50
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (unaudited)................... F-51
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Notes to Consolidated Financial Statements ............................... F-53
Schedule II. Valuation and Qualifying Accounts........................... F-55
Supplementary Audited Financial Statements:
Financial Statements for Showscan CityWalk Venture for the years
ended December 31, 1996 and 1995................................... F-56
Financial Statements for Cinemania (U.K.) Limited for the years ended
December 31, 1996 and 1995......................................... F-64
Financial Statements for Showscan/General Cinema Ventures for the
year ended October 31, 1996 and for the period from April 24, 1995
(date of formation) to October 31, 1995............................ F-72
</TABLE>
All other schedules have been omitted either as inapplicable or not
required under the instructions contained in Regulation S-X or because the
information is included in the consolidated Financial Statements of Showscan or
the Notes thereto.
APPENDICES
Appendix A Agreement and Plan of Reorganization and Amendment No. 1 to
Agreement and Plan of Reorganization
Appendix B Opinion of Suntrust Equitable Securities dated December 29, 1997
Appendix C Opinion of Suntrust Equitable Securities dated August 1, 1997
Appendix D Opinion of Resource Financial Corporation
Appendix E Opinion of Allen & Company Incorporated dated December 29, 1997
Appendix F Opinion of Allen & Company Incorporated dated July 31, 1997
F-2
<PAGE>
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. 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.
Los Angeles, California Ernst & Young LLP
August 5, 1997
F-3
<PAGE>
Iwerks Entertainment, Inc.
Consolidated Balance Sheets
Assets
(In Thousands)
<TABLE>
<CAPTION>
June 30,
------------------
1996 1997
------- -------
<S> <C> <C>
Current assets:
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
accounts (Note 1) 4,808 5,447
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 5) 5,583 6,339
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
accumulated depreciation 9,084 4,018
Property and equipment at cost, net of
accumulated depreciation and amortization (Note 7) 3,519 2,920
Film inventory at cost, net of amortization (Note 1) 3,372 3,439
Goodwill, net of amortization (Notes 1 and 3) 17,360 15,367
Other assets 688 3,530
------- -------
Total assets $72,926 $64,529
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
Iwerks Entertainment, Inc.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
June 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,815 $ 3,435
Accrued expenses 7,486 8,793
Notes payable to related parties, (Note 8) 875 -
Notes payable, current portion 571 81
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 5) 1,106 990
Deferred revenue 61 278
Capital leases, current portion (Note 12) 615 739
-------- --------
Total current liabilities 13,529 14,316
Notes payable, excluding current portion 81 -
Capital lease obligations, excluding
current portion (Note 12) 2,651 1,827
-------- --------
Total liabilities 16,261 16,143
Commitments and contingencies (Note 12)
Stockholders' equity (Note 11):
Preferred stock, $.001 par value, 1,000,000 authorized,
none issued and outstanding - -
Common stock, $.001 par value, 20,000,000 shares
authorized; 11,588,048 (1996) and 12,160,102 (1997)
issued and outstanding 56 57
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.
F-5
<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.
F-6
<PAGE>
Iwerks Entertainment, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Unearned Retained
------------------ Paid-in 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
class action settlement
(Note 16) 75 - 1,600 - - 1,600
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 Pioneer (Note 3) 299 1 1,200 - - 1,201
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.
F-7
<PAGE>
Iwerks Entertainment, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
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 (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 - - (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 sale lease-back - 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>
F-8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (in thousands)
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, Iwerks purchased patents, other assets and all the outstanding common
stock of the Pioneer related entities for cash and Iwerks Common Stock. The
Iwerks 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 Iwerks 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 sale
lease-back of portable simulation theatres.
In 1995, Iwerks increased film inventory by $574,750 with a corresponding
increase in notes payable.
In 1995, Iwerks acquired the minority interest of Iwerks Touring Technologies,
Inc. for $1,400,000, in exchange for Iwerks Common Stock valued at $360,000 and
cash.
See accompanying notes.
F-9
<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's 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 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.
F-10
<PAGE>
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 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. Iwerks has entered into
joint venture arrangements whereby Iwerks contributes ride simulation theater
equipment and the joint venture partner contributes site improvements. Iwerks
receives film licensing fees and cash flow income is split between the joint
venture partners. Iwerks' investment in the joint ventures is depreciated over
5 years.
ACCRUED EXPENSES - Iwerks 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.
Iwerks had legal accruals as of June 30, 1996 and 1997 in the amounts of
$209,000 and $671,000, respectively. Iwerks 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 were $848,000, $358,000 and $726,000 for the
years ended June 30, 1995, 1996 and 1997, respectively.
F-11
<PAGE>
INCOME TAXES - Iwerks 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 - Iwerks 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 - Iwerks conducts ongoing credit evaluations of all
customers and believes the credit risk from its customers is minimal.
QUALIFIED 401K PLAN - Iwerks 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 has completed three months of service with Iwerks 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, Iwerks 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 - Iwerks'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. Iwerks
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 consolidation was
completed in November 1995.
3. ACQUISITION OF PIONEER
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, Iwerks 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 Iwerks from March 4, 1997.
F-12
<PAGE>
Unaudited pro forma combined statements of operations for the years ended
June 30, 1997 and 1996, which would combine the results of operations of Iwerks
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 Iwerks'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.
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
Less billings to date (23,591) (27,848)
-------- --------
$ 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):
F-13
<PAGE>
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 5,583 $6,339
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,106) (990)
------- ------
$ 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 Iwerks, 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):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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.
F-14
<PAGE>
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.
Iwerks 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
Iwerks $5 million primarily for the right to become Iwerks' 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, Iwerks 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 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, Iwerks 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, Iwerks maintained a $5 million bank line of credit
which it did not draw upon during the fiscal year. Subsequent to June 30, 1997,
Iwerks 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. Iwerks 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 Iwerks' assets.
10. INCOME TAXES
Provision for income taxes for the three years ended June 30 consists of
(in thousands):
<TABLE>
<CAPTION>
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
===== ===== =====
</TABLE>
F-15
<PAGE>
The deferred tax asset at June 30 consists of (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
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)
------- ------- -------
$ - $ - $ -
======= ======= =======
</TABLE>
Reconciliation of effective rate of income taxes:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
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.
11. STOCK OPTIONS AND WARRANTS
Iwerks 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.
Iwerks 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 Iwerks 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 Iwerks 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's 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
F-16
<PAGE>
assumptions including the expected stock price volatility. Because Iwerks'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. Iwerks'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 Iwerks's stock option activities and related information for
the years 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.
F-17
<PAGE>
The following table summarizes information about stock options outstanding at
June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Average Number
------------------------------------------------------- ---------------------------
Number Weighted Average
Outstanding at Remaining Weighted Exercisable at Weighted
Range of June 30, 1997 Contractual Life Average June 30, 1997 Exercise
Exercise Prices in Thousands in Years Exercise Price in Thousands Price
- --------------- ------------- ---------------- -------------- -------------- --------
<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, 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
Iwerks 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>
Iwerks 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.
Iwerks entered into an agreement dated May 29, 1997 to design and
manufacture three camera systems at a cost of $1.8 million.
F-18
<PAGE>
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, Iwerks 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):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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. Iwerks 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, 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.
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
Iwerks 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, Iwerks reached an
agreement with the plaintiffs to settle all pending shareholder class action
suits against Iwerks and certain of its officers and directors in the United
States District Court of the Central District of California. The principal
terms of the agreement called for the establishment of a settlement fund
consisting of: (1) $1.75 million, to be paid by Iwerks' 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 Iwerks (with unclaimed stock and warrants being returned to
Iwerks). 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. Iwerks will receive the proceeds from the exercise of
the warrants if and when they are exercised. Iwerks took a charge against
earnings of $1.7 million in the fourth quarter of fiscal 1995 to reflect the
anticipated costs of the settlement. Further, there can be no assurance that
others not included in the settlement will not file similar claims in the
future.
Fred Hollingsworth III, a former director of Iwerks and former chief
executive officer and founder of Omni Films International, Inc., filed suit in
1996 against Iwerks' and seven of its current or former officers and directors.
In February, 1997
F-19
<PAGE>
Iwerks and Mr. Hollingsworth reached an out-of-court settlement. Iwerks made a
cash payment to Mr. Hollingsworth which Iwerks was reimbursed by its insurance
carrier in the quarter ended June 30, 1997.
There are no material legal proceedings to which Iwerks 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 Iwerks' 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 Iwerks.
Completion of the Merger is subject to approval by the stockholders of
Iwerks and Showscan, as well as other customary closing conditions. The
stockholders meetings are scheduled to take place, and the transaction is
anticipated to close, in the second fiscal quarter ending December 31, 1997.
In August 1997, Iwerks amended its Certificate of Incorporation to increase
its authorized shares from 20,000,000 to 50,000,000.
F-20
<PAGE>
Iwerks Entertainment, Inc.
Condensed Consolidated Balance Sheets
Assets
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------- ------------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,662 $ 3,608
Short-term investments 13,718 15,459
Trade accounts receivable, net of allowance for doubtful 3,040 5,447
accounts
Costs and estimated earnings in excess of billings on 2,738 6,339
uncompleted contracts
Inventories and other current 3,899 4,402
------- -------
Total current assets 27,057 35,255
Portable simulation theatres at cost, net of 3,711 4,018
accumulated depreciation
Property and equipment at cost, net of 3,871 2,920
accumulated depreciation
Film inventory at cost, net of amortization 4,972 3,439
Goodwill, net of amortization 15,054 15,367
Investment in joint ventures and other assets 3,185 3,530
------- -------
Total assets $57,850 $64,529
======= =======
</TABLE>
See accompanying notes.
F-21
<PAGE>
Iwerks Entertainment, Inc.
Condensed Consolidated Balance Sheets
Liabilities and Stockholders' Equity
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ---------
(unaudited) (audited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,164 $ 3,435
Accrued expenses 6,419 8,793
Notes payable, current portion - 81
Billings in excess of costs and estimated 2,507 990
earnings on uncompleted contracts
Deferred revenue 176 278
Capital leases, current portion 693 739
-------- --------
Total current liabilities 11,959 14,316
Capital lease obligations, excluding
current portion 1,511 1,827
Preferred stock, $.001 par value, 1,000,000
authorized, none issued and outstanding - -
Common stock, $.001 par value, 50,000,000
authorized; issued and outstanding
12,161,250 and 12,160,102, respectively 57 57
Additional paid-in capital 78,016 78,016
Accumulated deficit (33,693) (29,687)
-------- --------
Total stockholders' equity 44,380 48,386
-------- --------
Total liabilities and stockholders' equity $ 57,850 $ 64,529
======== ========
</TABLE>
See accompanying notes.
F-22
<PAGE>
Iwerks Entertainment, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 5,989 $10,023 $14,041 $19,618
Cost of sales 5,168 6,955 9,957 13,192
--------- --------- --------- ---------
Gross profit 821 3,068 4,084 6,426
Selling, general and administrative expenses 4,311 3,322 7,916 6,703
Merger related expenses (note 6) 218 - 531 -
--------- --------- --------- ---------
(Loss) from operations (3,708) (254) (4,363) (277)
Interest income 272 296 491 610
Interest expense 64 99 134 216
--------- --------- --------- ---------
Net (loss) income $(3,500) $ (57) $(4,006) $ 117
========= ========= ========= =========
Basic and diluted income (loss) per common share $ (0.29) $ 0.00 $ (0.33) $ 0.01
========= ========= ========= =========
Weighted average shares outstanding - basic 12,161 11,715 12,160 11,675
========= ========= ========= =========
Weighted average shares outstanding - diluted 12,161 11,715 12,160 12,335
========= ========= ========= =========
</TABLE>
See accompanying notes.
F-23
<PAGE>
Iwerks Entertainment, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
December 31,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (4,006) $ 117
Depreciation and amortization 2,259 2,810
Changes in operating assets and liabilities 4,673 (2,855)
----------- ----------
Net cash provided (used) by operating activities 2,926 72
----------- ----------
INVESTING ACTIVITIES
Investment in joint ventures (208) (673)
Investment in portable simulation theatres (45) (108)
Purchases of property and equipment (1,399) (365)
Additions to film inventory (2,518) (698)
Investment in debt securities 1,741 (3,056)
----------- ----------
Net cash used in investing activities (2,429) (4,900)
FINANCING ACTIVITIES
Repayment of notes payable (81) (1,188)
Payments on capital leases (362) (304)
Exercise of stock options - 312
----------- ----------
Net cash used in financing activities (443) (1,180)
----------- ----------
Net increase (decrease) in cash 54 (6,008)
Cash and cash equivalents at beginning of period 3,608 12,674
----------- ----------
Cash and cash equivalents at end of period $ 3,662 $ 6,666
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 131 $ 233
=========== ==========
$ 8 $ -
Cash paid during the period for income taxes =========== ==========
</TABLE>
See accompanying notes.
F-24
<PAGE>
IWERKS ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTRODUCTION
The accompanying condensed consolidated financial statements of Iwerks have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although Iwerks believes that the
disclosures made are adequate to make information presented not misleading. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of Iwerks as of
December 31, 1997 and the results of its operations for the three and six months
ended December 31, 1997 and 1996 and the cash flows for the six months ended
December 31, 1997 and 1996 have been included. The results of operations for
interim periods are not necessarily indicative of the results which may be
realized for the full year. For further information, refer to the consolidated
financial statements and footnotes thereto included in Iwerks' latest Annual
Report on Form 10-K as filed with the SEC.
2. INCOME TAXES
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. As a result of these net operating losses and current
period losses, Iwerks' effective tax rate was negligible and consequently no
income tax provision or benefit was recorded in the periods presented.
3. DEPRECIATION AND AMORTIZATION
Depreciation expense and amortization expense for goodwill and other is
computed using the straight line method over the estimated useful lives of the
assets. Film costs are amortized using the individual film forecast method.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
-----------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Depreciation and amortization on fixed assets $ 230,000 $ 294,000 $ 448,000 $ 574,000
Depreciation on touring equipment 184,000 373,000 352,000 740,000
Amortization of film 367,000 449,000 985,000 1,033,000
Amortization of goodwill and other 227,000 232,000 474,000 463,000
---------- ---------- ---------- ----------
Total depreciation and amortization $1,008,000 $1,348,000 $2,259,000 $2,810,000
========== ========== ========== ==========
</TABLE>
Depreciation and amortization included in cost of sales was $561,000 and
$836,000 for the quarter ended December 31, 1997 and 1996, respectively and
1,356,000 and 1,800,000 for the six months ended December 31, 1997 and 1996
respectively.
4. NET (LOSS) INCOME PER COMMON SHARE:
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. The
statement requires restatement of prior years' earnings 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. Basic EPS excludes the dilutive
effects of stock options and warrants. Under the provisions of FAS 128, basic
and diluted EPS were the same for the periods reported herein.
5. LITIGATION
On or about February 5, 1998, Iwerks received notice of a complaint filed
in the US District Court of New York by a subsidiary of IMAX Corporation
alleging that the pending merger with Showscan Entertainment, Inc. is in
violation of the Sherman and Clayton Anti-trust Acts. Iwerks believes that the
suit is without merit and intends to vigorously defend itself.
F-25
<PAGE>
There are no other material legal proceedings to which Iwerks is a
defendant 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 Iwerks' financial position or results of operations.
6. PROPOSED MERGER WITH SHOWSCAN ENTERTAINMENT, INC.
On August 5, 1997, Iwerks and Showscan Entertainment, Inc. (Showscan)
announced that they signed a definitive agreement to merge. This agreement was
amended December 29, 1997. 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 amended merger agreement calls for each share of Showscan Common Stock
to be converted into 0.62 of a share of Iwerks' Common Stock. Outstanding
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 4.0
million shares of Iwerks' Common Stock in the merger (plus shares issuable upon
exercise of outstanding Showscan options, warrants and 8% Convertible Notes)
resulting in an estimated transaction value of approximately $10.0 million at
February 9, 1998 (based on closing price of Iwerks' Common Stock on the Nasdaq
National Market of $2.50 per share). The transaction will be accounted for as a
pooling of interests, after which Showscan will become a wholly owned subsidiary
of Iwerks. Under the pooling rules, the costs incurred in consummating the
merger are expensed as incurred, as such Iwerks has expensed $218,000 and
$531,000 for the three and six months ended December 31, 1997, respectively.
Further, if the merger is consummated, Iwerks expects to incur an additional
$5.8 million in expenses related to investment banking, legal, accounting,
printing, severance, estimated cost to sublease Showscan's current facility,
relocation costs, 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.
Completion of the Merger is subject to approval by the stockholders of
Iwerks 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 expected to occur in March, 1998.
7. 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 Statement becomes effective for all financial statements for
fiscal years beginning after December 15, 1997, with earlier adoption permitted.
Iwerks has reviewed those Statements and does not believe that they will have a
material impact on its financial statements and related disclosures.
8. SUBSEQUENT EVENTS
In January 1998, Iwerks reduced its workforce by approximately 13% after
which Iwerks has approximately 131 employees. In an unrelated event, on
February 20, 1998, Charles Goldwater was appointed Chief Executive Officer,
President and Chairman of the Board, succeeding Roy A. Wright. Iwerks
anticipates accruing approximately $1.7 million in third quarter of fiscal 1998
for severance and related expense with respect to the foregoing.
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Showscan Entertainment Inc.
We have audited the accompanying consolidated balance sheets of Showscan
Entertainment Inc. as of March 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. Our audits also included the
financial statement schedule of Showscan Entertainment Inc. listed in Item 21.
These financial statements and schedule 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Showscan
Entertainment Inc. at March 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statements schedule,
which considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Los Angeles, California
June 27, 1997
F-28
<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
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>
F-27
<PAGE>
Showscan Entertainment Inc.
Consolidated Balance Sheets
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
March 31
------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,562 $ 5,055
Short-term investments (Note 1) - 3,086
Accounts receivable, net of allowances of $425
(1997) and $215 (1996) 2,716 1,885
Unbilled receivables on uncompleted equipment
contracts (Note 1) - 1,122
Due from affiliated entities (Note 7) 884 1,216
Equipment sales inventory 1,289 1,547
Prepaid expenses and other current assets
(Note 1) 1,072 122
------- -------
Total current assets 8,523 14,033
Film library, net (Note 1) 5,520 3,481
Equipment and leasehold improvements, less
depreciation and amortization (Note 2) 868 1,313
Investment in and advances to O&O theatres
(Notes 1 and 6) 2,123 4,424
Patents and other intellectual properties,
net of amortization (Note 1) 1,336 1,770
Other assets 1,558 994
------- -------
Total assets $19,928 $26,015
======= =======
</TABLE>
See accompanying notes.
F-29
<PAGE>
<TABLE>
<CAPTION>
March 31
------------------
1997 1996
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 654 $ 603
Customer advances on uncompleted film and
equipment contracts (Note 1) 1,033 2,143
Accrued expenses and other current
liabilities (Note 1) 2,308 3,351
-------- --------
Total current liabilities 3,995 6,097
Total liabilities 5,690 6,620
-------- --------
8% convertible notes (Note 3) 9,685 12,717
-------- --------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 5):
Series A Convertible Preferred Stock, $.001 par
value; 150,000 shares authorized, no shares issued
and outstanding in 1997 and 1996 (Note 4) - -
Series C Convertible Preferred Stock, $.001 par
value; 100,000 shares authorized; 49,000 shares
issued and outstanding in 1997 and 1996,
$100 per share liquidation preference (Note 4) - -
Common Stock, $.001 par value; 20,000,000 shares
authorized; shares issued and outstanding of
5,642,058 in 1997 and 5,480,324 in 1996 6 5
Additional paid-in capital 42,567 41,704
Accumulated deficit (32,330) (28,411)
-------- --------
Total stockholders' equity 10,243 13,298
-------- --------
Total liabilities and stockholders' equity $ 19,928 $ 26,015
======== ========
</TABLE>
See accompanying notes.
F-30
<PAGE>
Showscan Entertainment Inc.
Consolidated Statements of Operations
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Year ended March 31
-----------------------------
1997 1996 1995
------- ------- -------
Revenues (Note 9):
<S> <C> <C> <C>
Film licensing and production services $ 6,236 $ 9,039 $ 5,978
Equipment sales and related services 11,475 8,426 9,459
------- ------- -------
17,711 17,465 15,437
Costs of revenues 10,854 8,399 8,584
------- ------- -------
Gross profit 6,857 9,066 6,853
Other costs and expenses:
General and administrative expenses 6,904 7,576 5,560
Depreciation and amortization 961 971 1,025
------- ------- -------
7,865 8,547 6,585
------- ------- -------
Operating income (loss) (1,008) 519 268
Other income (expense):
Equity in net operations of O&O theatres (Note 6) (694) (217) (502)
Effect of impairment loss on equity in net operations of
O&O theatres (Note 6) (1,771) - -
Other income, including interest of $241 (1997), $250
(1996) and $237 (1995) 250 358 444
Other expense, including interest of $672 (1997), $410
(1996) and $128 (1995) (692) (555) (128)
------- ------- -------
(2,907) (414) (186)
------- ------- -------
Income (loss) before taxes (3,915) 105 82
Provision for income taxes 4 4 3
------- ------- -------
Net income (loss) $(3,919) $ 101 $ 79
======= ======= =======
Net Income (loss) per common share (Note 1) $ (0.70) $ 0.02 $ 0.01
======= ======= =======
</TABLE>
See accompanying notes.
F-31
<PAGE>
Showscan Entertainment Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Series A Series C
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
-------------------- ---------------------- ----------------------
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 150,000 $ - - $ - 4,679,519 $5
Proceeds from common stock - - - - 560,340 -
offering
Accretion on Series B - - - - - -
Preferred Stock
Proceeds from issuance of
Series C Convertible
Preferred Stock and
warrants to purchase
common stock - - 25,000 - - -
Conversion of Series B
Preferred Stock to
Series C Convertible
Preferred Stock - - 24,000 - - -
Exercise of stock options - - - - 3,000 -
Stock issuance costs - - - - - -
Net income - - - - - -
-------- ---- ------ ----- --------- --
Balance at March 31, 1995 150,000 - 49,000 - 5,242,859 5
Conversion of Series A
Convertible Preferred
Stock to common stock (150,000) - - - 165,380 -
Exercise of stock options - - - - 6,000 -
Conversion of convertible
notes payable to common - - - - 66,085 -
stock
Other - - - - - -
Net income - - - - - -
-------- ---- ------ ----- --------- --
Balance at March 31, 1996 - - 49,000 - 5,480,324 5
Exercise of stock options - - - - - -
Conversion of convertible
notes to common stock - - - - 161,734 1
and other
Net income - - - - - -
-------- ---- ------ ----- --------- --
Balance at March 31, 1997 - $ - 49,000 $ - 5,642,058 $6
======== ==== ====== ===== ========= ==
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
------- -------- -------
<S> <C> <C> <C>
Balance at March 31, 1994 $33,660 $(28,591) $ 5,074
Proceeds from common stock
offering 4,342 - 4,342
Accretion on Series B
Preferred Stock (122) - (122)
Proceeds from issuance of
Series C Convertible
Preferred Stock and
warrants to purchase
common stock 2,500 - 2,500
Conversion of Series B
Preferred Stock to
Series C Convertible
Preferred Stock 1,800 - 1,800
Exercise of stock options 12 - 12
Stock issuance costs (436) - (436)
Net income - 79 79
------- -------- -------
Balance at March 31, 1995 41,756 (28,512) 13,249
Conversion of Series A
Convertible Preferred
Stock to common stock - - -
Exercise of stock options 30 - 30
Conversion of convertible
notes payable to common
stock 345 - 345
Other (427) - (427)
Net income - 101 101
------- -------- -------
Balance at March 31, 1996 41,704 (28,411) 13,298
Exercise of stock options - - -
Conversion of convertible
notes to common stock
and other 863 - 864
Net income - (3,919) (3,919)
------- -------- -------
Balance at March 31, 1997 $42,567 $(32,330) $10,243
======= ======== =======
</TABLE>
See accompanying notes.
F-32
<PAGE>
Showscan Entertainment Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year ended March 31
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(3,919) $ 101 $ 79
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 961 971 1,025
Amortization of film library 613 481 502
Amortization of debt issue costs 198 85 -
Provision for doubtful accounts receivable 270 440 (30)
Equity in net operations of O&O theatres, including
impairment loss 2,465 217 502
Accrued interest on subordinated note - - 123
Changes in operating assets and liabilities:
Accounts receivable (1,101) (279) 353
Due from affiliated entities 332 (319) (697)
Equipment sales inventory 258 595 (702)
Unbilled receivables on uncompleted equipment
contracts 1,122 (252) 248
Prepaid expenses and other assets (1,784) (12) (7)
Accounts payable, accrued expenses and other (992) 2,023 (570)
Customer advances on uncompleted equipment
contracts (1,110) (786) 798
------- ------- -------
Net cash (used in) provided by operating activities (2,687) 3,265 1,624
INVESTING ACTIVITIES
Purchases of short-term investments - (3,086) (7)
Redemptions of short-term investments 3,086 - 1,243
Additions to film library (2,652) (2,568) (891)
Investment in and advances to O&O theatres (164) (2,486) (2,456)
Purchases of equipment and leasehold improvements and
other, net (76) (151) (275)
------- ------- -------
Net cash provided by (used in) investing activities 194 (8,291) (2,379)
</TABLE>
F-33
<PAGE>
Showscan Entertainment Inc.
Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year ended March 31
-----------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings, net of debt issue costs $ - $ 6,381 $ -
Repayment of subordinated note payable - (3,121) -
Net proceeds from issuance of common stock - - 4,079
Net proceeds from issuance of preferred stock and - - 2,327
common stock warrants
Proceeds from exercise of stock options - 30 12
------- ------- ------
Net cash provided by financing activities - 3,290 6,418
------- ------- ------
Net (decrease) increase in cash and cash equivalents (2,493) (1,736) 5,663
Cash and cash equivalents at beginning of year 5,055 6,791 1,128
------- ------- ------
Cash and cash equivalents at end of year $ 2,562 $ 5,055 $6,791
======= ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 479 $ 1,818 $ 4
======= ======= ======
Income taxes paid $ 4 $ 4 $ 2
======= ======= ======
</TABLE>
See accompanying notes.
F-34
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements
COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OF SHOWSCAN
Showscan Entertainment Inc. ("Showscan") is a leader in its business, which is
the production and distribution of exciting movie-based entertainment
attractions shown in large-screen, special-format theatres worldwide.
Showscan's motion simulation and specialty theatres are open or under
construction around the world, located in theme parks, motion picture
multiplexes, expos, world fairs, resorts, shopping centers, casinos, museums and
other tourist destinations. Showscan also owns and operates motion simulation
theatres in partnership with leading entertainment companies around the world.
Showscan's simulation attractions combine the exhibition of a short action film
with multi-channel sound systems and synchronized theatre seat movement to
produce an immersive entertainment experience in which the theatre patron has
the perception of actually participating in the on-screen action. The
entertainment creates a thrill ride or action entertainment experience (such as
riding a runaway train or racing through outer space). Showscan's attractions
incorporate various proprietary technologies, including the award winning and
patented 70mm filming and projection process known as Showscan(R). Showscan
believes that films made and exhibited in the Showscan process create a visual
effect of depth, clarity and realism that is superior to any other film format.
The Showscan process is also used for the exhibition of films in large screen
special format movie theatres. Showscan's films have been exhibited in such
specialty theatres at world fairs, tourist destinations, trade conventions and
other locations where the operator desires the impact of the large-screen,
intense image that a Showscan film provides.
Showscan is presently in the business of: (a) licensing and distributing the
films in its library and the proprietary technologies necessary to produce and
exhibit Showscan's films; (b) selling and installing motion simulation
attractions and specialty theatres (including projectors, screens, sound
systems, synchronization and show control, and theatre design packages); (c)
selling motion bases and other equipment used in motion simulation attractions;
(d) producing films using the Showscan process; and (e) operating motion
simulation attractions in which Showscan has an economic interest (O&O
Theatres). Showscan is also committed to the continued recognition of the
Showscan(R) brand name worldwide.
Showscan's primary business strategy is to develop high margin recurring
revenues from the licensing and distribution of movie-based software to third-
party owner/operators of its attractions and from ticket sales at, and the
licensing of its movie-based software to, its O&O Theatres. Showscan seeks to
increase the demand for its film library by significantly increasing the
installed base of both its motion simulation attractions and specialty theatres.
CONSOLIDATION
The financial statements consolidate the accounts of Showscan and its wholly-
owned subsidiaries. All significant intercompany amounts and transactions have
been eliminated in consolidation.
Showscan accounts for its investment in O&O Theatres (see Note 6) using the
equity method of accounting.
RECLASSIFICATIONS
The consolidated financial statements for the years ended March 31, 1996 and
1995 contain certain reclassifications to conform to the presentation for the
year ended March 31, 1997.
FILM LIBRARY
Showscan's film library primarily consists of short thrill-ride or action films
that are exhibited in motion simulation attraction theatres worldwide. Films are
stated at the lower of unamortized cost or estimated realizable values. The cost
of a film includes the direct costs to produce or purchase the film and the
costs of production overhead, if any. The components of the unamortized film
library consist of the following:
F-35
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
March 31
1997 1996
------- ------
<S> <C> <C>
Films in production $ 2,399 $ 476
Completed films in release 10,239 9,510
------- ------
12,638 9,986
Less accumulated amortization 7,118 6,505
------- ------
$ 5,520 $3,481
======= ======
</TABLE>
Films are being amortized over their estimated future revenue stream (five to
seven years) as revised quarterly, if applicable; however, many of Showscan's
films are expected to generate revenues for periods up to ten years or longer.
Showscan estimates that approximately 60% of unamortized film costs at March 31,
1997 will be amortized over the next four fiscal years.
PATENTS AND OTHER INTELLECTUAL PROPERTIES
Patents (expiring in fiscal year 2002) and other intellectual properties
represent the excess of the total purchase cost over the values assigned to
tangible assets at the date of acquisition of the Showscan process.
Amortization is provided on the basis of the ratio of annual revenues to
projected revenues over the lives of the patents, as revised quarterly, if
applicable, from the Showscan process with minimum annual amortization of
approximately $434,000 (equal to 1/15 of the original balance of $6,504,000).
Accumulated amortization of the patents and other intellectual properties was
$5,169,000 and $4,734,000 at March 31, 1997 and 1996, respectively.
EQUIPMENT SALES ACCOUNTING
Equipment sales inventory, consisting primarily of film exhibition and motion
simulation system equipment packages and related components, is valued at the
lower of average cost or market.
Equipment sales contracts are accounted for using the percentage-of-completion
method of accounting, generally measured by the percentage of labor hours
incurred to date to the estimated total labor hours for each contract. When
revenues and cost estimates for a contract indicate an ultimate loss, that loss
is recognized immediately.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost.
Depreciation of equipment is computed using the straight-line method over the
estimated useful lives of the respective assets, generally 7 to 12 years.
Amortization of leasehold improvements is computed using the straight-line
method over the lease term. Depreciation and amortization of equipment and
leasehold improvements was $527,000, $537,000 and $590,000 for the years 1997,
1996 and 1995, respectively.
FILM LICENSING REVENUES
Revenues from film license agreements are recognized when the license period
begins and the film is available pursuant to the terms of the license agreement
and accepted by the customer.
F-36
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
INCOME TAXES
Showscan accounts for taxes using Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Showscan considers all highly liquid debt instruments purchased with an original
maturity of three months or less or investments in money market funds to be cash
equivalents.
Short-term investments are stated at amortized cost and consisted of amounts
invested in debt securities (U.S. Treasury Bills) which were held to maturity.
Such securities had maturities ranging from three to nine months from the time
of acquisition.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Showscan to concentrations of
credit risk consist principally of accounts receivable. Showscan performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses. Showscan generally requires customers to furnish
irrevocable letters of credit on equipment sales and to pay film licensing
revenues at the beginning of the license period in order to minimize Showscan's
credit risk.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets include $600,000 at March 31, 1997 of
costs advanced for the joint defense of certain litigation against Showscan and
a supplier. Such litigation was settled subsequent to year end, and Showscan
realized the amounts capitalized.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Included in accrued expenses and other current liabilities are the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued participations and royalties $ 972,000 $ 988,000
Purchase of motion simulation films - 1,620,000
Accrued cost of film and equipment sales 679,000 175,000
Other items 657,000 568,000
---------- ----------
$2,308,000 $3,351,000
========== ==========
</TABLE>
F-37
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. Showscan has elected to account for its stock
compensation arrangements under the provisions of APB 25, "Accounting for Stock
Issued to Employees." Showscan adopted the provisions for pro forma disclosures
requirements of SFAS 123 in fiscal year 1997 (see Note 5).
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NET INCOME (LOSS) PER COMMON SHARE
Per share information has been determined on the basis of 5,594,245, 6,317,167,
and 5,788,230 weighted average shares outstanding for the years ended March 31,
1997, 1996 and 1995, respectively.
For the year ended March 31, 1997, the effect of common stock equivalents is not
included in the per share computation as such items are anti-dilutive. The
weighted average shares for the years ended March 31, 1996 and 1995 give effect
to the assumed conversion of Showscan's Convertible Preferred Stock (the effect
of all other common stock equivalents was anti-dilutive and thus not reflected
in the per share computation).
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) and supersedes APB Opinion No. 15, "Earnings Per Share" (APB No.
15). SFAS No. 128 replaces the presentation of primary EPS with a presentation
of basic EPS. Basic EPS excludes the dilutive effects, if any, of common stock
equivalents, and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period.
SFAS No. 128 also requires dual presentation of basic EPS and diluted EPS on the
face of the income statement for all periods presented. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB No. 15, with certain
modifications. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Early
adoption is not permitted and SFAS No. 128 requires restatement of all prior
period EPS data presented after SFAS No. 128's effective date.
Showscan will adopt SFAS No. 128 effective with its March 31, 1998 fiscal year
end. Pro forma earnings (loss) per share data calculated in accordance with SFAS
No. 128 for the year ended March 31, 1997 and 1996 has not been presented as it
would have been the same as the historical amounts reported.
F-38
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at March 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Showscan equipment $4,580,000 $4,559,000
Leasehold improvements 926,000 927,000
Office furniture and equipment 652,000 769,000
---------- ----------
6,158,000 6,255,000
Less accumulated depreciation and amortization 5,290,000 4,942,000
---------- ----------
$ 868,000 $1,313,000
========== ==========
</TABLE>
3. 8% CONVERTIBLE NOTES
In September 1995, Showscan completed a private placement of $7,000,000 in
Convertible Notes which mature on September 1, 1999 and bear interest at 8% per
annum payable semi-annually. The notes are secured by substantially all of the
assets of Showscan, although the security excludes Showscan's film library and
the capital stock of its subsidiaries, which includes its O&O Theatres. In
connection with the placement, $619,000 of debt issue costs were incurred and
are being amortized over the life of the notes. The notes are convertible into
common stock at the option of the holder at a conversion price (subject to
certain anti-dilution adjustments) of $5.75 per share (the closing price on The
Nasdaq National Market on the transaction closing date). Through March 31, 1997,
$1,310,000 of notes were converted into 227,819 shares of common stock, leaving
an outstanding balance of $5,690,000.
The fair value of convertible notes was determined using valuation techniques
that considered cash flows discounted at current market rates and management's
best estimate for instruments without quoted market prices. At March 31, 1997
and 1996, the carrying value of convertible notes exceeded the fair value by
approximately $1,300,000 and $0, respectively.
4. PREFERRED STOCK
Showscan is authorized to issue preferred stock in one or more series and to fix
the rights, preferences, privileges, qualifications, limitations, restrictions
and the number of shares constituting any such series.
Showscan is authorized to issue a total of 10,000,000 shares of preferred stock
of which 49,000 shares are issued as of March 31, 1997. Accordingly, 9,951,000
shares of preferred stock are available for issuance.
SERIES A CONVERTIBLE PREFERRED STOCK (SERIES A)
On September 30, 1995, Showscan converted all 150,000 previously outstanding
shares of its Series A into 165,380 shares of common stock.
SERIES C CONVERTIBLE PREFERRED STOCK (SERIES C)
Showscan has 49,000 shares of Series C outstanding. The Series C is convertible
into common stock at $5.04 per share (subject to certain anti-dilution
adjustments), has a liquidation preference of $100 per share, and provides
voting rights as if such shares had been fully converted into common stock. Each
share of Series C entitles the holder to receive dividends in an amount equal to
110% of the dividends per share declared on each share of common stock. Showscan
may elect to pay dividends on the Series C either in cash or in additional
shares of Series C based on its liquidation preference of $100 per share.
F-39
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
The Series C is senior to the common stock of Showscan; additionally, a majority
of the holders of Series C must consent to (a) the issuance of any equity
securities ranking senior to, or on parity with, the Series C, and (b) the
repurchase or retirement of any equity securities of Showscan other than the
Series C.
SERIES D PARTICIPATING PREFERRED STOCK (SERIES D)
The issuance of 10,000 shares of Series D was authorized in November 1994 in
connection with the adoption of Showscan's stockholder rights plan.
In connection therewith, Showscan issued a dividend of one preferred share
purchase right (a "Right") for each outstanding share of common stock and for
each share of common stock issuable upon conversion of outstanding Series C to
the stockholders of record on November 11, 1994. Each Right entitles the
registered holder to purchase from Showscan one one-thousandth of a share of
Series D at a purchase price of $40 per one one-thousandth of a share of Series
D, subject to adjustment (the "Purchase Price").
The Rights may be exercised (a) 20 days after a person or group of persons has
become the beneficial owner of 20% or more of the common stock then outstanding
(an "Acquiring Person"), or (b) 20 business days after the date of commencement
of a tender or exchange offer the consummation of which would result in a person
or group of persons becoming an Acquiring Person. The Rights, which do not have
any voting rights, expire on November 11, 2004 and may be redeemed by Showscan
at a price of $.01 per Right, subject to adjustment, at any time prior to their
expiration and prior to such time as any person or group of persons becomes an
Acquiring Person.
In the event that a person or group of persons becomes an Acquiring Person, each
Right will entitle its holder to purchase, at the Right's then Purchase Price, a
number of shares of common stock of Showscan having a market value of twice the
Purchase Price. If certain mergers or sales of assets by Showscan occur, each
Right shall entitle the holder to purchase, at the then Purchase Price, a number
of shares of common stock of the surviving corporation or purchaser having a
market value of twice the Purchase Price.
5. STOCK OPTIONS AND WARRANTS
OPTIONS
Showscan currently has two stock option plans in effect, the 1987 Option Plan
and the 1992 Option Plan (collectively, the "Plans"). The Plans provide for the
issuance of nonqualified and qualified stock options under the Internal Revenue
Code of 1986, as amended. An aggregate of 300,000 shares of common stock were
initially reserved for grant under the 1992 Option Plan to officers, directors
and employees as well as independent contractors and consultants who performed
services for Showscan. In 1995, the 1992 Option Plan was amended to permit the
grant of up to 800,000 shares of common stock and such number of shares have
been reserved for grant at March 31, 1997. All remaining shares reserved for
grant under the 1987 Option Plan were canceled upon adoption of the 1992 Option
Plan. Persons who are not employees of Showscan are eligible to receive only
nonqualified stock options. The options may be granted for a term of up to ten
years. If an incentive stock option is granted to an individual owning more than
10% of the total combined voting power of all classes of Showscan's stock, the
exercise price of the option may not be less than 110% of the fair market value
of the underlying shares on the date of the grant and the term of the option may
not exceed five years.
F-40
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
OPTIONS (CONTINUED)
The Plans provide that the aggregate fair market value (determined at the time
the option is granted) of the common stock with respect to which incentive stock
options are exercisable for the first time by an optionee during any calendar
year shall not exceed $100,000.
Showscan has elected to follow APB 25 (see Note 1) in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS 123 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 Showscan's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if Showscan had accounted for its employee
stock options under the fair value method of SFAS 123. 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 each of the years
ended March 31, 1997 and 1996: risk-free interest rates ranging from 5% to 6%,
volatility factors of the expected market price of Showscan's common stock of
.361, and a weighted average expected life of the options ranging from 7 to 10
years.
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
Showscan'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 SFAS 123 on pro forma net income
and pro forma earnings 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. Showscan's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Pro forma net loss $(4,475,000) $(402,000)
Pro forma loss per share $ (0.80) $ (0.08)
</TABLE>
F-41
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
The following is a summary of Showscan stock options granted, exercised and
terminated through March 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 605,750 $7.51 619,500 $7.58 333,000 $6.68
Granted 200,000 $4.75 32,250 $6.53 304,750 $8.47
Exercised - $ - (6,000) $5.00 (3,000) $4.00
Canceled (31,500) $8.81 (40,000) $6.06 (15,250) $4.44
------- ----- ------- ----- ------- -----
Outstanding at end of year 774,250 $6.75 605,750 $7.51 619,500 $7.58
======= ===== ======= ===== ======= =====
Exercisable at end of year 364,688 $7.30 235,625 $7.24 156,500 $6.70
======= ===== ======= ===== ======= =====
Weighted average fair value of
options granted during year $2.41 $3.32 $4.30
===== ===== =====
</TABLE>
Exercise prices for options outstanding at March 31, 1997 ranged from $3.625 to
$9.06. The weighted average remaining contractual life of those options is 8
years. Options vest over a period of 4 or 5 years from respective grant dates.
WARRANTS
During 1991, warrants to purchase an aggregate of 200,000 shares of common stock
were issued by Showscan. Warrants for 150,000 shares expired on July 11, 1996
and the remaining warrants for 50,000 shares are exercisable at a price of $6.50
and expire on March 9, 1999, subject to certain anti-dilution adjustments.
In October 1993, Showscan issued a warrant to purchase an aggregate of 50,000
shares of common stock at an exercise price of $4.47 per share to the Chairman
of its Board of Directors. The warrant was issued as compensation for services
the Chairman provided to Showscan. At March 31, 1997, the warrant has been
adjusted (due to anti-dilution adjustments) to permit the purchase of up to
55,127 shares of common stock at an exercise price of $4.05 per common share.
The warrant is exercisable at any time on or before October 26, 1998.
In September 1993, Showscan issued to certain of its directors (and their
affiliates) warrants which initially allowed the purchase of up to 850,000
shares of common stock at the then exercise price of $4.00 per share. The
warrants have been adjusted (due to anti-dilution adjustments) to permit the
purchase of up to 937,155 shares of common stock at an exercise price of $3.63
per share and are currently exercisable and expire on September 27, 1998.
In August 1994, Showscan issued to United Artists Theatre Circuit, Inc. ("UA")
warrants to purchase an aggregate of 552,000 shares of common stock, at exercise
prices ranging from $6.50 to $8.50, subject to certain anti-dilution
adjustments. The warrants become exercisable at dates from August 22, 1995
(300,000) and annually thereafter at 75,000 per year with the remaining 27,000
exercisable on August 22, 1999, and have expiration dates of either August 22,
1999 or August 22, 2000.
F-42
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
In September 1995, Showscan issued warrants to purchase an aggregate of 150,000
shares of common stock at an exercise price of $5.75 per share, subject to
certain anti-dilution adjustments, to financial advisors who assisted in the
private placement of the Convertible Notes. The warrants became exercisable on
September 1, 1996 and expire on September 1, 2000.
In October 1995, Showscan issued warrants to purchase an aggregate of 30,000
shares of common stock at an exercise price of $6.44, subject to certain anti-
dilution adjustments, to an outside marketing, film production and consulting
company. The warrants become exercisable on August 2, 1996 (15,000) and August
2, 1997 (15,000) and expire on August 1, 1998.
Shares of Showscan's common stock reserved for issuance upon exercise of stock
options, warrants, preferred stocks and convertible notes are as follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31
Range of
Exercise Prices 1997 1996
---------------- --------- ---------
<S> <C> <C> <C>
1987 and 1992 Option Plans $3.625 - $9.0625 837,500* 837,500*
Warrants $3.63 - $8.50 1,774,283 1,924,283
Series C $5.04** 972,222 972,222
Convertible Notes $5.75** 989,567 1,151,304
--------- ---------
4,573,572 4,885,309
========= =========
</TABLE>
* At March 31, 1997 and 1996, shares reserved for options which are still
available for grant are 66,250 and 231,750, respectively.
** Subject to certain anti-dilution provisions.
6. OWNED AND OPERATED THEATRES
Showscan has an ownership interest, ranging from 15% to 50%, in selected
Showscan motion simulation theatre attractions. Showscan operates and/or has an
ownership interest in theatre attractions at Universal CityWalk in Universal
City, California (November 1993), at the Trocadero Arcade/Piccadilly Circus in
London, England (September 1994), Framingham, Massachusetts (May 1995), Osaka,
Japan (August 1995), on the Riverwalk in San Antonio, Texas (March 1996), in
Austin, Texas (through the UA Venture in July 1997) and in Darling Harbour in
Sydney, Australia (July 1997). Generally, in each of these arrangements,
Showscan receives reimbursement for direct expenses (as defined), a percentage
of each theatre's cash flow (equal to its ownership percentage), and receives
separately annual film licensing revenues, and management fees (if applicable).
Affiliated Ventures
- -------------------
Showscan and affiliates of certain of its directors have entered into three
ventures through March 31, 1997 with respect to owned and operated theatres:
a) Universal CityWalk - The Universal CityWalk Venture ("CityWalk Venture") is
------------------
a joint venture which is 50% owned by a wholly-owned subsidiary of Showscan,
and 50% owned by affiliates of certain of the directors. The CityWalk Venture
also entered into a ten-year profit sharing lease with the owner of Universal
CityWalk pursuant to which the owner contributed one-half of the costs incurred
for the construction of the theatre. In general, the CityWalk Venture is
obligated to pay a base rent plus 50% of the cash flow, as defined, from the
operations of the theatre.
F-43
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
b) Trocadero Arcade/Piccadilly Circus - The Trocadero Arcade/Piccadilly Circus
----------------------------------
theatres are owned by Cinemania (UK) Limited, a British corporation, which is
50% owned by a wholly-owned subsidiary of Showscan, and 50% owned by affiliates
of certain of the directors (investors). In connection with the issuance of
preferred stock to the investors, Showscan was required to make an initial
contribution to this venture which exceeded its ownership interest. The
investment account for this venture and additional paid-in-capital for all
periods presented has been restated by $742,000 to properly reflect such costs
of the preferred stock issuance. The adjustment had no impact on the reported
results of operations for any period.
c) Riverwalk/San Antonio - The Riverwalk/San Antonio theatre is owned by a
---------------------
limited liability company which is 50% owned by an unaffiliated third party and
50% owned by Showscan Attractions Venture, which is a joint venture 50% owned
by a wholly-owned subsidiary of Showscan and 50% owned by affiliates of certain
of the directors. Thus, Showscan effectively has a 25% ownership interest in
this theatre. The parties to this venture have agreed to close the theater and
liquidate its assets. The parties have further agreed to sell the theater
equipment to Showscan, which has negotiated to sell the equipment to a non-
affiliated third party. Showscan expects to fully realize the carrying value of
its investment in this venture at March 31, 1997 upon the completion of the
liquidation and subsequent sale.
The accompanying statement of operations for the year ended March 31, 1997
includes a non-cash charge of $1,771,000 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" by certain of the joint ventures. Under the
equity method of accounting, Showscan has recognized its share of joint venture
charges; accordingly, the carrying value of investments in and advances to O&O
theatres in the accompanying consolidated balance sheets was reduced by this
charge.
Showscan has through other financing and/or joint venture arrangements entered
into the following additional theatre ventures:
UA Venture
- ----------
In August 1994, Showscan and UA agreed to be partners in a venture called
Showscan/United Artists Theatres Joint Venture ("UA Venture").
Pursuant to a Theatre Rights Agreement, as amended ("TRA"), UA has agreed to
offer to the UA Venture for ownership and operation by the UA Venture, up to 24
theatre sites prior to August 19, 1999 for the installation of motion simulation
attraction theatres in or adjacent to existing or to-be-built UA theatre
multiplexes. If the UA Venture declines to acquire a particular site, then UA
must install a motion simulation attraction theatre at such site. As of March
31, 1997, UA has offered eight sites of which the UA Venture declined seven of
these sites as these sites did not meet the criteria of the UA Venture and on
July 1, 1997, the UA Venture exercised its rights under the TRA and accepted the
offer by UA for the theatre site in Austin, Texas. The TRA contains certain
provisions that require UA to make payments to Showscan if UA is unable to meet
its obligations under that agreement. The TRA provided that two motion
simulation attraction theatres be installed and in operation in Malaysia no
later than December 31, 1995. UA was unable to meet this commitment (see Note
7).
The TRA has been amended by Showscan and UA to eliminate certain installation
requirements in Malaysia and to add those requirements to the overall UA
obligations. In connection with the amendment, UA relinquished its exclusivity
rights to Malaysia and eliminated its rights of first refusal in the Asia
Territory (as defined).
Other O&O Theatres
- ------------------
The Framingham theatre is 50% owned by a wholly-owned subsidiary of Showscan and
50% owned by a subsidiary of General Cinema Corporation. The parties to this
venture have agreed to liquidate the assets of the venture. The parties have
further agreed to sell certain equipment back to Showscan, which has contracted
to sell the equipment to a non-affiliated third party. An additional capital
contribution may be necessary by one of the parties upon the ultimate settlement
and liquidation of the venture; however, the partners believe the contribution
to be under $100,000.
F-44
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
The Osaka theatre is 50% owned by a wholly-owned subsidiary of Showscan and 50%
by Imagine Japan, Inc. Sega Enterprises, Ltd. operates the Osaka theatre in
exchange for a certain percentage of the gross receipts.
Showscan has acquired (effective July 1997) a 15% investment interest in a
theatre located in Darling Harbour which is owned by Reality Cinema Pty. Ltd.,
an Australian corporation, by acquiring a 15% ownership in Reality Cinema Pty.
Ltd.
During 1997, 1996 and 1995, Showscan sold equipment to several of these ventures
and eliminated the gross profit on such sales to the extent of its ownership
percentage ($38,705 in 1997, $382,000 in 1996, and $194,000 in 1995). The amount
of profit eliminated is being recognized into income over the depreciation
period of the related equipment.
7. RECEIVABLES FROM AFFILIATED ENTITIES
At March 31, 1997, Showscan is due $722,000 from UA in connection with the TRA
as discussed in Note 6. The payment terms provide for (a) interest on the unpaid
principal balance to be charged at 7.5% and (b) principal and interest to be
paid in full on or before December 31, 1996 ("Maturity Date"); provided,
however, that if the UA Venture has not accepted one of the theatre sites it has
been offered by UA prior to the Maturity Date, the Maturity Date will be
extended 30 days after the date that the UA Venture does accept, but in no event
shall the Maturity Date be extended later than August 19, 1999. Effective July
1, 1997, the UA Venture accepted an offered theatre site at Austin, Texas (see
Note 6), which will reduce the amount owed by UA by $390,000 (Showscan's
investment in this theatre). At March 31, 1997, the $390,000 is included in
other assets in the accompanying consolidated balance sheet and will be
reclassified to Investment in Owned and Operated Theatres effective July 1,
1997.
During the fiscal years ended 1997, 1996 and 1995, Showscan charged
approximately $909,000, $897,000 and $789,000, respectively, to the O&O Theatre
joint ventures. Such amounts have either been recognized as film rentals and
royalties ($666,000 in 1997, $565,000 in 1996 and $314,000 in 1995), or offset
against general and administrative expenses ($243,000 in 1997, $332,000 in 1996
and $475,000 in 1995) in the accompanying consolidated statements of operations.
Such amounts represent film rentals and royalties, management and administrative
services provided by Showscan to the theatre joint ventures. The joint ventures
owed Showscan approximately $238,000 and $318,000 at March 31, 1997 and 1996,
respectively, (included in due from affiliated entities) for such charges and
for costs paid on behalf of the ventures.
8. INCOME TAXES
At March 31, 1997, Showscan has net operating loss carryforwards for federal and
state income tax purposes of approximately $25,794,000 and $7,927,000,
respectively. The federal loss carryforwards expire through the year ending
2012. The state loss carryforwards expire through the year ending 2002. These
loss carryforwards can be used to offset future taxable income, if any. The
provision for income taxes for all years presented represents minimum state tax
liabilities.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts utilized for income tax purposes. Significant
components of Showscan's deferred tax liabilities and assets as of March 31,
1997 and 1996 are as follows (in thousands):
F-45
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Unbilled receivables on uncompleted equipment
contracts $ - $ 1,770
-------- --------
Total deferred tax liabilities - 1,770
Deferred tax assets:
Customer advances on uncompleted equipment
contracts - 1,505
Excess of book over tax depreciation 402 395
Patent amortization 251 339
Amortization of film library 236 127
Other 486 300
Net operating loss carryforward 9,765 10,181
-------- --------
Total deferred tax assets 11,140 12,847
Valuation allowance for deferred tax asset (11,140) (11,077)
-------- --------
Total deferred taxes $ - $ -
======== ========
</TABLE>
9. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Export revenues by geographic area for each of the three years ended March 31
consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Africa $ 215,000 $ 281,000 $ 851,000
Australia 1,976,000 2,574,000 1,031,000
Europe 1,206,000 1,992,000 3,531,000
Far East 6,048,000 5,628,000 4,982,000
Middle East 1,340,000 48,000 41,000
Other 159,000 125,000 184,000
----------- ----------- -----------
Total export revenues $10,944,000 $10,648,000 $10,620,000
=========== =========== ===========
</TABLE>
During the fiscal years ended 1997, 1996 and 1995, Showscan earned export
revenues from an unaffiliated customer of $3,117,000, $3,407,000 and $3,080,000,
respectively. During the fiscal years ended 1997, 1996 and 1995, Showscan
recognized domestic revenues from UA of approximately $5,405,000, $3,126,000 and
$109,000, respectively.
F-46
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES
Showscan is obligated under various operating leases for its corporate office,
storage premises and equipment. Future net minimum rental payments under these
leases at March 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 426,000
1999 426,000
2000 421,000
2001 421,000
2002 416,000
Thereafter 504,000
----------
$2,614,000
==========
</TABLE>
The corporate office lease provides for rent adjustments based on increases in
the Consumer Price Index. Showscan has provided a letter of credit to its
landlord in the amount of $295,000 which permits the landlord to draw against
the letter of credit upon default by Showscan (as defined) under the terms of
the lease. The letter of credit is secured by a cash deposit in the amount of
$295,000; such amount is included in other assets in the accompanying
consolidated balance sheet.
Total rental expense charged to operations for the years ended March 31, 1997,
1996 and 1995 was $400,000, $389,000 and $456,000, respectively.
Under the terms of a film production agreement, Showscan has guaranteed, for
four years beginning in 1996, a minimum amount per year ($287,500) of proceeds
to the outside investors in the film project. If revenues, as defined, from the
distribution of the film are less than the required minimum amount, Showscan
will contribute the difference to the outside investors. Based upon management's
estimate of future revenues to be derived from the film, Showscan does not
expect to pay any amounts under this guarantee.
Showscan is obligated under various royalty agreements to pay royalties (ranging
from 1% to 3%) to various parties, generally based on the gross receipts (as
defined) from either the exploitation of the Showscan process (in excess of
certain amounts), the exploitation of Showscan feature-length motion pictures,
or other receipts.
F-47
<PAGE>
Showscan Entertainment Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Share Information)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------- ---------
(unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,741 $ 2,562
Accounts receivable (net of allowances) 3,586 3,600
Unbilled receivables on uncompleted
film and equipment contracts 978 -
Equipment sales inventory 1,094 1,289
Prepaid expenses and other current assets 367 1,072
------- -------
Total current assets 8,766 8,523
Film library (net of amortization) 5,860 5,520
Equipment and leasehold improvements, less
accumulated depreciation and amortization 713 868
Investment in and advances to O&O theatres (Note 2) 1,872 2,123
Patents and other intellectual properties (net of
amortization) 1,118 1,336
Other assets 607 1,558
------- -------
Total assets $18,936 $19,928
======= =======
</TABLE>
Note: The balance sheet at March 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
F-48
<PAGE>
Showscan Entertainment Inc.
Condensed Consolidated Balance Sheets (continued)
(Dollars in Thousands Except Share Information)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ --------
(unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities: $ 335 $ 654
Accounts payable
Customer advances on uncompleted film and 2,239 1,033
equipment contracts 2,406 2,308
Accrued expenses and other current liabilities 1,000 -
11% note payable (Note 4) -------- --------
Total current liabilities 5,980 3,995
8% convertible notes (Note 5) 5,690 5,690
Stockholders' equity:
Series C Convertible Preferred Stock, $.001 par value;
100,000 shares authorized; 49,000 shares issued and
outstanding
Common stock, $.001 par value; 20,000,000 shares - -
authorized; 5,642,058 shares issued and
outstanding
Additional paid-in capital 6 6
Accumulated deficit 42,567 42,567
Total stockholders' equity (38,205) (32,330)
Total liabilities and stockholders' equity -------- --------
4,368 10,243
-------- --------
$ 16,038 $ 19,928
======== ========
</TABLE>
Note: The balance sheet at March 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
F-49
<PAGE>
Showscan Entertainment Inc.
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31,
1997 1996 1997 1996
-------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Film licensing and production services $ 791 $ 678 $ 2,922 $ 2,750
Equipment sales and related services 2,634 3,542 4,214 10,189
------- ------- ------- ----------
3,425 4,220 7,136 12,939
Costs of revenues 3,889 3,205 6,006 9,038
------- ------- ------- ----------
Gross profit/(loss) (464) 1,015 1,130 3,901
Costs and expenses:
General and administrative expenses 2,339 1,555 5,505 5,050
Depreciation and amortization 190 210 579 716
------- ------- ------- ----------
2,529 1,765 6,084 5,766
------- ------- ------- ----------
Operating loss (2,993) (750) (4,954) (1,865)
Other income (expense):
Equity in net operations of O&O Theatres (104) (281) (468) (445)
Other income, including interest of
$21, $24, $61 and $198, respectively 23 24 64 206
Interest and other expense (190) (175) (517) (492)
------- ------- ------- ----------
(271) (432) (921) (731)
------- ------- ------- ----------
Net loss
$(3,264) $(1,182) $(5,875) $ (2,596)
======= ======= ======= ==========
Basic and diluted net loss per common share $ (.58) $ (.21) $ (1.04) $ (.47)
(Note 6) ======= ======= ======= ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-50
<PAGE>
<TABLE>
<CAPTION>
Showscan Entertainment Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
NINE MONTHS ENDED
DECEMBER 31,
1997 1996
-------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,875) $(2,596)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 579 716
Amortization of film library 683 458
Write Down/Provision For Film Library 1,150 -
Equity in operations of owned and operated
theatres 468 445
Accrued interest on debt 358 358
Provision for doubtful accounts 590 140
Changes in operating assets and liabilities:
Accounts receivable (779) (141)
Equipment sales inventory (566) 484
Unbilled receivables on uncompleted film and
equipment contracts (695) 31
Prepaid expenses and other assets 778 (88)
Investment in and advances to O&O Theatres 1,476 (145)
Accounts payable, accrued expenses and other
current liabilities (581) (1,913)
Customer advances on uncompleted equipment
contracts 1,206 (429)
------- -------
Net cash used in operating activities $(1,208) $(2,680)
------- -------
Cash flows from investing activities:
Redemptions of short term investments - 3,086
Purchases of equipment and leasehold
improvements (16) (62)
Additions to film library (1,022) (2,390)
Other assets 872 (235)
------- -------
Net cash provided by (used in)
investing activities $ (166) $ 399
------- -------
</TABLE>
F-51
<PAGE>
Showscan Entertainment Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1997 1996
------------------------------
(Unaudited)
<S> <C> <C>
Balance forwarded $(1,374) $(2,281)
------- -------
Cash flows from financing activities:
11% Short-term note payable 1,000
Other - (77)
------- -------
Net cash provided by (used in) financing activities 1,000 (77)
------- -------
Net decrease in cash and cash equivalents (374) (2,358)
Cash and cash equivalents, beginning of period 2,562 5,055
------- -------
Cash and cash equivalents, end of period $ 2,188 $ 2,697
======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 234 $ 251
======= =======
Income taxes paid $ - $ -
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-52
<PAGE>
Showscan Entertainment Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1--Introduction:
- --------------------
The accompanying unaudited condensed consolidated financial statements of
Showscan Entertainment Inc. have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period and the nine-month period ended December 31,
1997 are not necessarily indicative of the results that may be expected either
for any other quarter in the fiscal year ending March 31, 1998 or for the entire
fiscal year ended March 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in Showscan's
annual report on Form 10-K for the year ended March 31, 1997.
Note 2--Merger:
- --------------
On August 4, 1997, Showscan entered into an Agreement and Plan of
Reorganization by and among Showscan, Iwerks Entertainment, Inc. ("Iwerks") and
IWK-1 Merger Corporation ("Merger Sub"), as amended by that certain Amendment
No. 1 to Agreement and Plan of Reorganization dated December 29, 1997 (the
"Merger Agreement"), pursuant to which Merger Sub will be merged (the "Merger")
with and into Showscan. As a result of the Merger, (a) each share of Showscan's
common stock, $.001 par value ("Showscan Common Stock") which is outstanding
immediately prior to the Merger shall be converted into .62 shares of Iwerks'
common stock, $.001 par value ("Iwerks Common Stock"), and (b) each share of
Series C Convertible Preferred Stock will be converted into the right to receive
shares of Iwerks Common Stock in an amount equal to the number of shares of
Showscan Common Stock into which such share of Series C Convertible Preferred
Stock is convertible immediately prior to the Merger multiplied by .62. The
December, 1997 amendment of the Merger Agreement, among other things, reduced
the exchange ratio from .85 to .62. As a result of the Merger, Showscan will
become a wholly-owned subsidiary of Iwerks and the shares of Showscan Common
Stock will cease to be publicly traded. Consummation of the Merger is subject
to certain conditions, including certain approvals by the stockholders of both
Showscan and Iwerks. The Merger and other conditions to the effectiveness
thereof are more fully described in Showscan's Current Reports on Form 8-K dated
August 4, 1997 and December 29, 1997 on file with the Securities and Exchange
Commission. The Company currently anticipates holding a stockholder meeting
(and that the Merger will close) in March, 1998. On February 3, 1998, Ridefilm
Corporation, a wholly-owned subsidiary of Imax Corporation, filed suit against
Iwerks in the United States District Court for the Southern District of New
York. This lawsuit, among other things, seeks to enjoin the Merger under
various antitrust claims. Ridefilm is seeking a preliminary injunction of the
Merger as well. Showscan and Iwerks believe that the suit is without merit and
are vigorously defending these claims and are opposing the request for
preliminary injunction.
Note 3--Owned and Operated theatres:
- ------------------------------------
The Company retains an ownership interest in selected Showscan motion
simulation theatre attractions ("Showscan Attractions") through various joint
venture arrangements. The Company currently operates and/or has an ownership
interest in Showscan Attractions at Universal CityWalk in Universal City,
California (opened in November 1993), the Trocadero Arcade in London (opened in
September 1994), and Osaka, Japan (opened in August 1995) (collectively, the
"O&O Theatres"). Generally, in each of these arrangements, Showscan receives
reimbursement for direct expenses, a percentage of each theatre's cash flow
(equal to its ownership percentage), and receives separately annual film
licensing revenues and management fees (if applicable). The Company accounts
for its investment in the O&O Theatres under the equity method of accounting.
The Company has ceased operation of the theatres in Framingham, Massachusetts
(closed in October 1997) and in San Antonio, Texas (closed in September 1997)
and has either sold or is negotiating to sell to non-affiliated third parties
the equipment from each such theatre. The investment in each such closed
theatre is now reflected in equipment sales inventory. The Company expects to
fully realize the aggregate carrying value of the equipment retained by Showscan
upon completion of such sales.
The Company had accepted on behalf of its joint venture (the "UA Venture")
with United Artists Theatre Circuit, Inc. ("UA") the offer of the Showscan
Attraction site in Austin, Texas, which acceptance was to be effective July 1,
1997. During the process of finalizing documentation relating to the
acquisition of the Austin site, however, UA entered into a merger agreement with
two other
F-53
<PAGE>
large theatre chains, and the circumstances surrounding the merger transaction
created uncertainty with respect to the Austin site. Accordingly, the UA Venture
has terminated its plans to acquire ownership of the Showscan Attraction at the
Austin site. In addition, Showscan was to acquire a 15% investment in a Showscan
Attraction in Darling Harbour, Sydney, Australia. During the process of
finalizing documentation relating to such investment, however, disputes arose
regarding (i) the valuation of costs associated with the Showscan Attraction,
which costs were used to calculate the price of the 15% investment and (ii) the
remaining payment obligations owed to Showscan by Reality Cinema Pty. Ltd., the
co-investor which was to own an 85% interest in the Showscan Attraction.
Accordingly, Showscan has advised Reality Cinema Pty. Ltd. that Showscan will
not proceed with its plans to acquire any ownership of a Showscan Attraction at
the Sydney site until such disputes are satisfactorily resolved.
Note 4--11% Promissory Note
- ---------------------------
On November 1, 1997, Showscan completed a placement of a $1,000,000
promissory note through an unaffiliated third party. The note bears interest at
a rate of 11 percent per annum. The principal and interest amounts are due and
payable in full on November 15, 1998 or, if earlier, the date which is six
months after the close of a merger involving Showscan. The note is secured by
accounts receivable from the distribution of Showscan's film library and the
proceeds thereof.
Note 5--8% Convertible Notes:
- -----------------------------
On September 1, 1995, Showscan completed a private placement of $7,000,000
in secured convertible notes ("8% Convertible Notes") through a European
financial institution, Banca del Gottardo. The notes have a four-year maturity
and an 8% interest rate payable semi-annually and are convertible at the option
of the holder into 1,217,391 shares of Showscan Common Stock at a conversion
price of $5.75 per share. Through December 31, 1997, $1,310,000 of such notes
had been converted into 227,819 shares of Common Stock leaving an outstanding
balance of $5,690,000. The notes are secured by substantially all of the assets
of Showscan, although the security excludes Showscan's film library and the
capital stock of its subsidiaries (which thereby excludes its O&O Theatres). In
connection with the placement, $619,000 of debt issue costs were incurred and
are being amortized over the life of the notes.
Note 6--Loss per common share:
- ------------------------------
Loss per common share for the three months ended December 31, 1997 and
December 31, 1996 has been determined by using 5,642,058 and 5,631,605 weighted
average shares of Common Stock, respectively. For the nine months ended
December 31, 1997 and December 31, 1996, the weighted average shares of Common
Stock used to determine loss per common share were 5,642,058 and 5,578,597,
respectively. The impact of common stock equivalents and potentially dilutive
securities, such as the assumed conversion of Series C Convertible Preferred
Stock and the assumed conversion of the 8% Convertible Notes due September 1,
1999 has not been included, as such items are anti-dilutive for all periods
presented.
Showscan has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and supersedes APB Opinion No. 15, "Earnings Per Share" ("APB No.
15"). SFAS No. 128 replaces the presentation of primary EPS with a presentation
of basic EPS. Basic EPS excludes the dilutive effects, if any, of common stock
equivalents, and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period.
SFAS No. 128 also requires dual presentation of basic EPS and diluted EPS on the
face of the income statement for all periods presented. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB No. 15, with certain
modifications.
F-54
<PAGE>
Showscan Entertainment Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Description Balance CHARGED
at Charged to TO OTHER Balance
Beginning Costs and ACCOUNTS Deductions - at End of
of Year Expenses - DESCRIBE Describe Year
------------- ------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended 1997:
Allowance for doubtful accounts $ 215,000 $ 270,000 $ - $ 60,000(a) $ 425,000
------------- ------------- ----------- -------------- --------------
Product warrant liability $ 182,000 $ 67,000 $ - $ 69,000(b) $ 180,000
------------- ------------- ----------- -------------- --------------
Year ended 1996:
Allowance for doubtful accounts $ 254,000 $ 440,000 $ - $ 479,000(a) $ 215,000
------------- ------------- ----------- -------------- --------------
Product warrant liability $ 187,000 $ 77,000 $ - $ 82,000(b) $ 182,000
------------- ------------- ----------- -------------- --------------
Year ended 1995:
Allowance for doubtful accounts $ 283,000 $ (30,000) $ - $ (1,000)(a) $ 254,000
------------- ------------- ----------- -------------- --------------
Product warrant liability $ 213,000 $ 124,000 $ - $ 150,000(b) $ 187,000
------------- ------------- ----------- -------------- --------------
</TABLE>
(a) Represents write-off of uncollectible accounts receivable.
(b) Represents actual warranty expenditures.
F-55
<PAGE>
Report of Independent Auditors
The Partners
Showscan CityWalk Venture
We have audited the accompanying balance sheets of Showscan CityWalk Venture as
of December 31, 1996 and 1995, and the related statements of operations,
partners' capital, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Venture'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 financial statements referred to above present fairly, in
all material respects, the financial position of Showscan CityWalk Venture at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 4 to the financial statements, the Venture adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," in 1996.
Ernst & Young LLP
Los Angeles, California
June 27, 1997
F-56
<PAGE>
Showscan CityWalk Venture
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Revenues $ 996,380 $1,000,198 $1,206,961
Cost of revenues, primarily film
rental, royalty and management fees
(Note 3) 264,749 293,708 250,383
----------------------------------------
Gross profit 731,631 706,490 956,578
Other costs and expenses:
Rent 183,182 197,923 180,000
Payroll and related items 216,178 180,402 191,151
Marketing and advertising 13,494 27,235 294,065
Other general and administrative 273,693 238,139 263,496
Impairment loss on long-lived assets
(Note 4) 770,000 - -
Depreciation and amortization 157,150 151,014 148,939
----------------------------------------
1,613,697 794,713 1,077,651
----------------------------------------
Net loss $ (882,066) $ (88,223) $ (121,073)
========================================
</TABLE>
See accompanying notes.
F-58
<PAGE>
Showscan CityWalk Venture
Statements of Partners' Capital
<TABLE>
<S> <C>
Partners' capital at December 31, 1993 $1,325,460
Capital contributions 20,000
Net loss (121,073)
----------
Partners' capital at December 31, 1994 1,224,387
Capital contributions 26,424
Net loss (88,223)
----------
Partners' capital at December 31, 1995 1,162,588
Net loss (882,066)
----------
Partners' capital at December 31, 1996 $ 280,522
==========
</TABLE>
See accompanying notes.
F-59
<PAGE>
Showscan CityWalk Venture
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(882,066) $(88,223) $(121,073)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Impairment loss on long-lived assets 770,000 - -
Loss on disposal of assets 3,102 - -
Depreciation and amortization 157,150 151,014 148,939
Changes in operating assets and
liabilities:
Prepaid expenses and other assets (44,994) 52,580 12,387
Accounts payable and accrued expenses (4,782) (57,618) 95,287
Due to Showscan Entertainment Inc. 2,310 2,223 (171,368)
------------------------------------
Net cash provided by operating
activities 720 33,552 55,828
INVESTING ACTIVITIES
Purchases of property and equipment (16,384) (63,169) (2,664)
------------------------------------
Net cash used in investing activities (16,384) (63,169) (2,664)
FINANCING ACTIVITIES
Capital contributions by partners - 26,424 20,000
Due from Showscan Entertainment Inc. 26,424 (26,424) -
Due from Showscan CityWalk, Inc. 20,000 - (20,000)
------------------------------------
Net cash provided by financing
activities 46,424 26,424 20,000
------------------------------------
Increase (decrease) in cash 30,760 (3,193) (38,492)
Cash at beginning of year 74,163 77,356 115,848
------------------------------------
Cash at end of year $ 104,923 $ 74,163 $ 77,356
====================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest $ 1,441 $ 1,790 $ 6,849
Income taxes $ - $ - $ -
</TABLE>
See accompanying notes.
F-60
<PAGE>
Showscan CityWalk Venture
Notes to Financial Statements
December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Showscan CityWalk Venture (the Venture) is a venture engaged in the business of
operating a Showscan motion simulation attraction theatre. The theatre opened in
late November 1993 at Universal CityWalk adjacent to Universal Studios,
Universal City, California. The Venture is 50% owned by Showscan CityWalk, Inc.,
a wholly-owned subsidiary of Showscan Entertainment Inc. (Showscan). Moss Family
LA Corp. and DiBenedetto CityWalk Limited Partnership (collectively the
Investors) each own 25% of the Venture. The principals of the Investors are
greater than 10% stockholders and members of the Board of Directors of Showscan.
Cumulative net income or loss of the Venture is allocated to the partners in
accordance with their respective ownership percentage interests.
REVENUE RECOGNITION
The Venture recognizes revenue from ticket sales at the time the tickets are
purchased.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost.
Depreciation on operating equipment is recorded on a straight-line basis over
the esti mated useful lives of the assets, generally 3 to 10 years. Operating
equipment consists of projection and motion-based equipment used in the
operation of the theatre. Leasehold improvements are amortized on a straight-
line basis over their estimated useful lives or the term of the lease, whichever
is shorter.
INCOME TAXES
No provision has been made for income taxes in the accompanying financial
statements; such taxes, if any, are the responsibility of the individual
partners.
F-61
<PAGE>
Showscan CityWalk Venture
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. COMMITMENTS AND CONTINGENCIES
In connection with the establishment of the Universal CityWalk theatre, the
Venture entered into a ten-year profit sharing lease pursuant to which MCA
Development Company, a division of MCA, Inc. (now known as Universal Studios
Recreation, a division of Universal Studios), contributed one-half of the costs
incurred for the construction of the theatre. The lease expires in November
2002, subject to options to extend it for three five-year periods. The Venture
is obligated to pay base rent equal to $180,000 (subject to annual Consumer
Price Index increases) per year plus 50% of the cash flow, as defined
(Percentage Rent), from the operations of the theatre. Percentage rent paid was
$13,358 in 1995 and none in 1996 and 1994.
Future minimum payments, by year and in the aggregate, under the lease at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 185,274
1998 185,274
1999 185,274
2000 185,274
2001 185,274
Thereafter 370,548
----------
Total minimum lease payments $1,296,918
==========
</TABLE>
3. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1996, 1995 and 1994, cost of revenues shown in
the accompanying statements of operations include $185,700, $184,500 and
$180,250, respectively, of amounts paid or owed to Showscan for film rental,
royalty and management fees. At December 31, 1996 and 1995, the Venture owed
Showscan $23,558 and $21,248, respectively, related to such fees.
F-62
<PAGE>
Showscan CityWalk Venture
Notes to Financial Statements (continued)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Amounts due from Showscan CityWalk, Inc. and Showscan related to capital
contributions due the Venture. Such contributions were made subsequent to
December 31, 1995.
4. IMPAIRMENT OF LONG-TERM ASSETS
During 1996, the Venture adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS No. 121). The continued operating losses were
indicators of potential impairment. The estimated undiscounted cash flows
anticipated from operating the Venture indicated that a write-down to fair
market value was required under SFAS No. 121. Accordingly, the Venture recorded
a non-cash charge of $770,000 for the impairment of its long-lived assets. The
impairment loss was calculated based on the excess of the carrying amount of the
assets over the discounted cash flow expected to be received from the operation
of the Venture.
F-63
<PAGE>
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
CINEMANIA (UK) LIMITED
We have audited the accompanying balance sheets of Cinemania (UK) Limited as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 United States 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 financial statements referred to above present fairly, in
all material respects, the financial position of cinemania (UK) Limited at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with United States generally accepted accounting principles.
As discussed in Note 6 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," in 1996.
Ernst & Young
London
England
F-64
<PAGE>
Cinemania (UK) Limited
- -------------------------------------------------------------------------------
Balance sheet
<TABLE>
<CAPTION>
December 31 December 31
Notes 1996 1995
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 280,785 $ 821,401
Prepaid expenses and other current assets 238,341 187,315
----------- ----------
Total current assets 519,126 1,008,716
Property and equipment, net 2 and 6 282,340 2,925,474
----------- ----------
Total assets $ 801,466 $3,934,190
=========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 92,932 $ 58,431
Accrued expenses and other current liabilities 102,635 202,048
Amounts payable to related party 5 47,761 22,483
Current maturities of notes payable to
stockholders 3 712,048 633,695
----------- ----------
Total current liabilities 955,376 916,657
Notes payable to stockholders 3 1,155,201 1,478,619
----------- ----------
Total liabilities 2,110,577 2,395,276
----------- ----------
Stockholders' equity:
Common stock , (Pounds)1 ($1.48) par value;
1,000 shares authorised; 100 shares
issued and outstanding 148 148
Additional paid-in capital 1,891,000 1,891,000
Accumulated deficit (3,428,366) (423,040)
Currency translation adjustments 228,107 70,806
----------- ----------
Total stockholders' equity (1,309,111) 1,538,914
----------- ----------
Total liabilities and stockholders' equity $ 801,466 $3,934,190
=========== ==========
</TABLE>
See accompanying notes
F-65
<PAGE>
Cinemania (UK) Limited
- --------------------------------------------------------------------------------
Statement of operations
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31 December 31 December 31
Note 1996 1995 1994
<S> <C> <C> <C> <C>
Revenues $ 1,728,567 $2,140,118 $ 507,242
Cost of revenues, primarily film rental,
royalty and management fees 5 306,294 415,035 157,544
----------- ---------- ---------
Gross profit 1,422,273 1,725,083 349,698
Costs and expenses:
Rent 568,388 344,551 78,348
Payroll and related items 418,326 402,359 63,652
Marketing and advertising 30,915 87,188 54,044
Pre-opening - - 397,151
Other general and administrative 234,777 310,338 205,801
Depreciation 304,611 265,959 69,528
Impairment loss on long-lived assets 6 2,750,000 - -
----------- ---------- ---------
Gross profit 4,307,017 1,410,395 868,524
----------- ---------- ---------
Operating (loss)/profit (2,884,744) 314,688 (518,826)
Other income(expense):
Interest income 21,973 24,193 3,199
Interest expense (142,555) (171,818) (74,476)
----------- ---------- ---------
(120,582) (147,625) (71,277)
----------- ---------- ---------
Net (loss)/profit $(3,005,326) $ 167,063 $(590,103)
=========== ========== =========
Net (loss)/profit per common share $ (30,053) $ 1,671 $ (5,901)
=========== ========== =========
</TABLE>
See accompanying notes
F-66
<PAGE>
Cinemania (UK) Limited
- --------------------------------------------------------------------------------
Statement of stockholders' equity
<TABLE>
<CAPTION>
Common stock Additional Currency
Number of paid in Accumulated translation
shares Amount capital deficit adjustments Total
$ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 - - - - - -
Proceeds from issuance
of common stock 100 148 - - - 148
Capital contributions - - 1,891,000 - 1,891,000
Net loss (590,103) (590,103)
Foreign exchange gain
on translation - - - - 81,321 81,321
--------- ------ --------- ----------- ----------- -----------
Balance at
December 31, 1994 100 148 1,891,000 (590,103) 81,321 1,382,366
Net profit - - - 167,063 - 167,063
Foreign exchange loss on
translation - - - - (10,515) (10,515)
--------- ------ --------- ----------- ----------- -----------
Balance at
December 31, 1995 100 148 1,891,000 (423,040) 70,806 1,538,914
Net loss - - - (3,005,326) - (3,005,326)
Foreign exchange gain
on translation - - - - 157,301 157,301
--------- ------ --------- ----------- ----------- -----------
Balance at
December 31, 1996 100 148 1,891,000 (3,428,366) 228,107 (1,309,111)
========= ====== ========= =========== =========== ===========
</TABLE>
See accompanying notes
F-67
<PAGE>
Cinemania (UK) Limited
- --------------------------------------------------------------------------------
Statement of cash flows
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31 December 31 December 31
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss)/profit $(3,005,326) $ 167,063 $ (590,103)
Adjustments to reconcile net (loss)/profit
to net cash provided by/used in)
operating activities:
Depreciation 304,611 265,959 69,528
Impairment loss 2,750,000 - -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (31,878) (50,056) (138,311)
Accounts payable 28,529 (121,319) 179,750
Accrued expenses and other liabilities (120,067) (62,596) 202,116
Amounts payable to related party 22,979 22,483 -
Interest payable to stockholders 116,589 82,597 47,435
----------- ---------- -----------
Net cash provided by operating activities 65,437 304,131 (229,585)
INVESTING ACTIVITY
Purchases of property and equipment (112,448) (55,051) (3,211,450)
----------- ---------- -----------
Net cash used in investing activity (112,448) (55,051) (3,211,450)
FINANCING ACTIVITIES
Proceeds from issuance of common stock - - 148
Capital contributions - - 1,891,000
Repayments to stockholders (443,146) - -
Borrowings from stockholders - 96,946 1,947,558
----------- ---------- -----------
Net cash (used in) provided by financing activities (443,146) 96,946 3,838,733
Effect of exchange rate changes on cash (50,459) (3,644) 81,321
----------- ---------- -----------
Net (decrease)/increase in cash (540,616) 342,382 479,019
Cash at beginning of year 821,401 479,019 -
----------- ---------- -----------
Cash at end of year $ 280,785 $ 821,401 $ 479,019
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 283,575 $ 730 $ 254
Taxes paid $ - $ - $ -
</TABLE>
See accompanying notes
F-68
<PAGE>
Cinemania (UK) Limited
----------------------------------------------------------------------------
Notes to financial statements
1. ORGANISATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANISATION AND BUSINESS
Cinemania (UK) Limited (the Company), owns a Showscan motion simulation twin
theatre attraction based at Piccadilly Circus, London, England. The Company
was incorporated in December 1993. The Showscan attraction opened on
September 26 1994.
REVENUE RECOGNITION
The company recognises revenues from ticket sales at the time the tickets
are purchased.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of equipment is
computed using the straight line method over the estimated useful lives of
the assets, ranging from 3 to 10 years. Leasehold property is depreciated on
a straight line basis over the initial term of the lease.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company are measured
using local currency as the functional currency. Assets and liabilities of
the Company are translated into US dollars at the exchange rate in effect at
the year end (1996 -$1.7113: (Pounds)1, 1995-$1.5526: (Pounds)1). Income
statement accounts are translated at the average rate of exchange prevailing
during the year. Translation adjustments arising from differences in
exchange rates from period to period are included in stockholders' equity.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
These costs relate mainly to the prepaid running costs of the Company such
as rent, rates, service charges and insurance.
INCOME TAXES
The company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
Under SFAS No. 109, the liability method is used. Under this method,
deferred tax assets and liabilities are measured using the enacted tax rates
and laws for the year in which the taxes are expected to be paid.
NET PROFIT (LOSS) PER COMMON SHARE
The net profit (loss) per common share has been determined on the basis of
the 100 weighted average shares outstanding for each of the three years in
the period ended December 31, 1996.Cinemania (UK) Limited
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
F-69
<PAGE>
Cinemania (UK) Limited
----------------------------------------------------------------------------
Notes to financial statements
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Leasehold property $ 44,150 $ 40,056
Operating equipment 3,588,721 3,205,971
Office furniture and fixtures 39,567 $ 14,934
---------- ----------
3,672,438 3,260,961
Less accumulated depreciation 3,390,098 335,487
---------- ----------
$ 282,340 $2,925,474
========== ==========
</TABLE>
3. NOTES PAYABLE TO STOCKHOLDERS
The loans, which are due to mature on May 1, 2000, are repayable in 10 semi-
annual instalments commencing November 1, 1995, only to the extent that the
company has cumulative net profits available to make such payments. If no
payments are made due to lack of profits available, interest will accrue
until such time as cumulative profits exist whereby payments will be made.
Interest is payable at LIBOR plus 3% (8.563% and 8.875% at December 31, 1996
and 1995 respectively).
The aggregate maturities of long-term debt (including interest of $238,940
at December 31, 1996) are as follows:
<TABLE>
<CAPTION>
1996
<S> <C>
1997 $ 712,048
1998 462,080
1999 462,080
2000 231,041
----------
$1,867,249
==========
</TABLE>
Included within the $712,048 debt due to mature in 1997 is $249,975 which
was due to be paid on November 1, 1996. However, due to the lack of
available profits, no payment was made.
4. LEASES
The Company leases its theatre location under an operating lease, having a
non-cancellable term expiring in 2008, with a renewal option for 10 years.
Future minimum payments under leases with terms of one year or more are
approximately as follows:
<TABLE>
<CAPTION>
Operating
leases
<S> <C>
1997 $ 240,000
1998 247,500
1999 247,500
2000 247,500
2001 and thereafter 1,980,000
----------
Total minimum lease payments $2,962,500
==========
</TABLE>
F-70
<PAGE>
Cinemania (UK) Limited
- --------------------------------------------------------------------------------
Notes to financial statements
5. RELATED PARTY TRANSACTIONS
Showscan Entertainment Inc. (Showscan) holds a 50% equity interest in the
Company. Cost of revenues shown in the accompanying statement of operations
includes $156,637, $228,400 and $151,000 in 1996, 1995 and 1994
respectively, of amounts paid to and $47,761, $22,483 and $nil in 1996, 1995
and 1994 respectively of amounts owed to Showscan for film rental and
royalty fees.
Entities controlled by Mr Charles Moss and Mr Thomas DiBenedetto each hold a
25% equity interest in the Company. Mr Moss and Mr DiBenedetto each have a
greater than 10% stockholding in Showscan and are directors of Showscan.
6. IMPAIRMENT OF LONG-TERM ASSETS
During 1996, the company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". The recent decline in attendance and the operating loss generated
during 1996 was a potential indicator of impairment. The estimated
undiscounted cash flows anticipated from operating the Company indicated
that a write-down to fair market value was required under SFAS No. 121.
Accordingly, the company recorded a non-cash charge of $2,750,000 for the
impairment of its long-lived assets. The impairment loss was calculated
based on the excess of the carrying amount of the assets over the discounted
cash flow expected to be received from the operation of the theatre.
F-71
<PAGE>
Report of Independent Auditors
The Partners
Showscan/General Cinema Ventures
We have audited the accompanying statements of net assets in liquidation of
Showscan/General Cinema Ventures (the Venture) as of October 31, 1996 and 1995,
and the related statements of operations--liquidation basis, statements of
changes in net assets in liquidation, and cash flows-liquidation basis for the
year ended October 31, 1996 and for the period April 24, 1995 (date of
formation) to October 31, 1995. These financial statements are the
responsibility of the Venture's management. Our responsibility is to express an
opinion on these 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.
As described in Note 1, the partners have agreed to sell the assets and dissolve
the partnership. Accordingly, as of October 31, 1996, the Venture has changed
its basis of accounting from a going-concern basis to a liquidation basis.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets of Showscan/General Cinema Ventures at
October 31, 1996 and 1995, and the results of its operations and its cash flows
for the year ended October 31, 1996 and for the period April 24, 1995 (date of
formation) to October 31, 1995 in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Boston, Massachusetts
June 6, 1997
F-72
<PAGE>
Showscan/General Cinema Ventures
Statements of Net Assets in Liquidation
<TABLE>
<CAPTION>
OCTOBER 31
1996 1995
------------------------
<S> <C> <C>
ASSETS
Current assets:
Current portion of foregone rent $ 123,256 $ 110,086
Other assets 3,783 -
Total current assets 127,039 110,086
------------------------
Property and equipment:
Leasehold improvements 1,011,864 1,011,864
Operating equipment 1,723,422 1,723,422
------------------------
2,735,286 2,735,286
Less accumulated depreciation and
amortization (568,111) (189,378)
------------------------
2,167,175 2,545,908
Foregone rent, less current portion,
net of accumulated amortization of
$146,254 in 1996 and $42,726 in 1995 394,490 511,188
------------------------
Total assets $2,688,704 $3,167,182
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Due to Showscan $ 72,468 $
Due to (from) General Cinema Theatre 100,299 (34,858)
Accounts payable and accrued expenses 25,108 49,640
------------------------
Total current liabilities 197,875 14,782
Net assets in liquidation 2,490,829 3,152,400
------------------------
Total liabilities and net assets in
liquidation $2,688,704 $3,167,182
========================
</TABLE>
See accompanying notes.
F-73
<PAGE>
Showscan/General Cinema Ventures
Statements of Operations--Liquidation Basis
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 24, 1995
(DATE OF
YEAR ENDED FORMATION) TO
OCTOBER 31 OCTOBER 31
1996 1995
-----------------------------
<S> <C> <C>
Revenues $ 274,366 $159,651
Cost of revenues, primarily film rental
and management
fees to related parties 230,195 86,664
-----------------------------
Gross profit 44,171 72,987
Other costs and expenses:
Rent 165,000 71,500
Payroll and related items 70,586 30,892
Marketing and advertising 27,263 18,865
Other general and administrative 125,632 38,012
Depreciation and amortization 378,733 189,378
-----------------------------
767,214 348,647
-----------------------------
(723,043) (275,660)
Interest income 61,472 28,774
-----------------------------
Net loss $(661,571) $(246,886)
=============================
</TABLE>
See accompanying notes.
F-74
<PAGE>
Showscan/General Cinema Ventures
Statements of Changes in Net Assets in Liquidation
<TABLE>
<S> <C>
Beginning net assets effective April 24, 1995 $3,399,286
Cash contributions 97,643
Cash distributions (97,643)
Allocation of net loss (246,886)
----------
Net assets at October 31, 1995 3,152,400
Allocation of net loss (661,571)
----------
Net assets at October 31, 1996 $2,490,829
==========
</TABLE>
See accompanying notes.
F-75
<PAGE>
Showscan/General Cinema Ventures
Statements of Cash Flows--Liquidation Basis
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 24, 1995
(DATE OF
YEAR ENDED FORMATION) TO
OCTOBER 31 OCTOBER 31
1996 1995
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(661,571) $(246,886)
Adjustments to reconcile net loss to
net cash used
in operating activities:
Depreciation and amortization 378,733 189,378
Foregone rent, net 103,528 42,726
Changes in operating assets and
liabilities:
Other assets (3,783) -
Due to Showscan 72,468 -
Due to/(from) General Cinema 135,157 (34,858)
Accounts payable and accrued expenses (24,532) 49,640
---------------------------
Net cash used in operating activities 0 0
FINANCING ACTIVITIES
Capital contributions - 97,643
Capital distributions - (97,643)
---------------------------
Net cash used in financing activities - 0
---------------------------
Net increase in cash and cash equivalents 0 0
Cash at beginning of year 0 0
---------------------------
Cash at end of year $ -0- $ -0-
===========================
NONCASH ACTIVITY
Noncash capital contributions:
Equipment $ - $1,723,422
Leasehold improvements $ - $1,011,864
Foregone rent $ $ 664,000
See accompanying notes.
</TABLE>
F-76
<PAGE>
Showscan/General Cinema Ventures
Notes to Financial Statements--Liquidation Basis
October 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Showscan/General Cinema Ventures (the Venture) is a partnership engaged in the
business of operating twin Showscan motion attraction simulation theaters. The
theaters opened in late May 1995 at the Framingham General Cinema 14-screen
multiplex in Framingham, Massachusetts. The Venture is 50% owned by Showscan
Framingham, Inc. (Showscan), a wholly-owned subsidiary of Showscan Entertainment
Inc., and 50% owned by General Cinema of Framingham Inc. (General Cinema), a
wholly-owned subsidiary of General Cinema Corp. of Massachusetts. Net income or
loss of the Venture is allocated 50% to Showscan and 50% to General Cinema.
Showscan and General Cinema hold equal voting interests in the Venture
regardless of capital accounts.
The partners of the Venture have agreed to close the twin Showscan motion
attraction simulation theaters and liquidate the assets of the Venture. The
partners have further agreed to sell the simulation attraction equipment back to
Showscan at its current fair market value, which approximates the underlying net
book value of the equipment. The remainder of the assets will be allocated, as
defined in the Venture Agreement, back to the partners. An additional capital
contribution may be necessary by one of the partners upon settlement and
liquidation of the Venture; however, the partners believe the contribution will
be under $100,000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Venture recognizes revenue from ticket sales at the time the tickets are
purchased.
F-77
<PAGE>
Showscan/General Cinema Ventures
Notes to Financial Statements--Liquidation Basis (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment were contributed to the Venture as part of the initial
capital contributions of the partners and are carried at values representing
cost, as specified in the Venture Agreement. Other assets purchased
specifically for the Venture are carried at the cost to the contributor.
Depreciation on operating equipment was recorded on a straight-line basis over
the estimated useful lives of the assets of five or ten years. Leasehold
improvements were being amortized on a straight-line basis over the shorter of
their estimated useful lives or the five-year term of the leases.
INCOME TAXES
No provision has been made for income taxes in the accompanying financial
statements; such taxes, if any, are the responsibility of the individual
partners.
RECLASSIFICATION
Certain 1995 amounts have been reclassified to conform to 1996 presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for foregone rent, accounts
payable, due to Showscan and General Cinema Theatre approximate their fair
values.
2. RELATED-PARTY TRANSACTIONS
Cost of revenues shown in the accompanying statement of operations includes
$130,199 and $43,332 at October 31, 1996 and 1995, respectively, of amounts paid
or due to Showscan Entertainment Inc. for film rental and $99,996 and $43,332 at
October 31, 1996 and 1995, respectively, of amounts paid or due to General
Cinema for management fees.
In accordance with the Venture agreement, General Cinema was credited with a
capital contribution to the Venture in the amount of $664,000, representing the
present value of
F-78
<PAGE>
Showscan/General Cinema Ventures
Notes to Financial Statements--Liquidation Basis (continued)
2. RELATED-PARTY TRANSACTIONS (CONTINUED)
five years of rent which would be payable by the Venture to General Cinema but
for which payment was waived. Such amount has been classified as an asset on
the Venture's balance sheet as foregone rent. The initial undiscounted value of
the foregone rent was $881,250. The discounting effect of the rent resulted in
the Venture recognizing interest income of $61,472 and $28,774 for the period
ended October 31, 1996 an 1995, respectively. Rent expense is being recognized
on a straight-line basis over the 60-month lease period concluding May of 1999.
Related rent expense for the year ended October 31, 1996 and 1995 amounted to
$165,000 and $71,500, respectively.
General Cinema also made in-kind capital contributions in the form of leasehold
improvements and equipment, which are being carried at cost of approximately
$1.1 million as specified in the venture agreement.
As part of its initial capital contribution, Showscan made a noncash
contribution of certain operating equipment valued at $1,602,000. As specified
in the Venture Agreement, such value represents 90% of the price Showscan
generally charges unaffiliated parties for the purchase of such equipment.
In addition, Showscan made a cash capital contribution of approximately $98,000,
which was then paid out as a distribution to General Cinema in order to equalize
the capital accounts as called for in the Venture Agreement.
F-79
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
IWERKS ENTERTAINMENT, INC.
IWK-1 MERGER CORPORATION
AND
SHOWSCAN ENTERTAINMENT INC.
AUGUST 4, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AGREEMENT AND PLAN OF REORGANIZATION............................................... 1
R E C I T A L S.................................................................... 1
A G R E E M E N T.................................................................. 1
1. DEFINITIONS................................................................... 1
-----------
2. THE MERGER.................................................................... 6
----------
2.1 EXECUTION, FILING, EFFECTIVE TIME...................................... 6
2.2 CONSTITUENT AND SURVIVING CORPORATIONS................................. 6
2.3 CERTIFICATE OF INCORPORATION AND BYLAWS................................ 7
2.4 BOARD OF DIRECTORS AND OFFICERS........................................ 7
2.5 CONVERSION OF THE COMPANY COMMON STOCK, COMPANY PREFERRED STOCK
AND SUB CAPITAL STOCK.................................................. 7
2.6 COMPANY PURCHASE RIGHTS AND CONVERTIBLE NOTES.......................... 10
2.7 CLOSING OF TRANSFER BOOKS.............................................. 11
2.8 RELATED AGREEMENTS..................................................... 11
2.9 DISSENTING STOCKHOLDERS................................................ 11
2.10 DISSENTER PAYMENT...................................................... 12
3. CLOSING DATE.................................................................. 12
------------
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................. 12
----------------------------------------------
4.1 ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS........................ 12
4.2 AUTHORIZATION.......................................................... 13
4.3 NO CONSENTS............................................................ 13
4.4 CAPITAL STOCK.......................................................... 13
4.5 SUBSIDIARIES........................................................... 14
4.6 COMMISSION REPORTS AND FINANCIAL STATEMENT............................. 15
4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS................................... 15
4.8 PENDING LITIGATION..................................................... 16
4.9 PARTICIPATIONS AND RESIDUALS........................................... 16
4.10 TAX RETURNS............................................................ 16
4.11 TAX ELECTION........................................................... 17
4.12 PROPERTIES, ENCUMBRANCES............................................... 17
4.13 PERSONAL PROPERTY...................................................... 17
4.14 EMPLOYEE BENEFIT PLANS................................................. 18
4.15 CERTAIN AGREEMENTS..................................................... 18
4.16 COMPLIANCE WITH APPLICABLE LAW......................................... 19
4.17 ENVIRONMENTAL COMPLIANCE MATTERS....................................... 19
4.18 PATENTS, TRADE NAMES AND OTHER INTELLECTUAL PROPERTY RIGHTS............ 20
</TABLE>
i
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<TABLE>
<S> <C>
4.19 NO BROKERS............................................................. 20
4.20 BOARD APPROVAL......................................................... 20
4.21 TAKEOVER PROVISIONS INAPPLICABLE....................................... 20
4.22 FAIRNESS OPINION....................................................... 20
4.23 NO DISSENTERS RIGHTS................................................... 20
5. REPRESENTATIONS AND WARRANTIES OF PARENT....................................... 20
----------------------------------------
5.1 ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS........................ 21
5.2 AUTHORIZATION.......................................................... 21
5.3 NO CONSENTS............................................................ 21
5.4 CAPITALIZATION......................................................... 22
5.5 SUBSIDIARIES........................................................... 22
5.6 AUTHORIZATION OF PARENT COMMON STOCK................................... 23
5.7 COMMISSION REPORTS AND FINANCIAL STATEMENTS............................ 23
5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS................................... 23
5.9 PENDING LITIGATION..................................................... 24
5.10 TAX RETURNS............................................................ 24
5.11 TAX ELECTION........................................................... 25
5.12 PROPERTIES, ENCUMBRANCES............................................... 25
5.13 PERSONAL PROPERTY...................................................... 25
5.14 EMPLOYEE BENEFIT PLANS................................................. 25
5.15 CERTAIN AGREEMENTS..................................................... 26
5.16 COMPLIANCE WITH APPLICABLE LAW......................................... 26
5.17 ENVIRONMENTAL COMPLIANCE MATTERS....................................... 26
5.18 PATENTS, TRADE NAMES AND OTHER INTELLECTUAL PROPERTY RIGHTS............ 27
5.19 NO BROKERS............................................................. 27
5.20 BOARD APPROVAL......................................................... 28
5.21 TAKEOVER PROVISIONS INAPPLICABLE....................................... 28
5.22 FAIRNESS OPINION....................................................... 28
6. COVENANTS OF PARENT AND THE COMPANY............................................ 28
-----------------------------------
6.1 CONDUCT OF BUSINESS BY THE COMPANY..................................... 28
6.2 CONDUCT OF BUSINESS BY PARENT.......................................... 30
6.3 INSPECTION OF RECORDS.................................................. 31
6.4 STOCKHOLDER APPROVAL................................................... 31
6.5 REGISTRATION STATEMENT; PROXY STATEMENT................................ 31
6.6 AGREEMENTS BY AFFILIATED STOCKHOLDERS OF THE COMPANY................... 33
6.7 COMFORT LETTER......................................................... 33
6.8 TAKEOVER STATUTES...................................................... 33
6.9 EXPENSES............................................................... 34
6.10 REORGANIZATION......................................................... 34
6.11 CONTINUITY OF INTEREST LETTERS......................................... 34
6.12 FILINGS; OTHER ACTION.................................................. 34
6.13 NOTIFICATION OF CERTAIN MATTERS........................................ 34
6.14 LEGAL ACTION........................................................... 34
</TABLE>
ii
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<TABLE>
<S> <C>
6.15 PUBLICITY............................................................... 35
6.16 ALTERNATIVE PROPOSALS................................................... 35
6.17 INDEMNIFICATION AND INSURANCE........................................... 36
6.18 APPOINTMENT OF COMPANY NOMINATED DIRECTORS.............................. 37
7. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER..................... 37
----------------------------------------------------------
7.1 STOCKHOLDER APPROVAL.................................................... 37
7.2 NO LEGAL ACTION......................................................... 37
7.3 REGISTRATION STATEMENT EFFECTIVE........................................ 37
7.4 LISTING OF ADDITIONAL SHARES ON THE NASDAQ NATIONAL MARKET.............. 37
7.5 PERMITS AND APPROVALS................................................... 38
7.6 ACCOUNTING TREATMENT.................................................... 38
8. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT................................. 38
----------------------------------------------
8.1 REPRESENTATIONS, COVENANTS, CERTIFICATE................................. 38
8.2 NO ADVERSE CHANGE....................................................... 38
8.3 CERTAIN LEGAL MATTERS................................................... 38
8.4 TAX OPINION AND CERTIFICATES............................................ 38
8.5 CERTIFICATE............................................................. 39
8.6 RESIGNATION OF COMPANY OFFICERS AND DIRECTORS........................... 39
9. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF THE COMPANY........................ 39
-------------------------------------------------------
9.1 REPRESENTATIONS, COVENANTS, CERTIFICATE................................. 39
9.2 CERTAIN LEGAL MATTERS................................................... 39
9.3 TAX OPINION AND CERTIFICATES............................................ 39
9.4 CERTIFICATE............................................................. 40
10. TERMINATION.................................................................... 40
-----------
10.1 TERMINATION............................................................. 40
10.2 OPTION TO PURCHASE...................................................... 41
10.3 EFFECT OF TERMINATION................................................... 44
11. MISCELLANEOUS PROVISIONS....................................................... 45
------------------------
11.1 NOTICES................................................................. 45
11.2 TERMINATION OF REPRESENTATIONS AND WARRANTIES........................... 46
11.3 SEVERABILITY............................................................ 46
11.4 EXHIBITS AND SCHEDULES.................................................. 46
11.5 GOVERNING LAW........................................................... 46
11.6 WAIVER OF JURY TRIAL.................................................... 46
11.7 NO ADVERSE CONSTRUCTION................................................. 47
11.8 COUNTERPARTS............................................................ 47
11.9 COSTS AND ATTORNEYS' FEES............................................... 47
11.10 SUCCESSORS AND ASSIGNS.................................................. 47
11.11 AMENDMENT............................................................... 47
</TABLE>
iii
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<TABLE>
<S> <C>
11.12 WAIVER................................................................ 47
11.13 ENFORCEMENT OF AGREEMENT.............................................. 47
11.14 ENTIRE AGREEMENT...................................................... 47
11.15 BEST EFFORTS.......................................................... 48
11.16 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS..... 48
11.17 NO THIRD PARTY BENEFICIARIES.......................................... 48
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made and
entered into as of August 4, 1997, by and among SHOWSCAN ENTERTAINMENT INC., a
Delaware corporation (the "Company"), IWK-1 MERGER CORPORATION, a Delaware
corporation ("Sub"), and IWERKS ENTERTAINMENT, INC., a Delaware corporation
("Parent"), with respect to the following:
R E C I T A L S
---------------
A. The Boards of Directors of Parent, the Company and Sub each has
determined that a business combination among Parent, the Company and Sub is in
the best interest of their respective companies and stockholders and presents an
opportunity for their respective companies to achieve long-term strategic and
financial benefits, and accordingly the parties have agreed to effect the merger
provided for herein (the "Merger") upon the terms and subject to the conditions
set forth herein.
B. The Boards of Directors of Parent, the Company and Sub each has
approved and adopted this Agreement and approved the Merger and the other
transactions contemplated hereby (including the Company Stockholder Support
Agreements and the Parent Stockholder Support Agreements, as such terms are
defined in Section 2.8 hereof) and recommended approval and adoption of this
Agreement and the Merger by their respective stockholders.
C. For federal income tax purposes, it is intended that the Merger shall
qualify as a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and for financial accounting purposes
shall be accounted for as a pooling of interests.
D. Parent, Sub and the Company desire to make certain representations,
warranties and agreements in connection with the Merger.
A G R E E M E N T
-----------------
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants and agreements contained herein, and
intending to be bound hereby, the parties to this Agreement hereby agree as
follows:
1. DEFINITIONS. As used in this Agreement, terms defined in the preamble
-----------
and recitals hereto shall have the respective meanings specified therein and the
following terms shall have the meanings set forth below:
1.1 "AFFILIATE" means, when used with reference to a specified
Person, any other Person that directly or indirectly through one or more
intermediaries controls or is controlled by, or is under common control with,
such specified Person. The term "control" (including as used
1
<PAGE>
in the terms "controlling," "controlled by," and "under common control with") of
a Person means the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise. For
purposes of this Agreement (i) each of the joint ventures known as Showscan
Citywalk, Showscan Attractions, Framingham Venture, Osaka Venture and Maloney
Venture is an Affiliate of the Company so long as such joint venture is not
dissolved or otherwise terminated and so long as the Company or its Subsidiary
or Affiliate, as applicable, has not sold or otherwise transferred its interest
in such joint venture to a third party (other than an Affiliate of the Company),
and (ii) neither Parent nor any of its Subsidiaries shall be considered an
Affiliate of the Company or any of its Subsidiaries, or vice versa.
1.2 "AGREEMENT" shall mean this Agreement and Plan of
Reorganization.
1.3 "AVERAGE PRICE" shall mean the average of the closing sale
prices of the Parent Common Stock on the Nasdaq National Market (as reported by
the Wall Street Journal, or if not so reported as reported by another
authoritative source) over the 20 trading day period ending on (and including)
the third trading day immediately preceding the date of the meeting of the
stockholders of the Company contemplated in Section 6.4. For purposes of the
preceding sentence, a "trading day" means a day on which trading generally takes
place on the Nasdaq National Market and on which trading in shares of Parent
Common Stock occurred.
1.4 "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
1.5 "COMMISSION" means the Securities and Exchange Commission.
1.6 "COMPANY" shall mean Showscan Entertainment Inc., a Delaware
corporation.
1.7 "COMPANY COMMON STOCK" shall mean the Common Stock, par value
$0.001 per share, of the Company.
1.8 "COMPANY PREFERRED STOCK" shall mean the Series C Convertible
Preferred Stock, par value $0.001 per share, of the Company.
1.9 "COMPANY PURCHASE RIGHTS" shall mean each outstanding warrant,
option, purchase right, subscription or other right or agreement or commitment
of any character relating to the issuance of shares of Company Common Stock,
Company Preferred Stock, or any other shares of capital stock of the Company
(including, without limitation warrants, options or rights that may be issued
and outstanding under any stock option plan but excluding the Convertible Notes,
the Company Preferred Stock, and the Series D Rights).
1.10 "COMPANY SECURITIES" shall mean the Company Common Stock,
Company Preferred Stock and the Company Purchase Rights.
2
<PAGE>
1.11 "CONVERTIBLE NOTES" shall mean the 8% Convertible Notes due
September 1, 1999 of the Company.
1.12 "DELAWARE LAW" shall mean the General Corporation Law of the
State of Delaware.
1.13 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended and the rules and regulations promulgated thereunder.
1.14 "GAAP" shall mean generally accepted accounting principles.
1.15 "KNOWLEDGE OF THE COMPANY" shall mean the actual knowledge, if
any, of the officers, directors, and employees of the Company set forth in
Section 115 of the Company Disclosure Letter.
1.16 "KNOWLEDGE OF PARENT" shall mean the actual knowledge, if any,
of the officers, directors, and employees of Parent set forth in Section 1.16 of
the Parent Disclosure Letter.
1.17 "MATERIAL ADVERSE EFFECT" means when used in connection with
the Company or any of its Subsidiaries, or Parent or any of its Subsidiaries, as
the case may be, any condition, change or effect that is or is reasonably likely
to be materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of the Company and its Subsidiaries
or Parent and its Subsidiaries, in each case taken as a whole; provided,
however, Parent and the Company acknowledge and agree that the adverse effect
(if any) on the Company's film license renewals, customer orders, backlog,
consolidated revenues and net income (and the related effect on the Company's
financial condition), or the loss of employees, directly or indirectly,
resulting from, or which is reasonably likely to result from, the public
announcement by Parent and the Company of this Agreement and the Merger shall
not constitute a Material Adverse Effect hereunder.
1.18 "MERGER" shall have the meaning provided in Recital A to this
Agreement.
1.19 "NASD" shall mean the National Association of Securities
Dealers, Inc.
1.20 "NASDAQ NATIONAL MARKET" shall mean the Nasdaq National Market.
1.21 "PARENT" shall mean Iwerks Entertainment, Inc., a Delaware
corporation.
1.22 "PARENT COMMON STOCK" shall mean the Common Stock, par value
$0.001 per share, of Parent.
1.23 "PARENT PURCHASE RIGHTS" shall mean each outstanding warrant,
option, purchase right, subscription or other right or agreement or commitment
of any character relating to the issuance of shares of Parent Common Stock or
any other shares of capital stock of Parent
3
<PAGE>
(including, without limitation, warrants, options or rights that may be issued
and outstanding under any stock option plan).
1.24 "PERSON" includes an individual, general or limited
partnership, limited liability company, limited liability partnership, trust,
estate, corporation, joint venture, unincorporated association, government
bureau or agency or other entity of whatsoever kind or nature.
1.25 "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended and the rules and regulations promulgated thereunder.
1.26 "SERIES D RIGHTS" shall mean the issued and outstanding rights
to purchase shares, or fractions thereof, of Series D Convertible Preferred
Stock, par value $0.001, of the Company.
1.27 "SUB" shall mean IWK-1 Merger Corporation, a Delaware
corporation.
1.28 "SUB COMMON STOCK" shall mean the Common Stock, par value
$0.001 per share, of Sub.
1.29 "SUBSIDIARY" shall mean, with respect to Parent, those entities
identified on Schedule 1.29(a) and with respect to the Company, those entities
----------------
identified on Schedule 1.29(b).
----------------
<TABLE>
<CAPTION>
Section
Where
Defined Term Found
- ----------------------------------------- ------------
<S> <C>
Alternative Proposal 6.16
AICPA Statement 6.7
Beneficial Ownership 10.2(d)
Certificate(s) 2.5(d)
Certificate of Merger 2.1
Closing 3
Closing Date 3
Company Disclosure Letter 4
Company Financial Statements 4.6
Company Named Stockholders 2.8
Company Nominated Directors 6.18
Company Participations 4.9
Company Permitted Liens 4.12
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Section
Where
Defined Term Found
- ----------------------------------------- ------------
<S> <C>
Company Plans 4.14
Company Reports 4.6
Company Rights Agreement 4.21
Company Stockholders Support Agreement 2.8
Confidentiality Agreement 6.3
Constituent Corporations 2.2
Dissenter 2.9
Effective Time 2.1
Environmental Laws 4.17
ERISA 4.14
ERISA Affiliate 4.14
Exchange Agent 2.5(c)
Exchange Fund 2.5(c)
Initial Triggering Event 10.2(d)
Indemnified Parties 6.17(b)
Intellectual Property 4.18
IRS 4.10
Leased Property 4.12
Liens 4.12
Maximum Amount 6.17(c)
Notice Date 10.2(b)
Option 10.2(a)
Optioned Shares 10.2(a)
Parent Disclosure Letter 5
Parent Financial Statements 5.7
Parent Named Directors and Officers 2.8
Parent Permitted Liens 5.12
Parent Plans 5.14
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Section
Where
Defined Term Found
- ----------------------------------------- ------------
<S> <C>
Parent Properties 5.12
Parent Reports 5.7
Parent Rights Agreement 5.21
Parent Stockholders Support Agreement 2.8
Per Share Consideration 2.5(a)(i)
Per Share Price 10.2(a)
Pooling Letters 7.6
Proxy Statement 6.5(a)
Purchase Event 10.2(d)
Registration Statement 6.5(a)
Remedies Exception 4.2
Restrictions 4.12
Rule 145 Affiliates 6.6
Securities Laws 4.6
Sub Capital Stock 2.5(a)(v)
Surviving Corporation 2.2
Tax Matters Certificate 8.4
Tax Returns 4.10
Taxes 4.10
Treasury Shares 2.5(a)(iv)
</TABLE>
2. THE MERGER.
----------
2.1 EXECUTION, FILING, EFFECTIVE TIME. On the date of the Closing
of the Merger referred to in Section 3, and subject to the terms and conditions
hereinafter set forth, the Company, Parent and Sub agree to cause the Merger to
be consummated by executing, delivering and filing with the office of the
Delaware Secretary of State a Certificate of Merger (the "Certificate of
Merger") in a form approved by the Company and Parent, which approval shall not
be unreasonably withheld or delayed, and such other documents as may be required
by the provisions of the Delaware Law and as are necessary to cause the Merger
to become effective. The Merger shall become effective when such Certificate of
Merger and such other necessary documents are so
6
<PAGE>
filed with the Secretary of State of the State of Delaware. The time at which
the Merger becomes effective is herein referred to as the "Effective Time."
2.2 CONSTITUENT AND SURVIVING CORPORATIONS. The Company and Sub
shall be the constituent corporations in the Merger (collectively, the
"Constituent Corporations"). At the Effective Time, Sub shall be merged into
the Company in accordance with the Delaware Law and the Company shall be the
surviving corporation in the Merger (in such capacity, the Company is sometimes
hereinafter referred to as the "Surviving Corporation"). At the Effective Time,
the identity and separate existence of Sub shall cease. Upon the effectiveness
of the Merger, the Surviving Corporation shall possess all of the rights,
privileges, immunities, powers, franchises and authority, whether of a public or
private nature, and be subject to all restrictions, disabilities and duties, of
each of the Constituent Corporations, and all the rights, privileges,
immunities, powers, franchises and authority of each of the Constituent
Corporations, and all assets and properties of every description, real, personal
and mixed, and every interest therein, wherever located, and all debts and other
obligations belonging or due to either of the Constituent Corporations on
whatever account, as well as stock subscriptions and all other things in action
belonging or due to each of the Constituent Corporations, shall be vested in the
Surviving Corporation, and all property rights, privileges, immunities, powers,
franchises and authority, and all and every other interest, shall be thereafter
as effectually the property of the Surviving Corporation as they were of the
Constituent Corporations, and the title to any real estate or interest therein
vested in either Constituent Corporation shall not revert or be in any way
impaired by reason of the Merger but all rights of creditors and all liens upon
any property of either of the Constituent Corporations shall be preserved
unimpaired, and the Surviving Corporation shall be liable for the debts and
other obligations of each of the Constituent Corporations, and any claims
existing or action or proceeding pending, by or against either of the
Constituent Corporations may be prosecuted to judgment with right of appeal, as
if the Merger had not taken place.
2.3 CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation and Bylaws of the Company in effect immediately prior to the
Effective Time shall be the Certificate of Incorporation and Bylaws of the
Surviving Corporation.
2.4 BOARD OF DIRECTORS AND OFFICERS. At the Effective Time, the
directors of Sub immediately prior to the Effective Time shall become the
directors, and the officers of the Company immediately prior to the Effective
Time shall become the officers, of the Surviving Corporation, each such director
and officer to hold office from the Effective Time until their respective
successors are duly elected or appointed and qualified in the manner provided in
the Certificate of Incorporation and Bylaws of the Surviving Corporation and
applicable law. The Company shall use reasonable efforts to cause each director
of the Company and of its Subsidiaries which are corporations to tender his or
her resignation prior to the Effective Time, each such resignation to be
effective as of the Effective Time.
2.5 CONVERSION OF THE COMPANY COMMON STOCK, COMPANY PREFERRED STOCK
AND SUB CAPITAL STOCK.
7
<PAGE>
(a) Conversion of the Company Common Stock, the Company Preferred
-------------------------------------------------------------
Stock and Sub Capital Stock. At the Effective Time, each share of Company Common
- ---------------------------
Stock, Company Preferred Stock and Sub capital stock issued and outstanding
immediately prior to the Effective Time (excluding any treasury shares of the
Company Common Stock and Company Preferred Stock then owned by the Company or
any of its Subsidiaries and any shares of the Company Common Stock and Company
Preferred Stock then held by Parent or any of its Subsidiaries) shall, by virtue
of the Merger and without any action on the part of Parent, Sub, the Company or
the holder thereof, be canceled and converted into the right to receive the
following:
(i) each share of Company Common Stock outstanding immediately prior
to the Effective Time shall entitle the holder thereof to 0.85 validly issued,
fully paid and non-assessable shares of Parent Common Stock (the "Per Share
Consideration");
(ii) each share of Company Preferred Stock outstanding immediately
prior to the Effective Time shall entitle the holder thereof to that number of
validly issued, fully paid and non-assessable shares of Parent Common Stock as
is equal to the number of shares of Company Common Stock into which such share
of Company Preferred Stock is convertible immediately prior to the Effective
Time multiplied by 0.85;
(iii) no fractional shares of Parent Common Stock will be issued, but
in lieu thereof, any holder of shares of Company Common Stock or Company
Preferred Stock entitled to receive a fractional share of Parent Common Stock
shall be paid cash (rounded to the nearest whole cent) equal to the product of
multiplying such fraction by the Average Price;
(iv) If more than one certificate representing shares of Company
Common Stock and/or Company Preferred Stock shall be surrendered at one time for
the account of the same stockholder of record, the number of full shares of
Parent Common Stock for which certificates shall be delivered shall be computed
on the basis of the aggregate number of shares of the Company Common Stock
and/or Company Preferred Stock, as the case may be, represented by the
certificates so surrendered. All shares of Company Common Stock and Company
Preferred Stock held by the Company at the Effective Time as treasury shares or
held by any of the Company's Subsidiaries or by Parent or any of its
Subsidiaries (collectively, "Treasury Shares") shall cease to exist and the
certificates for such shares shall, as promptly as practicable thereafter, be
canceled and no shares of capital stock of Parent or Sub shall be issued in
exchange therefor.
(v) each outstanding share of capital stock of Sub (the "Sub Capital
Stock") shall be converted into and become one fully paid and nonassessable
share of Common Stock of the Surviving Corporation. At the Effective Time,
Parent, as the sole holder of the Sub Capital Stock, shall surrender any and all
certificates representing such Sub Capital Stock to the Surviving Corporation
and shall be entitled to receive in exchange therefor a certificate representing
the number of shares of Common Stock of the Surviving Corporation into which the
Sub Capital Stock theretofore represented by the certificates so surrendered
shall have been converted as provided in this Section 2.5(a)(v). From and after
the Effective Time, until so surrendered, each certificate theretofore
representing shares of issued and outstanding Sub Capital
8
<PAGE>
Stock shall be deemed for all corporate purposes to evidence the number of
shares of Common Stock of the Surviving Corporation into which such shares of
Sub Capital Stock shall have been converted.
(b) Adjustment to the Per Share Consideration. The Per Share
-----------------------------------------
Consideration shall be adjusted to reflect fully the effect of any stock split,
reverse stock split, stock dividend (including any dividend or distribution of
securities convertible into shares of Parent Common Stock, shares of Company
Common Stock or shares of Company Preferred Stock), reorganization,
recapitalization or other like change in the number of shares of Parent Common
Stock, shares of Company Common Stock or shares of Company Preferred Stock
occurring after the date hereof and prior to the Effective Time; provided,
---------
however, that no such changes to the capital stock of Parent, the Surviving
- -------
Corporation or the Company shall be effected except as permitted by this
Agreement.
(c) Payment for Company Common Stock and Company Preferred Stock.
------------------------------------------------------------
Parent shall authorize one or more persons reasonably acceptable to the Company
to act as exchange agents (the "Exchange Agent") hereunder. As of the Effective
Time, Parent shall deposit, or cause to be deposited, with the Exchange Agent,
for the benefit of the holders of the Company Common Stock and Company Preferred
Stock, certificates representing the number of whole shares of Parent Common
Stock and cash in lieu of fractional shares (such cash and certificates,
together with any dividends or distributions thereon, being hereinafter referred
to as the "Exchange Fund") into which the shares of the Company Common Stock and
Company Preferred Stock outstanding at the Effective Time are converted in
accordance with Section 2.5.(a) hereof. The Exchange Fund shall include
sufficient cash as is reasonably determined by Parent to be necessary to account
for additional fractional shares as the result of shares which are held in
depositary, nominee or book entry form.
(d) Delivery of New Certificates. Promptly after the Effective Time,
----------------------------
Parent shall cause the Exchange Agent to mail to each holder of record of a
certificate or certificates representing shares of Company Common Stock and/or
Company Preferred Stock (a "Certificate" and collectively the "Certificates")
(i) a letter of transmittal which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon delivery of
the Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Parent and the Company may reasonably specify and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Parent Common Stock and cash in lieu of
fractional shares. Upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, the holder of such
Certificate shall be entitled to receive in exchange therefor (x) a certificate
representing that number of whole shares of Parent Common Stock and (y) a check
representing the amount of cash in lieu of fractional shares, if any, and unpaid
dividends and distributions, if any, which such holder has the right to receive
in respect of the Certificate surrendered pursuant to the provisions of this
Section 2.5(d), after giving effect to any required withholding tax, and the
Certificate so surrendered shall forthwith be canceled. No interest will be
paid or accrued on the cash included within the Exchange Fund, payable to
holders of Certificates. If any certificate for shares of Parent Common Stock is
to be issued in a name other than that in which a certificate for shares of the
Company Common Stock and/or Company Preferred Stock so
9
<PAGE>
surrendered is then registered, such surrender shall be accompanied by payment
of any applicable transfer taxes and documents required for a valid transfer.
From and after the Effective Time, until so surrendered, each Certificate
theretofore representing shares of issued and outstanding Company Common Stock
and/or Company Preferred Stock shall be deemed for all corporate purposes,
except as provided in Section 2.5(a) with respect to fractional shares and
Treasury Shares, and except as set forth below, to evidence the number of whole
shares of Parent Common Stock into which such shares of Company Common Stock
and/or Company Preferred Stock shall have been converted. Unless and until any
such Certificates shall be so surrendered, the holder of such Certificate shall
not have any right to receive any cash amounts included in the Exchange Fund.
Upon surrender of a Certificate representing the Company Common Stock and/or
Company Preferred Stock, the holder of record thereof shall receive a
certificate representing the whole shares of Parent Common Stock, cash in lieu
of fractional shares to which he shall be entitled, and all dividends and other
distributions which shall have been paid or made to holders of record of Parent
Common Stock after the Effective Time with respect to such shares of Parent
Common Stock, without interest thereon. All such cash amounts unclaimed at the
end of one year from the Effective Time shall be released or repaid by the
Exchange Agent to Parent, after which the holders of the shares not receiving
such payment shall look, subject to applicable escheat or other laws, only to
Parent as general creditors for payment thereof.
(e) No Liability. None of Parent, the Company, the Exchange
------------
Agent or any other Person shall be liable to any former holder of shares of
Company Common Stock and/or Company Preferred Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(f) Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such Certificate to be lost,
stolen or destroyed and, if required by the Surviving Corporation, the posting
by such Person of a bond in such reasonable amount as the Surviving Corporation
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate the shares of Parent Common Stock, cash in
lieu of fractional shares, and unpaid dividends and distributions on shares of
Parent Common Stock as provided in Section 2.5(d), deliverable in respect
thereof pursuant to this Agreement.
2.6 COMPANY PURCHASE RIGHTS AND CONVERTIBLE NOTES.
(a) Each of the Company Purchase Rights, whether vested or
unvested, shall, subject to the terms of any applicable stock option, warrant
agreement or other applicable agreement evidencing the same, remain outstanding
following the Effective Time. At the Effective Time, such Company Purchase
Rights shall, by virtue of the Merger and without any further action on the part
of the Company, Parent, Sub or the holder of any Company Purchase Right, be
assumed by Parent in such manner that Parent (x) is a corporation "assuming a
stock option in a transaction to which Section 424 applied" within the meaning
of Section 424(a) of the Code or (y) to the extent Section 424 of the Code does
not apply to any such Company Purchase Rights, would be such a corporation were
Section 424 applicable to such option. In connection with the assumption of the
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Company Purchase Rights, Parent shall effect such assumption in such manner as
not to affect the "incentive stock option" status of those options which are
"incentive stock options" within the meaning of Section 422 of the Code at the
Effective Time. From and after the date hereof, no additional Company Purchase
Rights shall be granted by the Company and no "vesting" or exercise schedule of
Company Purchase Rights shall be modified or accelerated (other than pursuant to
the express terms of such Company Purchase Right or pursuant to other
contractual obligations to modify such "vesting" or exercise schedule as
disclosed on the Company Disclosure Letter) and no exercise price of any Company
Purchase Right shall be modified without the prior written consent of Parent.
(b) Parent agrees that each Convertible Note outstanding prior to
the Effective Time shall entitle the holder thereof to receive, during the
period such Convertible Note shall be convertible, upon conversion of such
Convertible Note, in lieu of each share of Company Common Stock deliverable on
such conversion immediately prior to the Merger, such number of shares of Parent
Common Stock which are receivable upon the effectiveness of the Merger by a
holder of one share of Company Common Stock.
2.7 CLOSING OF TRANSFER BOOKS. At and after the Effective Time,
transfers of the shares of Company Common Stock and Company Preferred Stock
outstanding immediately prior to the Effective Time shall not be made on the
stock transfer books of the Company.
2.8 RELATED AGREEMENTS. Each of the stockholders identified on
Schedule 2.8(a) of the Company Disclosure Letter (the "Company Named
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Stockholders") have executed and delivered to Parent separate agreements
(collectively the "Company Stockholder Support Agreements") pursuant to which
they agree to vote the shares of Company Common Stock and/or Company Preferred
Stock, as applicable, held by them in favor of this Agreement and the Merger at
the Stockholders Meeting called for that purpose and have granted an irrevocable
proxy to Parent to do the same in their place and stead. Each of the Directors
and Officers of Parent identified on Schedule 2.8(b) (the "Parent Named
---------------
Directors and Officers") have executed and delivered to the Company separate
agreements (collectively the "Parent Stockholder Support Agreements") pursuant
to which they agree to vote the shares of Parent Common Stock held by them in
favor of the issuance of the Parent Common Stock pursuant to the terms of this
Agreement at the Stockholders Meeting called for that purpose and have granted
an irrevocable proxy to the Company to do the same in their place and stead.
The Company Stockholder Support Agreements and the Parent Stockholder Support
Agreements collectively are referred to herein as the "Stockholder Support
Agreements" and are attached hereto on Schedule 2.8(c).
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2.9 DISSENTING STOCKHOLDERS. All issued and outstanding shares of
Company Preferred Stock held by holders of record as of the date fixed for
determination of stockholders entitled to notice of and to vote at the meeting
of the stockholders of the Company who shall have neither voted in favor of the
Merger nor consented thereto in writing and shall have delivered (and then have
been entitled to deliver) to the Company a written demand for appraisal of their
shares of Company Preferred Stock within the time and in the manner provided in
Section 262 of the Delaware Law (individually, a "Dissenter," and collectively,
the "Dissenters") shall not be converted into Parent Common Stock, but shall be
entitled to receive such consideration as shall be provided
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in Section 262 in accordance with the terms and subject to the conditions set
forth in said Section 262, except that each share of Company Preferred Stock
issued and outstanding immediately prior to the Effective Time and held by a
Dissenter who shall thereafter withdraw his demand for appraisal of his shares
of Company Preferred Stock with the Surviving Corporation's consent or lose his
right to such payment as provided in Section 262 shall be deemed converted, as
of the Effective Time, into fully paid and nonassessable shares of Parent Common
Stock, in which event such stockholder shall no longer be a Dissenter. The
Company shall deliver to Parent (i) on the first business day following the
meeting of stockholders of the Company (or the twenty first (21st) day following
notice of written consent), a list of all holders of Company Preferred Stock who
have filed written demands for payment of their shares of Company Preferred
Stock by the date of such meeting in accordance with said Section 262, and (ii)
from time to time, as Parent shall reasonably request, other relevant
information with respect to such objections and demands. The Company shall
afford to Parent the opportunity to participate in all negotiations and
proceedings with respect to any such demands and shall not, prior to the
Effective Time, except with the prior written consent of Parent, voluntarily
make any payment with respect to, settle or offer or agree to settle, any such
demands for payment.
2.10 DISSENTER PAYMENT. Each Dissenter who becomes entitled,
pursuant to the provisions of Section 262 of the Delaware Law, to payment for
the shares of Company Preferred Stock held by such Dissenter shall receive the
payment therefor provided under Section 262 from the Surviving Corporation, but
only up to the amount of such payment as shall have been agreed upon or finally
determined pursuant to Section 262, and such shares shall thereupon be canceled.
3. CLOSING DATE. The Closing of the Merger (the "Closing") shall, unless
------------
another date or place is agreed to in writing by the parties, take place at the
offices of Troop Meisinger Steuber & Pasich, 10940 Wilshire Boulevard, Los
Angeles, California 90024 (except for the filing of the Certificate of Merger,
which shall take place in the office of the Secretary of State of the State of
Delaware) on the second business day following the satisfaction or waiver of all
conditions precedent to the Merger (or such other date as the parties hereto may
mutually agree), including those set forth in Sections 7, 8 and 9 of this
Agreement. The date of the Closing is referred to in this Agreement as the
"Closing Date."
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth in
----------------------------------------------
the disclosure letter delivered to Parent at or prior to the execution of this
Agreement by the Company, which shall refer to the relevant Sections of this
Agreement (the "Company Disclosure Letter"), or in the Company Reports, the
Company represents and warrants to and agrees with Parent and Sub as follows:
4.1 ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS. The Company
is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware. The Company is qualified, licensed or
domesticated as a foreign corporation and is in good standing in all
jurisdictions where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified, licensed or domesticated would not have individually
or in the aggregate, a Material Adverse Effect. The Company has all requisite
power and authority and all requisite licenses, permits and franchises necessary
to own, lease and operate its properties and assets and to carry on
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its business in the manner and in the locations as presently conducted, except
where the failure to do so would not have individually or in the aggregate, a
Material Adverse Effect. Copies of the Certificate of Incorporation (as
certified by the Delaware Secretary of State) and Bylaws of the Company have
been delivered to Parent and are accurate and complete as of the date hereof.
4.2 AUTHORIZATION. The Company has the requisite corporate power
and authority to enter into and carry out the terms and conditions of this
Agreement and all the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by the Company's Board of Directors and, other
than the stockholder approval required pursuant to Section 6.4 hereof, all
corporate proceedings have been taken and no other corporate proceedings on the
part of the Company are necessary to authorize the execution, delivery and
performance by the Company of this Agreement. This Agreement has been duly
executed and delivered by the Company and constitutes the valid and binding
obligations of the Company, enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally from time to time in effect and except that equitable remedies
may not in all cases be available (regardless of whether enforceability is
considered in a proceeding at law or in equity) (collectively, the "Remedies
Exception"). The execution and delivery of this Agreement by the Company does
not, and the consummation of the transactions contemplated hereby, will not (i)
conflict with or violate the Certificate of Incorporation or By-Laws of the
Company or any of its Subsidiaries, (ii) conflict with or violate any statute,
law, rule, regulation, judgment, decree, order, writ, governmental permit or
license applicable to the Company or any of its Subsidiaries or by which any
asset of the Company or any or its Subsidiaries is bound or affected, (iii)
result in a breach of or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, result in a loss of a
material benefit under, or give to others any right of purchase or sale, or any
right of termination, amendment, acceleration, increased payments or
cancellation of, or result in the creation of a lien on any property or asset of
the Company or any of its Subsidiaries pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; except in the case of
clauses (ii) and (iii) above, for such conflicts, violations, breaches or
defaults which (x) would not prevent or delay the consummation of the
transactions contemplated hereby in any material respect, and (y) would not
have, individually or in the aggregate, a Material Adverse Effect.
4.3 NO CONSENTS. No consent, authorization, order or approval of,
or filing with or registration with, any governmental authority, commission,
board or other regulatory body of the United States or any state or political
subdivision thereof, or any other Person, is required to be made or obtained by
the Company for or in connection with the execution and delivery by the Company
of this Agreement and the consummation by the Company of the transactions
contemplated hereby, the absence of which, individually or in the aggregate,
would have a Material Adverse Effect, other than the filing of the Certificate
of Merger with the Delaware Secretary of State, the approval of the Merger by
the stockholders of the Company, compliance with the Securities Laws and
compliance with any applicable state securities or "Blue Sky" laws.
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4.4 CAPITAL STOCK. The authorized capital stock of the Company
consists of 20,000,000 shares of Company Common Stock, par value $0.001 per
share, 150,000 shares of Class A Preferred Stock, $0.001 par value per share,
24,000 shares of Class B Preferred Stock, $.001 par value per share, 100,000
shares of Class C Preferred Stock, $.001 par value per share and 10,000 shares
of Class D Preferred Stock, $0.001 par value per share. As of the date hereof,
(i) there are 5,642,058 shares of Company Common Stock issued and outstanding,
all of which are duly authorized, validly issued, fully paid and non-assessable
and were not issued in violation of any preemptive rights or any Federal or
State securities laws, (ii) no shares of Company Common Stock are held by
Subsidiaries of the Company, and (iii) 4,904,287 shares of Company Common Stock
are reserved for future issuance under outstanding Company Purchase Rights, the
Convertible Notes and the Company Preferred Stock. As of the date hereof, there
are 49,000 shares of Series C Preferred Stock issued and outstanding, all of
which are duly authorized, validly issued, fully paid and non-assessable and
were not issued in violation of any preemptive rights or any Federal or State
securities laws. As of the date hereof, there are no shares of Class A
Preferred Stock, Class B Preferred Stock or Class D Preferred Stock outstanding.
As of the date hereof, there are (i) no options, warrants, calls, subscriptions,
convertible securities or other rights, (including preemptive rights),
agreements, understandings, arrangements or commitments of any character
obligating the Company now or at any time in the future to issue or sell any of
its capital stock or other equity interests of the Company or any of its
Subsidiaries, (ii) there are no obligations, contingent or otherwise, of the
Company or any of its Subsidiaries, to repurchase, redeem or otherwise acquire
any shares of capital stock or other equity interests of the Company or any of
its Subsidiaries or to provide funds or to make any investment (in the form of a
loan, capital contribution or otherwise) in any Subsidiary or another entity,
other than guarantees of bank obligations of Subsidiaries entered into in the
ordinary course of business, (iii) there are no outstanding bonds, debentures,
notes or other obligations of the Company the holders of which have the right to
vote (or which are convertible into or exercisable for securities having the
right to vote) with the Company stockholders on any matter, (iv) there are no
obligations, contingent or otherwise, guaranteeing the value of any of the
shares of the Common Stock of the Company or any of its Subsidiaries either now
or at any time in the future, and (v) there are no voting trusts, proxies or
other agreements or understandings to which the Company is a party or is bound
with respect to the voting of any capital stock or other equity interests of the
Company or any of its Subsidiaries.
4.5 SUBSIDIARIES. The Company Disclosure Letter sets forth a true
and correct list of each Subsidiary of the Company as of the date hereof. All
of the outstanding capital stock of each such Subsidiary is owned entirely by
the Company or by a Subsidiary of the Company, as the case may be, as of the
date hereof, free and clear of all liens, charges, pledges, security interests
or other encumbrances, except for restrictions on transfer imposed by applicable
securities laws. All such shares of capital stock have been duly authorized and
validly issued and are fully paid and nonassessable. There are no agreements,
understandings or undertakings governing the rights and duties of the Company or
any Subsidiary of the Company as a stockholder of any Subsidiary, including,
without limitation, any agreement, arrangement or understanding under which the
Company is or may become obligated, directly or indirectly, to acquire or
dispose of any equity interest in, make any capital contribution or extend
credit to, or act as guarantor, surety or indemnitor for any liability of any
Subsidiary. Each such Subsidiary is duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization, has the
corporate power and
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authority to carry on its business as it is now being conducted and is duly
qualified to do business and is in good standing in all jurisdictions where the
failure to be so qualified would have, individually or in the aggregate, a
Material Adverse Effect. Other than its Subsidiaries, neither the Company nor
any Subsidiary of the Company has any equity investment in any corporation,
joint venture, partnership or other business enterprise.
4.6 COMMISSION REPORTS AND FINANCIAL STATEMENTS. From and after
April 1, 1994 the Company has filed with the Commission all forms, reports,
registration statements, proxy statements and other documents (collectively, the
"Company Reports") required to be filed by the Company under the Securities Act,
the Exchange Act, and the rules and regulations promulgated thereunder
(collectively, the "Securities Laws"), except failures to file which,
individually or in the aggregate, do not have a Material Adverse Effect. As of
their respective dates, or, in the case of registration statements, as of their
respective effective dates, all of the Company Reports, including all exhibits
and schedules thereto and all documents incorporated by reference therein, (i)
complied as to form in all material respects with the requirements of the
Securities Laws applicable thereto, and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements, in light of the
circumstances under which they were made, not misleading. The representation in
clause (ii) of the preceding sentence shall not apply to any misstatement or
omission in any Company Report filed prior to the date of this Agreement which
was superseded or corrected by a subsequent Company Report filed by the Company
before the date hereof. No Subsidiary of the Company is required to file any
report, form or other document with the Commission. The audited consolidated
financial statements and unaudited interim consolidated financial statements
included or incorporated by reference in the Company Reports (collectively, the
"Company Financial Statements") have been prepared in accordance with GAAP
applied on a consistent basis (except as may be indicated therein or in the
notes thereto) and fairly present the consolidated financial position of the
Company or other Person, as applicable, as of and at the dates thereof and the
results of operations and cash flows for the periods then ended, subject in the
case of the unaudited interim financial statements, to normal, recurring year-
end adjustments and any other adjustments described therein. Except as set
forth or reflected in the Company Financial Statements at March 31, 1997, or as
set forth in the interim unaudited balance sheets, or in the notes thereto,
included in the Company Reports since that date, neither the Company nor any of
its Subsidiaries, has any liabilities or obligations of any kind or nature
(whether accrued, absolute, contingent or otherwise) which would be required to
be reflected or reserved against in any balance sheet of the Company, or in the
notes thereto, prepared in accordance with GAAP consistently applied, except
liabilities arising since March 31, 1997 either (i) in the ordinary course of
business; or (ii) which, individually or in the aggregate, would not have a
Material Adverse Effect; or (iii) as contemplated or permitted by this
Agreement.
4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since March 31, 1997,
the Company and its Subsidiaries each has conducted its business in all material
respects in the ordinary and usual course consistent with past practice, and
there has not been (a) any event or occurrence which, individually or in the
aggregate, has or reasonably could result in a Material Adverse Effect, (b) any
material change in accounting methods, principles and practices by the Company
and its Subsidiaries (except for any such changes required by reason of a
concurrent change in GAAP or to conform a Subsidiary's accounting methods,
principles or practices to those of the Company), (c)
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any damage, destruction or loss, whether covered by insurance or not, having,
individually or in the aggregate, a Material Adverse Effect, (d) except as
contemplated by this Agreement, any entry by the Company or any of its
Subsidiaries into any commitment or transaction material to the Company which is
not in the ordinary course of business consistent with past practice, (e) any
declaration, payment or setting aside for payment of any dividends, or (f) any
grant to any officer or director of any increase in compensation (other than
periodic salary increases not in excess of 10% made in the ordinary course of
business consistent with past practice or increases resulting from job
promotions or expansions of employment responsibilities), or any loan to any
officer or director, or any adoption, amendment in any material respect or
termination of any bonus, profit sharing, stock option, employee stock
ownership, pension, retirement, deferred compensation, employment or consulting
or other plan, agreement or arrangement for the benefit of employees of the
Company.
4.8 PENDING LITIGATION. There are no actions, suits or proceedings
of any nature pending, or, to the Knowledge of the Company, threatened, against
or by the Company or any of its properties, assets or business, nor is the
Company or any of its properties, assets or business, subject to any order,
judgment, ruling, or decree of any competent authority, which would have, or is
reasonably like to have, individually or in the aggregate, a Material Adverse
Effect. The Company has not received notice of violation of any applicable
statute, regulation, code, ordinance, rule, order, judgment, decree or
requirement relating to its operations or its owned or leased properties and to
the Knowledge of the Company, no such violation exists, in each case, other than
a violation which would not have, individually or in the aggregate, a Material
Adverse Effect.
4.9 PARTICIPATIONS AND RESIDUALS. All agreements providing for the
payment of any participation or the payment of residuals now or hereafter
payable by the Company or any of its Subsidiaries to any and all Persons (the
"Company Participations") as of the date hereof relating to Devil's Mine Ride,
Cosmic Pinball, Space Race, Dracula's Haunted Castle and Storm Rider are
identified on the Company Disclosure Letter and have been delivered by the
Company to Parent.
4.10 TAX RETURNS. The Company and each of its Subsidiaries (i) has
accurately prepared and duly and timely filed all federal and state and all
other material income, property, sales and use and other applicable tax reports
and returns ("Tax Returns") required to be filed (subject to any extensions
applicable to any such filing) except where the failure to do so would not have,
individually or in the aggregate, a Material Adverse Effect, and all such Tax
Returns are true and complete except for such inaccuracies which would not have
a Material Adverse Effect, (ii) has paid all Taxes shown to be due and payable
on such Tax Returns or which have become due and payable pursuant to any
assessment, deficiency notice, 30-day letter, or other notice received by it
(except to the extent being contested in good faith), and (iii) has properly
accrued on its books and records all Taxes for such periods subsequent to the
periods covered by the Tax Returns, except for any Taxes which would not have,
individually or in the aggregate, a Material Adverse Effect. The Tax Returns of
the Company and each of its Subsidiaries have not been examined by the
appropriate taxing authority. Neither the Company nor any of its Subsidiaries
has executed or filed with the Internal Revenue Service ("IRS") or any other
taxing authority any agreement now in effect extending the period for assessment
or collection of any income or other Taxes. Neither the Company nor any of its
Subsidiaries is a party to any pending action or proceeding by any
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governmental authority for assessment or collection of Taxes, and to the
Knowledge of the Company, no claim for assessment or collection of Taxes has
been asserted against it. There are no liens for Taxes upon the assets of the
Company or any of its Subsidiaries except liens for Taxes not yet due. True,
correct and complete copies of all Tax Returns filed by the Company and each of
its Subsidiaries and all communications relating thereto have been delivered to
Parent or made available to the representatives of Parent. All Taxes which the
Company is required to withhold or collect, including without limitation, sales
and use taxes, have been duly withheld or collected and, to the extent required,
have been paid over to the proper governmental authorities or are held in
separate bank accounts for such purposes, except where the failure to do so
would not have, individually or in the aggregate, a Material Adverse Effect. For
purposes of this Agreement, the term "Taxes" shall mean and include all taxes,
charges, fees, levies or other assessments, including, without limitation,
income, gross receipts, excise, property, sales, withholding, social security,
occupation, use, service, license, payroll, franchise, transfer and recording
taxes, fees and charges imposed by the United States, or any state, local or
foreign government or subdivision or agency thereof, whether computed on a
separate, consolidated, unitary, combined or any other basis; and such term
shall include any interest, fines, penalties or additional amounts attributable
or imposed on or with respect to any such taxes, charges, fees, levies or other
assessments.
4.11 TAX ELECTION. Neither the Company nor any of its Subsidiaries
has filed (and will not file prior to the Effective Time) any consent agreement
under Section 341(f) of the Code or agreed to have Section 341(f) of the Code
apply to any disposition of the subsection (f) assets (as such term is defined
in Section 341(f)(4) of the Code) owned by the Company or any of its
Subsidiaries.
4.12 PROPERTIES, ENCUMBRANCES. The Company has a valid leasehold
interest in the property located at 3939 Landmark Street, Culver City,
California 90232-2315 (the "Leased Property") free and clear of all liens,
mortgages or deeds of trust, claims against title, security interests or other
encumbrances on title ("Liens") or any rights of way, written agreements, laws,
ordinances or regulations affecting the use or occupancy of such properties, or
any reservations of an interest in title ("Restrictions") except (i) Liens and
Restrictions reflected in the Company Financial Statements, (ii) Liens and
Restrictions for taxes not yet due and payable or being contested in good faith,
(iii) Liens and Restrictions attaching by operation of law, incurred in the
ordinary course of business consistent with past practices and securing payments
not past due, (iv) the rights of landlords or sublessors under the applicable
lease, (v) Liens and Restrictions disclosed in the Company Disclosure Schedule
and (vi) Liens and Restrictions which do not have, individually or in the
aggregate, a Material Adverse Effect (collectively, the "Company Permitted
Liens"). Neither the Company nor any of its Subsidiaries own any real property
or lease or otherwise use any real property other than the Leased Property in
the conduct of its business. All rental payments due under the lease pursuant
to which the Company uses the Leased Property have been paid and neither the
Company nor any of its Subsidiaries is in default, and to the Knowledge of the
Company, the landlord under the lease is not in default, and no condition or
event exists which with the giving of notice or the passage of time, or both,
would constitute a material default by any party under any such lease other than
any such non-payment or default which could not have, individually or in the
aggregate, a Material Adverse Effect.
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4.13 PERSONAL PROPERTY. The Company and its Subsidiaries own good
and marketable title to or a valid right to use all items of personal property
owned or used by them which are material to their business, free and clear of
all Liens or Restrictions other than the Company Permitted Liens.
4.14 EMPLOYEE BENEFIT PLANS. The Company Disclosure Letter sets
forth a list of all plans and other arrangements which provide compensation or
benefits to officers, directors or consultants or employee benefits to employees
of the Company or its Subsidiaries, including, without limitation, all "employee
benefit plans" as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar fringe or employee benefit plans, and all employment or
executive compensation agreements (collectively, the "Company Plans"). All
Company Plans comply with and are and have been operated in material compliance
with each applicable provision of ERISA, the Code, other federal statutes, state
law (including, without limitation, state insurance law) and the regulations and
rules promulgated pursuant thereto or in connection therewith, except for any
such failure to comply which would not have, individually or in the aggregate, a
Material Adverse Effect. No Company Plan is covered by Title IV of ERISA or
Section 412 of the Code. Neither the Company, any of its Subsidiaries, nor any
affiliate of the Company as determined under Section 414(b), (c), (m) or (o) of
the Code ("ERISA Affiliate") has failed to make any contributions or to pay any
amounts due and owing as required by the terms of any Company Plan, which
failure would have, individually or in the aggregate, a Material Adverse Effect.
No amounts payable under the Company Plans will fail to be deductible for
federal income tax purposes by virtue of Section 280G of the Code. True and
complete copies of each written Company Plan have been made available to Parent
or its representatives. Except as required by Section 4980B of the Code,
neither the Company, any of its Subsidiaries nor any ERISA Affiliate has
promised any former employee or other individual not employed by the Company,
any of its Subsidiaries or any ERISA Affiliate, medical or other benefit
coverage, and neither the Company, any of its Subsidiaries nor any ERISA
Affiliate maintains or contributes to any plan or arrangement providing medical
benefits, life insurance or other welfare benefits to former employees, their
spouses or dependents or any other individual not employed by the Company, any
of its Subsidiaries or any ERISA Affiliate except to the extent required by
applicable law. Neither the Company nor any Subsidiary is a party or subject to
any agreement, contract or other obligation which would require the making of
any payment, other than payments as contemplated by this Agreement, to any
employee of the Company or to any other Person as a result of the consummation
of the transactions contemplated herein.
4.15 CERTAIN AGREEMENTS. Neither the Company nor any of its
Subsidiaries is a party to any oral or written (i) agreement (including, without
limitation, any employment, management, severance or consulting contract) with
any current or former officer (whose employment terminated in the last year),
director, or holder of more than 10% of the outstanding shares of the Company
Common Stock or with any entity in which any of the foregoing is a more than 10%
equity owner, officer, director, employee or consultant, (ii) any agreement
involving an amount in excess of $100,000 the benefits of which are contingent,
or the terms of which are materially altered, upon the occurrence of a
transaction involving the Company or any of its Subsidiaries of the nature
contemplated by this Agreement, (iii) agreement or plan, including any
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stock option plan, stock appreciation rights plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be increased, or the
vesting of benefits of which will be accelerated, by the occurrence of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of the transactions contemplated by
this Agreement or (iv) unconsummated or pending agreement involving the
acquisition of any equity interest in any business.
4.16 COMPLIANCE WITH APPLICABLE LAW. The businesses of the Company
and its Subsidiaries are not being conducted in violation of any applicable law,
ordinance, regulation, decree or order of any governmental entity, except for
violations which either singly or in the aggregate do not and are not expected
to have a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is a party to or subject to any judgment, decree, or order entered
in any suit or proceeding brought by any governmental agency or by any other
person, enjoining the Company or any of its Subsidiaries with respect to any
business practice, the acquisition of any property, or the conduct of business
in any area.
4.17 ENVIRONMENTAL COMPLIANCE MATTERS. The businesses of the
Company and its Subsidiaries as conducted in the past were not and as currently
being conducted are not in violation of any applicable law, ordinance, rule,
prohibition or regulation relating to pollution, or the production, storage,
labeling or disposition of wastes or hazardous or toxic substances, or the
health, safety or environmental conditions on, beneath or about any of the
properties owned, used or leased by the Company or any of its Subsidiaries or
relating to the business of the Company or any of its Subsidiaries (such laws,
ordinances, rules, prohibitions and regulations being herein referred to as
"Environmental Laws"), except for any such violation which would not have,
individually or in the aggregate, a Material Adverse Effect. The Company and
its Subsidiaries have timely filed all material reports, obtained all material
approvals and permits and generated and maintained all material data,
documentation and records required under any applicable Environmental Laws,
except where the failure to do so would not have, individually or in the
aggregate, a Material Adverse Effect. Neither the Company, its Subsidiaries
nor, to the Knowledge of the Company or its Subsidiaries, any other Person has
placed, stored, buried, spilled or released, used, generated, manufactured,
refined, processed, treated, dumped or disposed of any materials produced by, or
resulting from, any business, commercial or industrial activities, operations or
processes, including without limitation any materials which are "Hazardous
Wastes", "Hazardous Substances", "Hazardous Materials", "Pollutants", "Toxic
Substances", "Solid Wastes" or "Contaminants" (as such terms are defined in any
applicable Environmental Law, including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, the
Hazardous Materials Transportation Act, the Resource Conservation and Recovery
Act and the Toxic Substances Control Act), on, beneath or about, or transported
any such materials to or from, any of the properties owned, used or leased by
the Company or its Subsidiaries in each case other than in material compliance
with applicable Environmental Laws and in the ordinary course of the Company's
or its Subsidiaries' business or where the failure to comply would not have
individually or in the aggregate a Material Adverse Effect. Neither the Company
nor its Subsidiaries has received any notice from any governmental agency or
private or public entity advising it that it is or may be responsible, or
potentially responsible, for costs with respect to a release, a threatened
release or clean up of materials located in any property owned by the Company or
its Subsidiaries or produced
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by, or resulting from, any business, commercial or industrial activities,
operations or processes of the Company or its Subsidiaries, including without
limitation, materials which are Hazardous Wastes, Hazardous Substances,
Hazardous Materials, Pollutants, Toxic Substances, Solid Wastes or Contaminants.
4.18 PATENTS, TRADE NAMES AND OTHER INTELLECTUAL PROPERTY RIGHTS.
The Company owns or is validly licensed or otherwise has the right to use, free
and clear of all Liens and Restrictions other than Company Permitted Liens, any
and all patents, trademarks, trade names, service marks, copyrights, trade
secrets, technology, know-how and processes (collectively, "Intellectual
Property"), used in or necessary for the conduct of its business as now
conducted or as proposed to be conducted except where any such failure would not
have, individually or in the aggregate, a Material Adverse Effect. The
operations and products of the Company do not infringe any Intellectual Property
rights of any other Person, except for any infringement which would not have,
individually or in the aggregate, a Material Adverse Effect. The Company has
not received any communication in the past three years alleging or stating that
the Company or any employee has violated or infringed, or by conducting business
as proposed, would violate or infringe any Intellectual Property right of any
other Person.
4.19 NO BROKERS. Other than with respect to the services of Allen &
Co., the Company's financial advisor, (the arrangements with which have been
disclosed to Parent), neither the Company, nor any of its Subsidiaries has
entered into any contract, arrangement or understanding with any Person or firm
which may result in the obligation of the Company, the Surviving Corporation or
Parent to pay any finder's fee, brokerage or agent's commissions or other like
payments in connection with the negotiation, execution or performance of this
Agreement and the Company is not aware of any claim for any such payment.
4.20 BOARD APPROVAL. As of the date hereof, the Board of Directors
of the Company has duly approved this Agreement, has determined that the Merger
is in the best interests of the Company and its stockholders and has resolved to
recommend the adoption of this Agreement and the Merger by its stockholders.
4.21 TAKEOVER PROVISIONS INAPPLICABLE. As of the date hereof and at
all times on or prior to the Effective Date, the Rights Agreement dated as of
November 11, 1994 by and between the Company and Continental Stock Transfer &
Trust Company, as amended (the "Company Rights Agreement") is, and shall be,
inapplicable to the Merger and the transactions contemplated by this Merger
Agreement and the Company Stockholder Support Agreements and a "Distribution
Date" as defined in the Company Rights Agreement has not occurred.
4.22 FAIRNESS OPINION. The Board of Directors of the Company has
received an opinion of Allen & Co., its financial advisor, to the effect that
the consideration to be paid to the holders of Company Common Stock and Company
Preferred Stock pursuant to the Merger is fair to the stockholders of the
Company from a financial point of view.
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4.23 NO DISSENTERS RIGHTS. Assuming the Parent Common Stock is
listed for quotation of the Nasdaq National Market, pursuant to Section
262(b)(1)(i) of the Delaware Law, there are no dissenters rights available to
the holders of Company Common Stock.
5. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB. Except as set forth
------------------------------------------------
in the disclosure letter delivered to the Company at or prior to the execution
of this Agreement by Parent, which shall refer to the relevant Sections of this
Agreement (the "Parent Disclosure Letter"), or in the Parent Reports, Parent and
Sub jointly and severally represent, warrant, covenant and agree with the
Company as follows:
5.1 ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS. Each of
Parent and Sub is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware. Parent is qualified, licensed
or domesticated as a foreign corporation and is in good standing in all
jurisdictions where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified, licensed or domesticated would not have,
individually or in the aggregate, a Material Adverse Effect. Sub has not
conducted any business prior to the date hereof and has no material assets and
liabilities other than those incident to its formation. Parent has all
requisite power and authority and all requisite licenses, permits and franchises
necessary to own, lease and operate its properties and assets and to carry on
its business in the manner and in the locations as presently conducted, except
where the failure to do so would not have, individually or in the aggregate, a
Material Adverse Effect. Copies of the Certificate of Incorporation (as
certified by the Delaware Secretary of State) and Bylaws of each of Parent and
Sub have been delivered to the Company and are accurate and complete as of the
date hereof.
5.2 AUTHORIZATION. Each of Parent and Sub has the requisite
corporate power and authority to enter into and carry out the terms and
conditions of this Agreement and all the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by Parent's and Sub's
Boards of Directors and, other than the stockholder approval required pursuant
to Section 6.4 hereof, all corporate proceedings have been taken and no other
corporate proceedings on the part of Parent or Sub are necessary to authorize
the execution, delivery and performance by Parent and Sub of this Agreement.
This Agreement has been duly executed and delivered by each of Parent and Sub
and constitutes the valid and binding obligations of Parent and Sub, enforceable
against each in accordance with its terms, subject to the Remedies Exception.
The execution and delivery of this Agreement by Parent and Sub do not, and the
consummation of the transactions contemplated hereby, will not (i) conflict with
or violate the Certificate of Incorporation or By-Laws of Parent or any of its
Subsidiaries, (ii) conflict with or violate any statute, law, rule, regulation,
judgment, decree, order, writ, governmental permit or license applicable to
Parent or any of its Subsidiaries or by which any asset of Parent or any or its
Subsidiaries is bound or affected, (iii) result in a breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, result in a loss of a material benefit under, or give to others
any right of purchase or sale, or any right of termination, amendment,
acceleration, increased payments or cancellation of, or result in the creation
of a lien on any property or asset of Parent or any of its Subsidiaries pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other
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instrument to which Parent or any of its Subsidiaries is a party or by which
Parent or any of its Subsidiaries is bound; except, in the case of clauses (ii)
and (iii) above, for such conflicts, violations, breaches or defaults which (x)
would not prevent or delay the consummation of the transactions contemplated
hereby in any material respect, and (y) would not have, individually or in the
aggregate, a Material Adverse Effect.
5.3 NO CONSENTS. No consent, authorization, order or approval of,
or filing with or registration with, any governmental authority, commission,
board or other regulatory body of the United States or any state or political
subdivision thereof, or any other Person, is required to be made or obtained by
Parent or Sub for or in connection with the execution and delivery by Parent and
Sub of this Agreement and the consummation by Parent and Sub of the transactions
contemplated hereby, the absence of which would have, individually or in the
aggregate, a Material Adverse Effect, other than the filing of the Certificate
of Merger with the Delaware Secretary of State, the approval of the issuance of
Parent Common Stock pursuant to the terms of this Agreement by the stockholders
of Parent, compliance with the Securities Laws and compliance with any
applicable state securities or "Blue Sky" laws.
5.4 CAPITALIZATION. The authorized capital stock of Parent consists
of 50,000,000 shares of Parent Common Stock, par value $0.001 per share, and
1,000,000 shares of Preferred Stock, $0.001 par value per share. As of the date
hereof, (i) there are 12,160,102 shares of Parent Common Stock issued and
outstanding, all of which are duly authorized, validly issued, fully paid and
non-assessable and were not issued in violation of any preemptive rights or any
Federal or State securities laws, (ii) there are no shares of Parent Preferred
Stock issued and outstanding, (iii) no shares of Parent Common Stock are held
by Subsidiaries of Parent and (iv) 2,278,979 shares of Parent Common Stock are
reserved for future issuance under outstanding Parent Purchase Rights. As of
the date hereof, there are (i) no options, warrants, calls, subscriptions,
convertible securities or other rights (including preemptive rights),
agreements, understandings, arrangements or commitments of any character
obligating Parent now or at any time in the future to issue or sell any of its
capital stock or other equity interests of Parent or any of its Subsidiaries,
(ii) there are no obligations, contingent or otherwise, of Parent or any of its
Subsidiaries, to repurchase, redeem or otherwise acquire any shares of capital
stock or other equity interests of Parent or any of its Subsidiaries or to
provide funds or to make any investment (in the form of a loan, capital
contribution or otherwise) in any Subsidiary or another entity, other than
guarantees of bank obligations of Subsidiaries entered into in the ordinary
course of business, (iii) there are no outstanding bonds, debentures, notes or
other obligations of Parent the holders of which have the right to vote (or
which are convertible into or exercisable for securities having the right to
vote) with Parent stockholders on any matter, (iii) there are no obligations,
contingent or otherwise, guaranteeing the value of any of the shares of the
Common Stock of Parent or any of its Subsidiaries either now or at any time in
the future, and (iv) there are no voting trusts, proxies or other agreements or
understandings to which Parent is a party or is bound with respect to the voting
of any capital stock or other equity interests of Parent or any of its
Subsidiaries.
5.5 SUBSIDIARIES. Parent Disclosure Letter sets forth a true and
correct list of each Subsidiary of Parent as of the date hereof. All of the
outstanding capital stock of each such Subsidiary is owned entirely by Parent or
by a Subsidiary of Parent, as the case may be, as of the
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date hereof, free and clear of all liens, charges, pledges, security interests
or other encumbrances, except for restrictions on transfer imposed by applicable
securities laws. All such shares of capital stock have been duly authorized and
validly issued and are fully paid and nonassessable. There are no agreements,
understandings or undertakings governing the rights and duties of Parent or any
Subsidiary of Parent as a stockholder of any Subsidiary, including, without
limitation, any agreement, arrangement or understanding under which Parent is or
may become obligated, directly or indirectly, to acquire or dispose of any
equity interest in, make any capital contribution or extend credit to, or act as
guarantor, surety or indemnitor for any liability of any Subsidiary. Each such
Subsidiary is duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization, has the corporate power and authority
to carry on its business as it is now being conducted and is duly qualified to
do business and is in good standing in all jurisdictions where the failure to be
so qualified would have, individually or in the aggregate, a Material Adverse
Effect. Other than its Subsidiaries, neither Parent nor any Subsidiary of Parent
has any equity investment in any corporation, joint venture, partnership or
other business enterprise.
5.6 AUTHORIZATION OF PARENT COMMON STOCK. The issuance of shares
of Parent Common Stock at the Closing will have been duly authorized by all
necessary corporate action prior to the Effective Time and, when issued as
contemplated by this Agreement, all such shares of Parent Common Stock will be
validly issued, fully paid and non-assessable.
5.7 COMMISSION REPORTS AND FINANCIAL STATEMENTS. From and after
April 1, 1994 Parent has filed with the Commission all forms, reports,
registration statements, proxy statements and other documents (collectively, the
"Parent Reports") required to be filed by Parent under the Securities Laws,
except failures to file which, individually or in the aggregate, do not have a
Material Adverse Effect. Parent has heretofore furnished the Company with true
and complete copies of all Parent Reports filed as of the date hereof. As of
their respective dates, or, in the case of registration statements, as of their
respective effective dates, all of the Parent Reports, including all exhibits
and schedules thereto and all documents incorporated by reference therein, (i)
complied as to form in all material respects with the requirements of the
Securities Laws applicable thereto, and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The representation in
clause (ii) of the preceding sentence shall not apply to any misstatement or
omission in any Parent Report filed prior to the date of this Agreement which
was superseded or corrected by a subsequent Parent Report filed by Parent before
the date hereof. No Subsidiary of Parent is required to file any report, form
or other document with the Commission. The audited consolidated financial
statements and unaudited interim consolidated financial statements included or
incorporated by reference in Parent Reports (collectively, the "Parent Financial
Statements") have been prepared in accordance with GAAP applied on a consistent
basis (except as may be indicated therein or in the notes thereto) and fairly
present the consolidated financial position of Parent or other Person, as
applicable, as of and at the dates thereof and the results of operations and
cash flows for the periods then ended, subject in the case of the unaudited
interim financial statements, to normal, recurring year-end adjustments and any
other adjustments described therein. Except as set forth or reflected in Parent
Financial Statements at June 30, 1996, or as set forth in the interim unaudited
balance sheets, or in the notes thereto, included in Parent Reports since that
date, neither Parent nor any of its Subsidiaries, has any
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liabilities or obligations of any kind or nature (whether accrued, absolute,
contingent or otherwise) which would be required to be reflected or reserved
against in any balance sheet of Parent, or in the notes thereto, prepared in
accordance with GAAP consistently applied, except liabilities arising since June
30, 1996 either (i) in the ordinary course of business; or (ii) which,
individually or in the aggregate, would not have a Material Adverse Effect; or
(iii) as contemplated or permitted by this Agreement.
5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since June 30, 1996,
Parent and its Subsidiaries each has conducted its business in all material
respects in the ordinary and usual course consistent with past practice, and
there has not been (a) any event or occurrence which, individually or in the
aggregate, has or reasonably could result in a Material Adverse Effect, (b) any
material change in accounting methods, principles and practices by Parent and
its Subsidiaries (except for any such changes required by reason of a concurrent
change in GAAP or to conform a Subsidiary's accounting methods, principles or
practices to those of Parent), (c) any damage, destruction or loss, whether
covered by insurance or not, having, individually or in the aggregate, a
Material Adverse Effect, (d) except as contemplated by this Agreement, any entry
by Parent or any of its Subsidiaries into any commitment or transaction material
to Parent which is not in the ordinary course of business consistent with past
practice (e) any declaration, payment or setting aside for payment of any
dividends or (f) any grant to any officer or director of any increase in
compensation (other than periodic salary increases not in excess of 10% made in
the ordinary course of business consistent with past practice or increases
resulting from job promotions or expansions of employment responsibilities), or
any loan to any officer or director, or any adoption, amendment in any material
respect or termination of any bonus, profit sharing, stock option, employee
stock ownership, pension, retirement, deferred compensation, employment or
consulting or other plan, agreement or arrangement for the benefit of employees
of Parent.
5.9 PENDING LITIGATION. There are no actions, suits or proceedings
of any nature pending, or, to the Knowledge of Parent, threatened, against or by
Parent or any of its properties, assets or business, nor is Parent or any of its
properties, assets or business, subject to any order, judgment, ruling, or
decree of any competent authority, which would have, or is reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect. Parent has
not received notice of violation of any applicable statute, regulation, code,
ordinance, rule, order, judgment, decree or requirement relating to its
operations or its owned or leased properties and to the Knowledge of Parent, no
such violation exists, in each case, other than a violation which would not
have, individually or in the aggregate, a Material Adverse Effect.
5.10 TAX RETURNS. Parent and each of its Subsidiaries (i) has
accurately prepared and duly and timely filed all Tax Returns required to be
filed (subject to any extensions applicable to any such filing) except where the
failure to do so would not have, individually or in the aggregate, a Material
Adverse Effect, and all such Tax Returns are true and complete, except for such
inaccuracies which would not have a Material Adverse Effect, (ii) has paid all
Taxes shown to be due and payable on such Tax Returns or which have become due
and payable pursuant to any assessment, deficiency notice, 30-day letter, or
other notice received by it (except to the extent being contested in good
faith), and (iii) has properly accrued on its books and records all Taxes for
such periods subsequent to the periods covered by the Tax Returns, except for
any Taxes which would
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not have, individually or in the aggregate, a Material Adverse Effect. The Tax
Returns of Parent and each of its Subsidiaries have not been examined by the
appropriate taxing authority. Neither Parent nor any of its Subsidiaries has
executed or filed with the IRS or any other taxing authority any agreement now
in effect extending the period for assessment or collection of any income or
other Taxes. Neither Parent nor any of its Subsidiaries is a party to any
pending action or proceeding by any governmental authority for assessment or
collection of Taxes, and to the Knowledge of Parent, no claim for assessment or
collection of Taxes has been asserted against it. There are no liens for Taxes
upon the assets of Parent or any of its Subsidiaries except liens for Taxes not
yet due. True, correct and complete copies of all Tax Returns filed by Parent
and each of its Subsidiaries and all communications relating thereto have been
delivered to the Company or made available to the representatives of the
Company. All Taxes which Parent is required to withhold or collect, including
without limitation, sales and use taxes, have been duly withheld or collected
and, to the extent required, have been paid over to the proper governmental
authorities or are held in separate bank accounts for such purposes, except
where the failure to do so would not have, individually or in the aggregate, a
Material Adverse Effect.
5.11 TAX ELECTION. Neither Parent nor any of its Subsidiaries has
filed (and will not file prior to the Effective Time) any consent agreement
under Section 341(f) of the Code or agreed to have Section 341(f) of the Code
apply to any disposition of the subsection (f) assets (as such term is defined
in Section 341(f)(4) of the Code) owned by the Company or any of its
Subsidiaries.
5.12 PROPERTIES, ENCUMBRANCES. Parent and its Subsidiaries have
good and marketable title in fee simple to, or a valid leasehold interest in,
each of the real properties reflected on the Parent Financial Statements or
which have been acquired after the date thereof or used by them as of the date
hereof (collectively, the "Parent Properties"), in each case, free and clear of
all Liens and Restrictions except (a) Liens and Restrictions reflected in the
Parent Financial Statements, (b) Liens and Restrictions for taxes not yet due
and payable or being contested in good faith, (c) Liens and Restrictions
attaching by operation of law, incurred in the ordinary course of business
consistent with past practices and securing payments not past due, (iv) the
rights of landlords or sublessors under the applicable lease, (v) Liens and
Restrictions disclosed in the Parent Disclosure Schedule and (vi) Liens and
Restrictions which do not have, individually or in the aggregate, a Material
Adverse Effect (collectively, the "Parent Permitted Liens"). All rental
payments due under any lease pursuant to which Parent uses any Parent Property
has been paid and neither Parent nor any of its Subsidiaries is in default, and
to the Knowledge of Parent, the landlord under the lease is not in default, and
no condition or event exists which with the giving of notice or the passage of
time, or both, would constitute a material default by any party under any such
leases other than any such non-payment or default which could not have,
individually or in the aggregate, a Material Adverse Effect.
5.13 PERSONAL PROPERTY. Parent and its Subsidiaries own good and
marketable title to or a valid right to use all items of personal property owned
or used by them which are material to their business, free and clear of all
Liens or Restrictions other than the Parent Permitted Liens.
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5.14 EMPLOYEE BENEFIT PLANS. The Parent Disclosure Letter sets
forth a list of all plans and other arrangements which provide compensation or
benefits to officers, directors or consultants or employee benefits to
employees of Parent or its Subsidiaries, including, without limitation, all
"employee benefit plans" as defined in Section 3(3) of ERISA, and all bonus,
stock option, stock purchase, incentive, deferred compensation, supplemental
retirement, severance and other similar fringe or employee benefit plans, and
all employment or executive compensation agreements (collectively, the "Parent
Plans"). All Parent Plans comply with and are and have been operated in
material compliance with each applicable provision of ERISA, the Code, other
federal statutes, state law (including, without limitation, state insurance law)
and the regulations and rules promulgated pursuant thereto or in connection
therewith, except for any such failure to comply which would not have,
individually or in the aggregate, a Material Adverse Effect. No Parent Plan is
covered by Title IV of ERISA or Section 412 of the Code. Neither Parent, any of
its Subsidiaries, nor any ERISA Affiliate of Parent has failed to make any
contributions or to pay any amounts due and owing as required by the terms of
any Parent Plan, which failure would have, individually or in the aggregate, a
Material Adverse Effect. No amounts payable under the Parent Plans will fail to
be deductible for federal income tax purposes by virtue of Section 280G of the
Code. True and complete copies of each Parent Plan have been made available to
the Company or its representatives. Except as required by Section 4980B of the
Code, neither Parent, any of its Subsidiaries nor any ERISA Affiliate has
promised any former employee or other individual not employed by Parent, any of
its Subsidiaries or any ERISA Affiliate, medical or other benefit coverage, and
neither Parent, any of its Subsidiaries nor any ERISA Affiliate maintains or
contributes to any plan or arrangement providing medical benefits, life
insurance or other welfare benefits to former employees, their spouses or
dependents or any other individual not employed by Parent, any of its
Subsidiaries or any ERISA Affiliate except to the extent required by applicable
law. Neither Parent nor any Subsidiary is a party or subject to any agreement,
contract or other obligation which would require the making of any payment,
other than payments as contemplated by this Agreement, to any employee of Parent
or to any other Person as a result of the consummation of the transactions
contemplated herein.
5.15 CERTAIN AGREEMENTS. Neither Parent nor any of its Subsidiaries
is a party to any oral or written (i) agreement (including, without limitation,
any employment, management, severance or consulting contract) with any current
or former officer (whose employment terminated in the last year), director, or
holder of more than 10% of the outstanding shares of the Parent Common Stock or
with any entity in which any of the foregoing is a more than 10% equity owner,
officer, director, employee or consultant, (ii) any agreement involving an
amount in excess of $100,000 the benefits of which are contingent, or the terms
of which are materially altered, upon the occurrence of a transaction involving
Parent or any of its Subsidiaries of the nature contemplated by this Agreement,
(iii) agreement or plan, including any stock option plan, stock appreciation
rights plan, restricted stock plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of the transactions contemplated by this Agreement or (iv) unconsummated
or pending agreement involving the acquisition of any equity interest in any
business.
5.16 COMPLIANCE WITH APPLICABLE LAW. The businesses of Parent and
its Subsidiaries are not being conducted in violation of any applicable law,
ordinance, regulation, decree
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or order of any governmental entity, except for violations which either singly
or in the aggregate do not and are not expected to have a Material Adverse
Effect. Neither Parent nor any of its Subsidiaries is a party to or subject to
any judgment, decree, or order entered in any suit or proceeding brought by any
governmental agency or by any other Person, enjoining Parent or any of its
Subsidiaries with respect to any business practice, the acquisition of any
property, or the conduct of business in any area.
5.17 ENVIRONMENTAL COMPLIANCE MATTERS. The businesses of Parent and
its Subsidiaries as conducted in the past were not and as currently being
conducted are not in violation of any Environmental Laws, except for any such
violation which would not have, individually or in the aggregate, a Material
Adverse Effect. Parent and its Subsidiaries have timely filed all material
reports, obtained all material approvals and permits and generated and
maintained all material data, documentation and records required under any
applicable Environmental Laws, except where the failure to do so would not have,
individually or in the aggregate, a Material Adverse Effect. Neither Parent,
its Subsidiaries nor, to the Knowledge of Parent or its Subsidiaries, any other
Person has placed, stored, buried, spilled or released, used, generated,
manufactured, refined, processed, treated, dumped or disposed of any materials
produced by, or resulting from, any business, commercial or industrial
activities, operations or processes, including without limitation any materials
which are "Hazardous Wastes", "Hazardous Substances", "Hazardous Materials",
"Pollutants", "Toxic Substances", "Solid Wastes" or "Contaminants" (as such
terms are defined in any applicable Environmental Law, including without
limitation the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, the Hazardous Materials Transportation Act, the
Resource Conservation and Recovery Act and the Toxic Substances Control Act),
on, beneath or about, or transported any such materials to or from, any of the
properties owned, used or leased by Parent or its Subsidiaries in each case
other than in material compliance with applicable Environmental Laws and in the
ordinary course of Parent's or its Subsidiaries' business or where the failure
to comply would not have, individually or in the aggregate, a Material Adverse
Effect. Neither Parent nor its Subsidiaries has received any notice from any
governmental agency or private or public entity advising it that it is or may be
responsible, or potentially responsible, for costs with respect to a release, a
threatened release or clean up of materials located in any property owned by
Parent or its Subsidiaries or produced by, or resulting from, any business,
commercial or industrial activities, operations or processes of Parent or its
Subsidiaries, including without limitation, materials which are Hazardous
Wastes, Hazardous Substances, Hazardous Materials, Pollutants, Toxic Substances,
Solid Wastes or Contaminants.
5.18 PATENTS, TRADE NAMES AND OTHER INTELLECTUAL PROPERTY RIGHTS.
Parent owns or is validly licensed or otherwise has the right to use, free and
clear of all Liens and Restrictions other than Parent Permitted Liens, any and
all Intellectual Property used in or necessary for the conduct of its business
as now conducted or as proposed to be conducted, except where any such failure
would not have, individually or in the aggregate, a Material Adverse Effect. The
operations and products of Parent do not infringe any Intellectual Property
rights of any other Person, except for any infringement which would not have,
individually or in the aggregate, a Material Adverse Effect. Parent has not
received any communication in the past three years alleging or stating that
Parent or any employee has violated or infringed, or by conducting business as
proposed, would violate or infringe any Intellectual Property right of any other
Person.
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5.19 NO BROKERS. Other than with respect to the services of
Equitable Securities, Parent's financial advisor, (the arrangements with which
have been disclosed to the Company), neither Parent, nor any of its Subsidiaries
has entered into any contract, arrangement or understanding with any Person or
firm which may result in the obligation of Parent, the Surviving Corporation or
the Company to pay any finder's fee, brokerage or agent's commissions or other
like payments in connection with the negotiation, execution or performance of
this Agreement and Parent is not aware of any claim for any such payment.
5.20 BOARD APPROVAL. As of the date hereof, the Board of Directors
of Parent has duly approved this Agreement, has determined that the Merger is in
the best interests of Parent and its stockholders and has resolved to recommend
the approval of the issuance of the Parent Common Stock pursuant to the terms of
this Agreement by its stockholders.
5.21 TAKEOVER PROVISIONS INAPPLICABLE. As of the date hereof and at
all times on or prior to the Effective Date, the Rights Agreement dated as of
May 22, 1995 by and between Parent and U.S. Stock Transfer Corporation, as
amended (the "Parent Rights Agreement") is, and shall be, inapplicable to the
Merger and the transactions contemplated by this Merger Agreement and the Parent
Stockholder Support Agreements and a "Distribution Date" as defined in the
Parent Rights Agreement has not occurred.
5.22 FAIRNESS OPINION. The Board of Directors of Parent has
received an opinion of Equitable Securities, its financial advisor, to the
effect that the consideration to be paid to the holders of Company Common Stock
and Company Preferred Stock pursuant to the Merger is fair to Parent from a
financial point of view.
6. COVENANTS OF PARENT AND THE COMPANY. Each of Parent and the Company
-----------------------------------
covenants and agrees with the other that:
6.1 CONDUCT OF BUSINESS BY THE COMPANY. During the period from the
date of this Agreement until the earlier to occur of the termination of this
Agreement or the Effective Time, except as contemplated by this Agreement,
unless Parent has consented in writing thereto, the Company (i) shall, and shall
cause each of its Subsidiaries to, conduct its operations only in the ordinary
course of business and in a manner consistent with past practice, and (ii) shall
use its reasonable commercial efforts, and shall cause each of its Subsidiaries
to use its reasonable commercial efforts, to preserve intact its respective
business organizations and goodwill, keep available the services of its
respective officers and employees and maintain satisfactory relationships with
those Persons having business relationships with it. By way of amplification
and not limitation, except as noted above or as contemplated hereby, neither the
Company nor any of its Subsidiaries shall, during the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, directly or indirectly, do, or propose to do,
any of the following without the prior written consent of Parent:
(a) amend or otherwise change its Certificate of Incorporation or
Bylaws;
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(b) split, combine, reclassify or amend the terms of any of its
capital stock;
(c) declare, set aside or pay any dividend or distribution payable in
cash, stock or property or any combination thereof with respect to shares of its
capital stock (other than pursuant to their terms);
(d) except pursuant to Company Purchase Rights outstanding on the
date hereof, authorize, issue, sell, pledge, encumber or agree to authorize,
issue, sell, pledge or encumber any additional shares of its capital stock of
any class or any other securities in respect of, in lieu of or in substitution
of Company Common Stock outstanding as of the date hereof or any options,
warrants, conversion rights or other rights to acquire capital stock of the
Company or any of its Subsidiaries;
(e) redeem or otherwise acquire any of its outstanding equity
securities or any outstanding options or rights to purchase any such equity
securities or make any commitment to take such action (other than pursuant to
their terms);
(f) accelerate, amend or change (or permit any acceleration,
amendment or change of) the period of exercisability of any Company Purchase
Right (other than pursuant to the express terms of such Company Purchase Right
or pursuant to other contractual obligations to accelerate, amend or change the
period of exercisability as disclosed on the Company Disclosure Letter);
(g) sell, pledge, dispose of or encumber any material assets
(including the capital stock of a Subsidiary) of the Company or any of its
Subsidiaries, except in the ordinary course of business consistent with past
practice and except any encumbrance on the Company's film library to secure
indebtedness allowed pursuant to clause (i) below;
(h) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or any other business organization or
division thereof;
(i) incur any indebtedness for borrowed money, or assume, guarantee
or otherwise as an accommodation become responsible for, the obligations of any
other Person or entity in excess of $1,000,000;
(j) authorize or make any capital expenditures or purchase of fixed
assets for the Company and its Subsidiaries which are in the aggregate more than
$500,000;
(k) increase the compensation or benefits payable or to become
payable to its officers or employees, except in amounts consistent with past
practices; or grant any severance or termination pay to, or enter into any
employment or severance agreement with, any director, officer or other employee
of the Company or any of its Subsidiaries; or establish any collective
bargaining, bonus, profit sharing, compensation, stock option, pension,
retirement, deferred compensation, employment or consulting or other plan,
agreement, trust, fund, plan, policy or arrangement for the benefit of any
current or former directors, officers or employees; provided,
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however, notwithstanding the foregoing, the Company may expend sums not to
exceed an aggregate of $450,000 to provide transition bonuses to its employees.
(l) make any change to its accounting (including tax accounting)
methods, principles or practices except for any changes required by GAAP;
(m) make any material tax election inconsistent with past practices
or settle or compromise any material federal, state, local or foreign tax
liability;
(n) take or agree to take, any action which would cause a material
breach of any of the representations or warranties of the Company contained in
this Agreement or prevent the Company from performing or cause the Company not
to perform its covenants hereunder in any material respect;
(o) submit any matters to the stockholders of the Company for a vote
prior to the Closing other than the Merger;
(p) enter into, or permit any of its Subsidiaries to enter into any
production or distribution arrangements, including, without limitation, any
joint venture agreements, with a term in excess of one year, without consulting
with Parent; or
(q) take any action which to the Company's knowledge would prevent
treatment of the Merger on a pooling of interests basis.
Notwithstanding the foregoing, the parties hereto acknowledge that prior to the
Closing, the Company intends to engage in the following transactions: (i) the
sale of all or substantially all of the assets used in connection with operation
of Showscan/General Cinema Ventures and Showscan Maloney and the dissolution and
liquidation of Showscan/General Cinema Ventures and Showscan Maloney in
accordance with the terms of the joint venture agreements, respectively; (ii)
enter into a new joint venture relationship with United Artists Theater Circuit,
Inc. pursuant to the joint venture agreements with United Artists Theater
Circuit, Inc. to operate a theater in Austin, Texas; (iii) relocate its
principal corporate offices (following consultation with Parent) and to sublease
the premises at which its current principal corporate offices are located and
(iv) as set forth on the Company Disclosure Letter in Section 61. Nothing
contained in this Section 6.1 shall prohibit or otherwise restrict the Company
from engaging in these transactions.
6.2 CONDUCT OF BUSINESS BY PARENT. During the period from the date
of this Agreement until the earlier to occur of the termination of this
Agreement or the Effective Time, except as contemplated by this Agreement,
unless the Company has consented in writing thereto, which consent shall not be
unreasonably withheld, Parent, (i) shall use its reasonable commercial efforts,
and shall cause each of its Subsidiaries to use its reasonable commercial
efforts, to preserve intact its respective business organizations and goodwill,
keep available the services of its respective officers and employees and
maintain satisfactory relationships with those Persons having business
relationships with it; (ii) shall not issue any shares of capital stock or
securities convertible into shares of its capital stock at less than the fair
market value of the stock as determined based on the
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closing sale price of a share of Parent Common Stock on the National Market
System on the day preceding such issuance (other than pursuant to outstanding
options and warrants); (iii) shall not amend or otherwise change its Certificate
of Incorporation or Bylaws; (iv) shall not split, combine, reclassify or amend
the terms of any of its capital stock; (v) shall not declare, set aside or pay
any dividend or distribution payable in cash, stock or property or any
combination thereof with respect to shares of its capital stock; (vi) shall not
take or agree to take any action which would cause a material breach of any of
the representations or warranties of Parent contained in this Agreement or
prevent Parent from performing or cause Parent not to perform its covenants
hereunder in any material respect; (vii) shall not submit any matters to the
stockholders of Parent for a vote prior to the Closing other than the Merger and
other than the other matters presented to the stockholders of Parent
concurrently with the Merger (all of which shall be presented as separate
proposals and the passage of such other matters shall not be a condition to
approval of the Merger); and (viii) take any action which to Parent's knowledge
would prevent treatment of the Merger on a pooling of interests basis.
6.3 INSPECTION OF RECORDS. From the date hereof to the earlier to
occur of the termination of this Agreement and the Effective Time, each of the
Company and Parent shall allow the duly authorized and appropriate officers,
attorneys, accountants and other representatives of the other access at all
reasonable times to the records and files, correspondence, audits and
properties, as well as to all information relating to commitments, contracts,
titles and financial position, or otherwise pertaining to, the business and
affairs of the Company and Parent and their respective Subsidiaries. Parent and
the Company acknowledge that they are parties to that certain Confidentiality
Agreement, dated March 6, 1997 (the "Confidentiality Agreement") the terms and
conditions of which shall survive the execution of this Agreement and shall
continue to be binding on the parties with respect to the inspections referred
to in this Section 6.3 of this Agreement.
6.4 STOCKHOLDER APPROVAL. Each of the Company and Parent will take
all necessary or appropriate action under the Exchange Act, Delaware Law, the
Bylaws of the NASD and other applicable Nasdaq rules and their respective
Certificates of Incorporation and Bylaws to call a meeting of its stockholders,
which shall be held at the earliest practicable date following the effective
date of the Registration Statement, but in no event later than 45 days following
the effective date of the Registration Statement, to consider and vote on a
proposal to approve this Agreement, the Merger and the transactions contemplated
hereby and thereby, will submit the same to its stockholders with a
recommendation for approval by the Board of Directors of the Company or Parent,
as the case may be, and will solicit the approval thereof by such stockholders
by mailing or delivering to each of the stockholders a Proxy Statement as
provided for below.
6.5 REGISTRATION STATEMENT; PROXY STATEMENT.
(a) As promptly as practicable after the execution of this Agreement,
(i) Parent and the Company shall prepare and file with the Commission (with
appropriate requests for confidential treatment) under the Exchange Act a joint
proxy statement/prospectus and a form of proxy (such joint proxy
statement/prospectus together with any amendments thereof or supplements
thereto, in the form or forms delivered to the stockholders of the Company and
the stockholders of Parent, the "Proxy Statement") relating to the meeting of
the stockholders of the
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Company and the vote of the stockholders of the Company with respect to the
Merger and the meeting of the stockholders of Parent and the vote of the
stockholders of Parent with respect to the issuance of Parent Common Stock in
connection with the Merger and (ii) following clearance by the Commission of the
Proxy Statement, Parent shall prepare and file with the Commission under the
Securities Act a registration statement on Form S-4 (such registration
statement, together with any amendments thereof or supplements thereto, the
"Registration Statement"), in which the Proxy Statement will be included as a
prospectus, in connection with the registration under the Securities Act of the
shares of Parent Common Stock to be distributed to holders of shares of Company
Common Stock and Company Preferred Stock pursuant to the Merger. Parent and the
Company will cause the Registration Statement and the Proxy Statement to comply
in all material respects with the Securities Act and the Exchange Act. Each of
Parent and the Company shall use all commercially reasonable efforts to have or
cause the Registration Statement to become effective (including clearing the
Proxy Statement with the Commission) as promptly as practicable thereafter, and
shall take any and all actions required under any applicable federal or state
securities or "Blue Sky" laws in connection with the issuance of shares of
Parent Common Stock pursuant to the Merger. Without limiting the generality of
the foregoing, each of Parent and the Company agrees to use all commercially
reasonable efforts, after consultation with the other such party, to respond
promptly to any comments made by the Commission with respect to the Proxy
Statement (including each preliminary version thereof) and the Registration
Statement (including each amendment thereof and supplement thereto). Each of
Parent and the Company shall, and shall cause its respective representatives to,
fully cooperate with the other such party and its respective representatives in
the preparation of the Proxy Statement and the Registration Statement, and
shall, upon request, furnish the other such party with all information
concerning it and its Affiliates, directors, officers and stockholders as the
other may reasonably request in connection with the preparation of the Proxy
Statement and the Registration Statement. The Proxy Statement shall include the
determination and recommendation of the Board of Directors of the Company that
the stockholders of the Company vote in favor of the approval and adoption of
this Agreement and the Merger and the determination and recommendation of the
Board of Directors of Parent that the stockholders of Parent vote in favor of
the approval of the issuance of Parent Common Stock pursuant to this Agreement;
provided, however, that the Board of Directors of the Company or Parent may
withdraw, modify or change such respective recommendation if either such Board
of Directors determines in good faith, based upon the advice of outside counsel,
that making such recommendations, or the failure to so withdraw, modify or
change its recommendation, or the failure to recommend any other offer or
proposal, could reasonably be deemed to cause the members of such Board of
Directors to breach their fiduciary duties under applicable law. As promptly as
practicable after the Registration Statement shall have become effective, Parent
and the Company shall cause the Proxy Statement to be mailed to their
stockholders.
(b) Without limiting the generality of the foregoing, (i) the Company
and Parent shall each notify the other as promptly as practicable upon becoming
aware of any event or circumstance which should be described in an amendment of,
or a supplement to, the Proxy Statement or the Registration Statement, and (ii)
the Company and Parent shall each notify the other as promptly as practicable
after the receipt by it of any written or oral comments of the Commission on, or
of any written or oral request by the Commission for amendments or supplements
to, the Proxy Statement or the Registration Statement, and shall promptly supply
the other with copies of
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all correspondence between it or any of its representatives and the Commission
with respect to any of the foregoing filings.
(c) The information supplied by the Company for inclusion or
incorporation by reference in the Proxy Statement and the Registration Statement
shall not (i) at the time the Registration Statement is declared effective, (ii)
at the time the Proxy Statement (or any amendment thereof or supplement thereto)
is first mailed to holders of Company Common Stock, Company Preferred Stock or
holders of Parent Common Stock, (iii) at the time of the meeting of the
stockholders of the Company or the meeting of the stockholders of Parent and
(iv) at the Effective Time, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event or
circumstance relating to the Company or any of its Affiliates or its or their
respective officers or directors should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Company shall promptly inform Parent of
such event or circumstance.
(d) The information supplied by Parent for inclusion or incorporation
by reference in the Proxy Statement and the Registration Statement shall not (i)
at the time the Registration Statement is declared effective, (ii) at the time
the Proxy Statement (or any amendment thereof or supplement thereto) is first
mailed to holders of Company Common Stock, Company Preferred Stock or holders of
Parent Common Stock, (iii) at the time of the meeting of the stockholders of the
Company or the meeting of the stockholders of Parent and (iv) at the Effective
Time, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they are misleading. If
at any time prior to the Effective Time any event or circumstance relating to
Parent or any of its Affiliates or its or their respective officers or directors
should be discovered by Parent which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, Parent shall
promptly inform the Company of such event or circumstance.
6.6 AGREEMENTS BY AFFILIATED STOCKHOLDERS OF THE COMPANY. The
Company shall use reasonable efforts to deliver or cause to be delivered to
Parent, from each "affiliate" of the Company, as such term is defined and used
in Rule 145 under the Securities Act ("Rule 145 Affiliates") an Affiliate Letter
in the form attached hereto as Schedule 6.6. Parent shall be entitled to place
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legends as specified in such Affiliate Letters on the certificate evidencing any
Parent Common Stock to be received by such Rule 145 Affiliates pursuant to the
terms of this Agreement, and to issue appropriate stop transfer instructions to
the transfer agent for the Parent Common Stock, consistent with the terms of
such Affiliate Letters.
6.7 COMFORT LETTER. If requested by Parent, the Company shall use
commercially reasonable efforts to deliver to Parent a "comfort" letter from
Ernest & Young, LLP, independent public accountants for the Company, of the kind
contemplated by the Statement of Auditing Standards with respect to Letters to
Underwriters promulgated by the American Institute of Certified Public
Accountants (the "AICPA Statement"), dated the Effective Time, in form and
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substance reasonably satisfactory to Parent in connection with the procedures
undertaken by it with respect to the financial statements and other financial
information of the Company and its Subsidiaries contained in the Proxy Statement
and Registration Statement and the other matters contemplated by the AICPA
Statement and customarily included in comfort letters relating to transactions
similar to the Merger.
6.8 TAKEOVER STATUTES. The Company and Parent shall cooperate and
take all action reasonably necessary to render inapplicable the prohibitions on
business combinations contained in Section 203 of the Delaware Law and eliminate
or minimize the validity or applicability to the Merger of any state takeover
statute.
6.9 EXPENSES. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses except as
expressly provided herein and except that (a) the filing fee in connection with
the filing of the Registration Statement or Proxy Statement with the Commission
and (b) the expenses incurred in connection with printing and mailing the
Registration Statement and the Proxy Statement, shall be shared equally by the
Company and Parent.
6.10 REORGANIZATION. From and after the date hereof and until the
Effective Time, neither Parent nor the Company nor any of their respective
Subsidiaries shall (i) knowingly take any action, or knowingly fail to take any
action, that would jeopardize qualification of the Merger as a reorganization
with the meaning of Section 368(a) of the Code; or (ii) enter into any contract,
agreement, commitment or arrangement with respect to the foregoing. In
addition, neither Parent, Sub nor the Company shall take a position inconsistent
with the treatment of the Merger as a reorganization within the meaning of
Section 368(a) of the Code on any Tax Return or otherwise.
6.11 CONTINUITY OF INTEREST LETTERS. The Company shall use its
reasonable efforts to cause each holder of 5% or more (by value) of Company
Common Stock and Company Preferred Stock (determined as of the date hereof) to
execute a Continuity-of-Interest Letter in the form attached hereto as Schedule
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6.11. Copies of any executed Continuity-of-Interest Letters received shall be
- ----
delivered to counsel to the Company and Parent, respectively, at the Closing.
6.12 FILINGS; OTHER ACTION. Subject to the terms and conditions
herein provided, the Company and Parent shall (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from
states and foreign jurisdictions in connection with the execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
and (ii) timely making all such filings and timely seeking all such consents,
approvals, permits or authorizations; and (b) use all reasonable efforts to
take, or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make effective
the transactions contemplated by this Agreement. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purpose of this Agreement, the proper officers and directors of Parent and the
Company shall take all such necessary action.
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6.13 NOTIFICATION OF CERTAIN MATTERS. The Company shall use
reasonable good faith efforts to promptly give written notice to Parent and
Parent shall use reasonable good faith efforts to promptly give written notice
to the Company, upon becoming aware of the occurrence or, to its Knowledge,
respectively, impending or threatened occurrence, of any event which would cause
or constitute a breach of any of its representations, warranties or covenants
contained or referenced in this Agreement and use its reasonable good faith
efforts to prevent or promptly remedy the same.
6.14 LEGAL ACTION. In the event that a preliminary or permanent
injunction or other order, decree or ruling is issued by any court of competent
jurisdiction or by any governmental, administrative or regulatory agency or
commission in the United States which prohibits the consummation of the Merger
and shall be in effect, each party agrees to use its reasonable efforts to have
such injunction lifted.
6.15 PUBLICITY. The Company and Parent shall, subject to their
respective legal obligations of public companies, use reasonable efforts to
agree upon the text of any press release relating to the Merger or the
transactions contemplated by this Agreement; provided, however, if the parties
hereto are unable to agree upon the text of any such press release, nothing
herein shall require any party to obtain the consent of any other party to the
release of any such press release which, upon the advice of outside legal
counsel, such party determines in good faith is required to be issued by
applicable law or the rule and regulations of the NASD.
6.16 ALTERNATIVE PROPOSALS. Prior to the earlier to occur of the
termination of this Agreement and the Effective Time, the Company agrees (a)
that neither it nor any of its Subsidiaries shall, and it shall direct and use
its best efforts to cause its officers, directors, employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) not to, initiate or
solicit, directly or indirectly, any inquiries or the making or implementation
of any proposal or offer (including, without limitation, any proposal or offer
to its stockholders) with respect to a merger, acquisition, consolidation or
similar transaction involving, or any purchase of (i) all or any significant
portion of the assets of the Company and its Subsidiaries, taken as a whole; or
(ii) 25% or more of the outstanding voting power of the capital stock of the
Company, (any such proposal or offer being hereinafter referred to as an
"Alternative Proposal") or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any Person
relating to an Alternative Proposal; and (b) that it will notify Parent
immediately if any such inquiries or proposals are received by, any such
information is received from, or any such negotiations or discussions are sought
to be initiated or continued with, it; provided, however, that nothing contained
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in this Section 616 shall prohibit the Board of Directors of the Company from
(i) furnishing information to, or entering into discussions or negotiations
with, any Person that makes an unsolicited bona fide offer or proposal with
respect to an Alternative Proposal, if, and only to the extent that (A) the
Board of Directors determines in good faith, after advice of its outside
counsel, that such action is required for the Board of Directors to comply with
its fiduciary duties to stockholders imposed by law, (B) prior to furnishing
such information to, or entering into discussions or negotiations with, such
Person, the Company provides written notice to Parent to the effect that it is
furnishing information to, or entering into discussions or negotiations with, a
Person (provided nothing herein shall require the Company to identify such
Person); and (ii) to the extent
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applicable, taking and disclosing to the Company's stockholders a position with
regard to a tender or exchange offer contemplated by Rules 14d-9 or 14e-2 or
promulgated under the Exchange Act and making such disclosure to the Company's
stockholders as may be required under applicable law. Nothing in this Section
6.16 shall (x) permit any party to terminate this Agreement (except as
specifically provided in Section 10.1 hereof), (y) permit any party to enter
into any agreement for an Alternative Proposal during the term of this Agreement
(it being agreed that during the term of this Agreement, no party shall enter
into any agreement with any Person that provides for, or in any way facilitates,
an Alternative Proposal (other than a confidentiality agreement in customary
form)), or (z) affect any other obligation of any party under this Agreement.
6.17 INDEMNIFICATION AND INSURANCE. From and after the Effective
Time,
(a) Parent shall cause the Surviving Corporation to, and the Surviving
Corporation shall, include as part of its Certificate of Incorporation and
Bylaws provisions relating to the indemnification of all current and former
directors, officers, employees and agents of the Company which are no less
favorable than the provisions contained in the Company's Certificate of
Incorporation and Bylaws. Such provisions shall not be amended, repealed or
otherwise modified after the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who at any time prior to the
Effective Time were directors, officers, employees or agents of the Company in
respect to actions or omissions occurring at or prior to the Effective Time
(including, without limitation, actions or omissions which occur in connection
with the transactions contemplated by this Agreement), unless such modification
is required by law.
(b) The Company shall, to the fullest extent permitted under
applicable law or under the Company's Certificate of Incorporation or Bylaws and
regardless of whether the Merger becomes effective, indemnify and hold harmless
and after the Effective Time, Parent and the Surviving Corporation shall, to the
fullest extent permitted under applicable law or under the Surviving
Corporation's Certificate of Incorporation or Bylaws, indemnify and hold
harmless, each present and former director, officer or employee of the Company
or any of its subsidiaries (collectively, the "Indemnified Parties") against any
costs or expenses (including attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, (x) arising out of or pertaining to the
transactions contemplated by this Agreement or (y) otherwise with respect to any
act or omissions occurring at or prior to the Effective Time, in each case for a
period of six years after the date hereof; provided, however, in no event shall
Parent be obligated to provide indemnity to the Indemnified Parties pursuant to
clause (y) immediately above which in the aggregate is in excess of $10,243,000.
In the event of any such claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Time), (i) any counsel retained
by the Indemnified Parties for any period after the Effective Time shall be
reasonably satisfactory to the Surviving Corporation, (ii) after the Effective
Time, the Surviving Corporation shall pay the reasonable fees and expenses of
such counsel, promptly after statements therefor are received, and (iii) the
Surviving Corporation will cooperate in the defense of any such matter;
provided, however, the Surviving Corporation shall not be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld); and provided, further, that, in the event that any claim
or claims for indemnification are asserted or made within such six-year
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period, all rights to indemnification in respect of any such claim or claims
shall continue until the disposition of any and all such claims. The Indemnified
Parties as a group may retain only one law firm to represent them with respect
to any single action unless there is, under applicable standards of professional
conduct, a conflict on any significant issue between the positions of any two or
more Indemnified Parties in which case this limitation shall not apply.
(c) For a period of six years after the Effective Time, Parent shall
cause the Surviving Corporation to maintain in effect directors' and officers'
liability insurance covering those persons who are currently covered by the
Company's directors' and officers' insurance policy on terms no less favorable
than those now applicable to directors and officers of the Company; provided,
however, that Parent and the Surviving Corporation may substitute therefor
policies of insurance containing terms and conditions that are no less
advantageous to such covered persons or provide for such coverage under Parent's
directors' and officers' liability insurance policy (a copy of which has been
made available to the Company) if Parent's policy provides, subject to the last
sentence of this Section 6.17(c), at least the same coverage and amounts and on
terms and conditions that are no less favorable to covered persons than the
Company's current policy. Notwithstanding the foregoing, neither Parent nor the
Surviving Corporation shall be required to maintain such policies to the extent
the premium therefore exceeds 200% of the annual premiums currently paid by the
Company in respect of the current policy or policies (the "Maximum Amount") but
in such case shall purchase as much comparable coverage as available for the
Maximum Amount.
6.18 APPOINTMENT OF COMPANY NOMINATED DIRECTORS. Parent hereby
agrees to appoint, immediately after the Effective Time, Messrs. Moss,
DiBenedetto and Hall ("Company Nominated Directors") to serve as directors on
Parent's Board of Directors in the Class of Directors and to serve as members of
that committee of Parent's Board of Directors each as set forth opposite each
Company Nominated Directors' name on Schedule 6.18, all in accordance with
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Parent's Bylaws until such time as their successors have been duly elected or
appointed and qualified or until the earlier death, resignation or removal of
such director in accordance with Parent's Bylaws.
7. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
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respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
7.1 STOCKHOLDER APPROVAL. This Agreement and the Merger shall have
been approved and adopted by the requisite vote or written consent of the
stockholders of the Company and the issuance of the shares of Parent Common
Stock pursuant to the terms of this Agreement shall have been approved and
adopted by the requisite vote of the stockholders of Parent.
7.2 NO LEGAL ACTION. No preliminary or permanent injunction or
other order, decree or ruling issued by any court of competent jurisdiction, or
by any governmental, administrative or regulatory agency or commission, in the
United States which prohibits the consummation of the Merger shall be in effect.
7.3 REGISTRATION STATEMENT EFFECTIVE. The Registration Statement
shall have become effective and shall not be subject to a "stop order," and no
action, suit, proceeding or
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investigation by the Commission to suspend the effectiveness thereof shall have
been initiated and be continuing.
7.4 LISTING OF ADDITIONAL SHARES ON THE NASDAQ NATIONAL MARKET.
The shares of Parent Common Stock issued in connection with the Merger shall
have been approved for listing on the Nasdaq National Market subject to oral
notice of official issuance.
7.5 PERMITS AND APPROVALS. All material filings, registrations,
covenants, permits, authorizations and regulatory approvals of governmental
authorities necessary for the consummation of the Merger shall have been duly
obtained or made and shall be in full force and effect.
7.6 ACCOUNTING TREATMENT. Each of Parent and the Company shall
have received letters (the "Pooling Letters"), dated as of the Effective Date,
from Ernst & Young, LLP, regarding such firm's concurrence with Parent's
management's and the Company's management's conclusions as to the
appropriateness of pooling of interest accounting for the Merger under
Accounting Principles Opinion No. 16 if closed and consummated in accordance
with this Agreement.
8. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT. The obligations of
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Parent to effect the Merger are subject to the fulfillment at or prior to the
Closing of the following additional conditions, any of which may be waived in
writing in whole or in part by Parent:
8.1 REPRESENTATIONS, COVENANTS, CERTIFICATE. The Company shall
have performed in all material respects its agreements contained in this
Agreement required to be performed on or prior to the Effective Time, and the
representations and warranties of the Company herein contained shall be true in
all material respects as of the date of this Agreement and the Effective Time
except for representations and warranties that speak as of a specific date or
time, which need only be true and correct in all material respects as of such
date or time and except for such inaccuracies which do not in the aggregate have
a Material Adverse Effect.
8.2 NO ADVERSE CHANGE. Since the date hereof, there shall not have
occurred any change in the financial condition, business or operations of the
Company and its Subsidiaries that would have or would be reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect.
8.3 CERTAIN LEGAL MATTERS. There shall not have been any statute,
rule, regulation or order promulgated, enacted, entered, enforced or deemed
applicable to the Merger by any United States federal or state government or
governmental authority, nor shall there be in effect an order or judgment
entered by any United States federal or state court, which (i) would make the
consummation of the Merger illegal or would materially delay the Effective Time,
(ii) would require the divestiture by Parent, the Company or any of their
respective Subsidiaries of any of the shares of Company Common Stock or of a
material portion of the business, assets, or property of either Parent or any of
its Subsidiaries, or of the Company or any of its Subsidiaries, or impose any
material limitation on the ability of any of them to conduct their respective
businesses and own their
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respective assets or property, or (iii) impose any limitations on the ability of
Parent, directly or indirectly, to control in any material respect the business
or operations of the Company, or any of its Subsidiaries.
8.4 TAX OPINION AND CERTIFICATES. At the Closing, the Company and
Parent shall deliver Tax Matters Certificates to counsel to Parent, which
certificates shall be substantially in the form of Schedules 8.4(a) and 8.4(b)
--------------- -----
attached hereto, respectively (the "Tax Matters Certificates"). At the Closing,
Parent shall have received a written opinion from its counsel, dated the Closing
Date, to the effect that (i) the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code and the Company, Parent and Sub will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code, (ii) no gain or loss will be recognized by the Company, Parent or Sub
as a result of the Merger, and (iii) no stockholder of the Company will
recognize gain or loss on the exchange of Company Common Stock or Company
Preferred Stock solely for Parent Common Stock in the Merger. Such counsel
shall, in rendering such opinions, be entitled to rely on reasonable
representations and assumptions from officers of the Company and Parent related
thereto.
8.5 CERTIFICATE. Parent shall have received a certificate of the
Company dated the Effective Time, signed by a senior officer of the Company,
certifying that (i) all representations and warranties of the Company were true
and correct in all material respects when made and are true and correct in all
material respects on the Effective Time as if made on the Effective Time, and
(ii) the Company has performed and complied in all material respects with all
covenants and agreements required in this Agreement to be performed or complied
with by it on or prior to the Effective Time.
8.6 RESIGNATION OF COMPANY OFFICERS AND DIRECTORS. Prior to the
Effective Time, each of the members of the Board of Directors of the Company and
its Subsidiaries shall have executed letters of resignation which shall become
effective as of the Effective Time.
9. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
-------------------------------------------------------
obligations of the Company to effect the Merger are subject to the fulfillment
at or prior to the Closing of the following additional conditions, any of which
may be waived in writing, in whole or in part, by the Company:
9.1 REPRESENTATIONS, COVENANTS, CERTIFICATE. Parent and Sub shall
have performed in all material respects their respective agreements contained in
this Agreement required to be performed on or prior to the Effective Time, and
the representations and warranties of Parent and Sub herein contained shall be
true and correct in all material respects as of the date of this Agreement and
the Effective Time except for representations and warranties that speak as of a
specific date or time, which need only be true and correct in all material
respects as of such date or time and except for such inaccuracies which do not
in the aggregate have a Material Adverse Effect.
9.2 CERTAIN LEGAL MATTERS. There shall not have been any statute,
rule, regulation or order promulgated, enacted, entered, enforced or deemed
applicable to the Merger by any United States federal or state government or
governmental authority, nor shall there be in effect an order or judgment
entered by any United States federal or state court, which would make the
consummation of the Merger illegal or would materially delay the Effective Time.
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9.3 TAX OPINION AND CERTIFICATES. At the Closing, the Company and
Parent shall deliver the Tax Matters Certificates to counsel to the Company. At
the Closing, the Company shall have received a written opinion from its counsel,
dated the Closing Date, to the effect that (i) the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code and the Company,
Parent and Sub will each be a party to that reorganization within the meaning of
Section 368(b) of the Code, (ii) no gain or loss will be recognized by the
Company, Parent or Sub as a result of the Merger, and (iii) no stockholder of
the Company will recognize gain or loss on the exchange of Company Common Stock
or Company Preferred Stock solely for Parent Common Stock or Parent Preferred
Stock in the Merger. Such counsel shall, in rendering such opinions, be
entitled to rely on reasonable representations and assumptions from officers of
the Company and Parent related thereto.
9.4 CERTIFICATE. The Company shall have received a certificate of
Parent dated the Effective Time, signed by a senior officer of Parent,
certifying that (i) all representations and warranties of Parent and Sub were
true and correct in all material respects when made and are true and correct in
all material respects on the Effective Time as if made on the Effective Time,
and (ii) Parent and Sub has performed and complied in all material respects with
all covenants and agreements required in this Agreement to be performed or
complied with by it on or prior to the Effective Time.
9.5 NO ADVERSE CHANGE. Since the date hereof, there shall not have
occurred any change in the financial condition, business or operations of Parent
and its Subsidiaries, that would have or would be reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect.
10. TERMINATION.
-----------
10. TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, notwithstanding approval thereof by the
stockholders of the Company or Parent:
(a) by mutual written consent duly authorized by the Boards of
Directors of Parent and the Company; or
(b) by either Parent or the Company, if the Merger shall not have been
consummated by December 31, 1997 (provided that the right to terminate this
Agreement under this Section 10.1 shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of or
a substantial contributor to the failure of the Merger to occur on or before
such date); or
(c) by either Parent or the Company, if a court of competent
jurisdiction or governmental, regulatory or administrative agency or commission
shall have issued a nonappealable final order, decree or ruling or taken any
other action having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger (provided that (i) if the party seeking to
terminate this Agreement pursuant to Section 10.1 is subject to such order,
decrees or ruling, it shall have used all reasonable efforts to have such order,
decree or ruling removed and (ii)
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the right to terminate this Agreement under this Section 10.1 shall not be
available to any party who has not complied with its obligations under Section
6.12 and such noncompliance materially contributed to the issuance of any such
order, decree or ruling or the taking of such action);
(d) by action of the Board of Directors of the Company (i) following
receipt of an Alternative Proposal if (a) the Board of Directors of the Company
determines in good faith, after advice of outside counsel, that such action is
necessary in order to fulfill its fiduciary duties to stockholders imposed by
law, and if (b) such Board of Directors is then in receipt of a written opinion
from its financial advisor that such Alternative Proposal would, if
consummated, result in a transaction more favorable to the Company's
stockholders from a financial point of view than the transaction contemplated by
this Agreement; provided, however, prior to any such termination, the Company
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notifies Parent promptly of its intention to terminate this Agreement or enter
into a definitive agreement with respect to an Alternative Proposal, but in no
event shall such notice be given less than 48 hours prior to the public
announcement of such action; or (ii) if the Board of Directors of Parent shall
have withdrawn or modified in a manner materially adverse to the Company its
approval of this Agreement or the Merger or recommendation of the issuance of
the Parent Common Stock pursuant to the terms of this Agreement or the Merger.
(e) by action of the Board of Directors of Parent if the Board of
Directors of the Company shall have withdrawn or modified in a manner materially
adverse to Parent its approval or recommendation of this Agreement or the
Merger.
(f) by Parent or the Company, if, at a duly held meeting of the
stockholders of the Company (including any adjournment thereof) held for the
purpose of voting on the Merger, this Agreement and the consummation of the
transactions contemplated hereby, the holders of a majority of the outstanding
shares of Company Common Stock and Company Preferred Stock (voting as a single
class) shall not have approved the Merger and this Agreement;
(g) by Parent or the Company, if, at a duly held meeting of the
stockholders of Parent (including any adjournment thereof) held for the purpose
of voting on the issuance of the Parent Common Stock in connection with the
Merger, the requisite vote of a majority of the holders of the outstanding
shares of Parent Common Stock shall not have approved such issuance.
10.2 OPTION TO PURCHASE.
(a) The Company hereby grants to Parent an irrevocable option (the
"Option") to purchase for an amount equal to $4.14 per share (the "Per Share
Price") in cash up to 330,714 authorized but unissued shares of Company Common
Stock (the "Optioned Shares"). The Option shall expire (such event being
referred to herein as the "Option Termination Event") if not exercised as
permitted under this Agreement prior to the earlier of (I) the Effective Time,
(ii) termination of this Agreement in accordance with the provisions of Section
10.1(a), 10.1(b), 10.1(c), 10.1(d)(ii), 10.1(f) (unless prior to the date of the
meeting referred to therein an Alternative Proposal is publicly announced) or
10.1(g) or (iii) the first business day after the three hundred and sixty-fifth
calendar day following termination of this Agreement for any reason pursuant to
10.1(d)(i), 10.1(e)
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or 10.1(f) (if prior to the date of the meeting referred to therein an
Alternative Proposal is publicly announced); provided, however, that in the
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event that the exercise of the Option shall be subject to any injunction
prohibiting its exercise such period shall be extended for a period of sixty
days following the removal of any such injunction.
(b) Provided that (i) no preliminary or permanent injunction or other
order issued by any Federal or state court of competent jurisdiction in the
United States prohibiting the exercise of the Option or the delivery of the
Optioned Shares shall be in effect and (ii) any such exercise shall otherwise be
subject to compliance with applicable law, Parent may exercise the Option in
whole or in part at any time or from time to time after the occurrence of both
an Initial Triggering Event and a Purchase Event (as defined in Section
10.2(d)) if, but only if, both the Initial Triggering Event and the Purchase
Event shall have occurred prior to the occurrence of an Option Termination
Event. In the event that Parent wishes to exercise the Option, Parent shall give
written notice of such exercise (the date of such notice being herein called the
"Notice Date") within 30 days following such Purchase Event to the Company
specifying the number of Optioned Shares it will purchase pursuant to such
exercise and a place and date for the closing of such purchase.
(c) At any closing of the exercise of the Option, (i) Parent will make
payment to the Company of the aggregate price for the Optioned Shares in
immediately available funds, in an amount equal to the product of the Per Share
Price multiplied by the number of Optioned Shares being purchased at such
closing and (ii) the Company will deliver to Parent a duly executed certificate
or certificates representing the number of Optioned Shares so purchased,
registered in the name of Parent or its nominee in the denominations designated
by Parent in its notice of exercise.
(d) For the purposes this Section 10.2, an "Initial Triggering Event"
shall have occurred at such time as one of the following events shall have
occurred and Parent shall have determined in good faith (and shall have notified
the Company in writing of such determination) that there is a reasonable
likelihood that, as a result of the occurrence of any of the following events,
consummation of the Merger pursuant to the term of this Agreement is
jeopardized: (i) any Person as defined in Sections (a)(9) or 13(d)(3) of the
Exchange Act (other than Parent or any Subsidiary of Parent) shall have
commenced a bona fide offer to purchase shares of Company Common Stock such
that, upon consummation of said offer, such Person would own or control 10% or
more of the outstanding shares of Company Common Stock, or shall have entered
into an agreement to (A) merge or consolidate or enter into any similar
transaction, with the Company, or (B) purchase or otherwise acquire (including
by way of merger, consolidation, share exchange or any similar transaction)
securities representing 10% or more of the voting power of the Company; (ii) any
Person (other than Parent or any Subsidiary of Parent) shall have acquired
beneficial ownership or the right to acquire beneficial ownership of 10% or more
of the outstanding shares of the Company Common Stock (the term "beneficial
ownership" for purposes of this Section 10.2(d) having the meaning assigned
thereto in Section 13(d) of the Exchange Act); (iii) any Person (other than
Parent or any Subsidiary of Parent) shall have made a bona fide proposal to the
Company after the date of this Agreement by public announcement or written
communication to (A) acquire the Company by merger, consolidation, purchase of
all or substantially all of its assets or any other similar transaction, or (B)
make an offer described herein; (iv) any Person shall have solicited
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proxies in a proxy solicitation subject to Regulation 14A under the Exchange Act
in opposition to approval of this Agreement by the Company's stockholders; (v)
or any Person shall have willfully breached any provision of this Agreement,
which breach would entitle Parent to terminate this Agreement and such breach
shall not have been cured pursuant to the terms of this Agreement and prior to
Parent's request under this Section 10.2. For purposes of this Section 10.2, a
"Purchase Event" shall have occurred at such time as the Company is obligated to
pay to Parent the Company Termination Fee set forth in Section 10.3(a)(i).
(e) At any time commencing upon the occurrence of a Purchase Event at
Parent's or Company's request, the Company shall pay to Parent an amount equal
to the difference between the "market/tender offer" price for shares of Company
Common Stock (defined as the higher of the average price per share at which a
tender or exchange offer has been made or the highest reported sale price for
shares of Company Common Stock on the date Parent or the Company gives notice of
the required payment under this Section 10.2) and the Per Share Price, as
adjusted pursuant to Section 10.2(f) which difference shall be multiplied by the
total number of Optioned Shares as to which the Option has not theretofore been
exercised, as adjusted pursuant to Section 10.2(f), but only if the
market/tender offer price is greater than such exercise price. In the event that
the Company makes a payment directly to Parent of the amounts provided for in
this Section 10.2(e), such payment shall extinguish all other rights of Parent
under this Option but shall not affect the rights of Parent under the Agreement
or otherwise.
(f) If between the date of this Agreement and the Effective Time, the
shares of the Company Common Stock shall be changed into a different number of
shares by reason of any reclassification, recapitalization, split-up,
combination or exchange of shares, or if a stock dividend thereon shall be
declared with a record date within said period, the number of Optioned Shares
and the Per Share Price shall be adjusted appropriately so as to restore Parent
to its rights hereunder, at an adjusted per share purchase price equal to the
Per Share Price multiplied by a fraction, the numerator of which shall be equal
to the number of shares of the Company Common Stock purchasable prior to the
adjustment and the denominator of which shall be equal to the number of shares
of Company Common Stock purchasable after the adjustment; provided, however,
-----------------
that nothing in this Option shall be construed as permitting the Company to take
any action or enter into any transaction prohibited by this Agreement.
(g) The Company shall, if requested by Parent, as expeditiously as
possible file a registration statement on a form of general use under the
Securities Act if necessary in order to permit the sale or other disposition of
the shares of Company Common Stock that have been acquired upon exercise of the
Option in accordance with the intended method of sale or other disposition
requested by Parent. Parent shall provide all information reasonably requested
by the Company for inclusion in any registration statement to be filed
hereunder. The Company will use its best efforts to cause such registration
statement first to become effective and then to remain effective for such period
not in excess of two hundred and seventy calendar days from the day such
registration statement first becomes effective as may be reasonably necessary to
effect such sales or other dispositions. The registration effected under this
Section 10.2 shall be at the Company's expense except for all agency fees and
commissions and underwriting discounts and commissions attributable to the sale
of such securities, which amounts shall be borne by Parent. In no event shall
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the Company be required to effect more than one registration hereunder
regardless of the number of assignees. The filing of any registration statement
hereunder may be delayed for such period of time as may reasonably be required
if the Company determines that any such filing or the offering of any such
shares of Company Common Stock would (i) impede, delay or otherwise interfere
with any financing, offer or sale of Company Common Stock or any other
securities of the Company, or (ii) require disclosure of material information
which, if disclosed at that time, would be materially harmful to the interests
of the Company and its shareholders. If requested by Parent in connection with
any such registration, the Company will become a party to any underwriting
agreement relating to the sale of such shares, but only to the extent of
obligating itself in respect of representations, warranties, indemnities and
other agreements customarily included in such underwriting agreements. Upon
receiving any request from Parent or an assignee thereof under this Section
10.2(g) the Company agrees to send a copy thereof to Parent and to any assignee
thereof known to the Company, in each case by promptly mailing the same, postage
prepaid, to the address of record of the Persons entitled to receive such
copies.
10.3 EFFECT OF TERMINATION.
(a) The Company shall pay Parent a fee of $1,500,000 (the "Company
Termination Fee") in the event that (i) this Agreement is terminated pursuant to
(x) Section 10.1(d)(i) or 10.1(e), or (y) Section 10.1(f) if prior to the
meeting of the stockholders of the Company contemplated pursuant to Section 6.4
an Alternative Proposal is publicly announced and the Company consummates such
Alternative Proposal within 12 months of the termination of this Agreement
pursuant to Section 10.1(f), or (ii) the condition set forth in Section 7.6 is
not satisfied as a result of either (x) false or inaccurate statements made by
the Company in the representation letter delivered by the Company to Ernst &
Young or (y) a sale or other transfer after the date hereof of the capital stock
of the Company or of Parent by an "affiliate" of the Company, as such term is
defined and used in Accounting Series Releases 130 and 135, as amended; or (z)
any action taken by the Company subsequent to the date of this Agreement. The
Company Termination Fee shall be payable by wire transfer of same day funds
either on the date contemplated in the last sentence of Section 10.1(d) if
applicable, or otherwise, within two business days after such amount becomes
due. The Company acknowledges that the agreements contained in this Section
10.3(a) are an integral part of the transactions contemplated in this Agreement,
and that, without these agreements, Parent would not enter into this Agreement;
accordingly, if the Company fails to promptly pay the amount due pursuant to
this Section 10.3(a) and, in order to obtain such payment, Parent commences a
suit which results in a judgment against the Company for the fee set forth in
this Section 10.3(a) the Company shall pay to Parent its costs and expenses
(including attorneys' fees) in connection with such suit, together with interest
on the amount of the fee at the rate of 10% per annum.
(b) Parent shall pay the Company a fee of $1,500,000 (the "Parent
Termination Fee") in the event that (i) this Agreement is terminated pursuant to
Section 10.1(d)(ii), or (ii) the condition set forth in Section 7.6 is not
satisfied as a result of either (x) false or inaccurate statements made by
Parent in the representation letter delivered by Parent to Ernst & Young; or (y)
a sale or other transfer after the date hereof of the capital stock of Parent by
an "affiliate" of Parent, as such term is defined and used in Accounting Series
Releases 130 and 135, as amended; or (z) any action taken by Parent subsequent
to the date of this Agreement. The Parent Termination Fee shall
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be payable by wire transfer of same day funds within two business days after
such amount becomes due. Parent acknowledges that the agreements contained in
this Section 10.3(a) are an integral part of the transactions contemplated in
this Agreement, and that, without these agreements, the Company would not enter
into this Agreement; accordingly, if Parent fails to promptly pay the amount due
pursuant to this Section 10.3(a) and, in order to obtain such payment, the
Company commences a suit which results in a judgment against Parent for the fee
set forth in this Section 103 Parent shall pay to the Company its costs and
expenses (including attorneys' fees) in connection with such suit, together with
interest on the amount of the fee at the rate of 10% per annum.
(c) If this Agreement is terminated pursuant to Section 10.1, this
Agreement shall become void and of no effect with no liability on the part of
any party hereto, except that (a) the agreements contained in Section 6.8, the
last sentence of Section 6.3 and Sections 10.3(a) and 10.3(b) shall survive the
termination hereof and (b) if termination of this Agreement shall be judicially
determined to have been caused by willful breach of this Agreement, then, in
addition to other remedies at law or equity for breach of this Agreement, the
party so found to have willfully breached this Agreement shall indemnify the
other parties for their respective costs, fees and expenses of their counsel,
accountants and other experts and advisors as well as fees and expenses incident
to negotiation, preparation and execution of this Agreement and related
documentation and their stockholders' meetings and consents.
11. MISCELLANEOUS PROVISIONS.
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11.1 NOTICES. All notices, demands or other communications
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered in Person, on the date actually given, (ii) by United States mail,
certified or registered, with return receipt requested, on the date which is two
business days after the date of mailing, or (iii) if sent by telex or facsimile
transmission, with a copy mailed on the same day in the manner provided in (ii)
above, on the date transmitted provided receipt is confirmed by telephone:
(a) if to Parent to:
Iwerks Entertainment, Inc.
4540 West Valerio Street
Burbank, California 91505
Attention: Roy A. Wright
Telecopy No.: (818) 841-6192
With copies to:
Troop Meisinger Steuber & Pasich, LLP
10940 Wilshire Boulevard, Suite 800
Los Angeles, California 90024
Attention: C.N. Franklin Reddick III, Esq.
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Telecopy No.: (310) 443-8512
(b) if to the Company to:
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Attention: Dennis Pope
Telecopy No.: (310) 280-0476
With copies to:
Latham & Watkins
75 Willow Road
Menlo Park, California
Attention: Peter Kerman, Esq.
Telecopy No.: (415) 463-2600
or at such other address as may have been furnished by such Person in writing to
the other parties.
11.2 TERMINATION OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties of the Company, Parent and Sub contained herein
shall expire with, and be terminated and extinguished at the Effective Time.
Neither the Company, Parent nor Sub shall be under any monetary or other
liability whatsoever with respect to any breach of a representation or warranty
contained herein or in or with respect to any certificate or other document
delivered pursuant hereto, and the sole consequence of any such breach shall be
limited to the failure to satisfy a condition set forth in Sections 8 and 9
hereof, as applicable, and the termination right provided for in Section 101
hereof, in each case to the extent applicable according to such Section's
express terms.
11.3 SEVERABILITY. Should any Section or any part of a Section
within this Agreement be rendered void, invalid or unenforceable by any court of
law for any reason, such invalidity or unenforceability shall not void or render
invalid or unenforceable any other Section or part of a Section in this
Agreement.
11.4 EXHIBITS AND SCHEDULES. Each Exhibit and Schedule delivered
pursuant to the terms of this Agreement and each document, instrument and
certificate delivered by the parties in connection with the transactions
contemplated hereby constitutes an integral part of this Agreement.
11.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED BOTH AS TO VALIDITY AND PERFORMANCE AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW
PRINCIPLES THEREOF.
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11.6 WAIVER OF JURY TRIAL. The parties hereto each waives any right to
have a jury participate in resolving any dispute whether sounding in contract,
tort, or otherwise arising out of, connected with, related to or incidental to
the relationship established between them pursuant to this Agreement. Instead,
any disputes resolved in court will be resolved in a bench trial without a jury.
11.7 NO ADVERSE CONSTRUCTION. The rule that a contract is to be
construed against the party drafting the contract is hereby waived, and shall
have no applicability in construing this Agreement or any provisions hereof.
11.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
11.9 COSTS AND ATTORNEYS' FEES. In the event that any action, suit, or
other proceeding is instituted concerning or arising out of this Agreement, the
prevailing party shall recover all of such party's costs, and reasonable
attorneys' fees incurred in each and every such action, suit, or other
proceeding, including any and all appeals or petitions therefrom.
11.10 SUCCESSORS AND ASSIGNS. None of the parties hereto may assign
their rights or obligations hereunder to any other person without the prior
written consent of the other parties hereto. All rights, covenants and
agreements of the parties contained in this Agreement shall, except as otherwise
provided herein, be binding upon and inure to the benefit of their respective
successors and assigns.
11.11 AMENDMENT. This Agreement may be amended by the parties
hereto, by action taken by their respective Boards of Directors at any time
before or after approval hereof by the stockholders of the Company, but after
any such approval, no amendment shall be made which changes the Per Share
Consideration, or which is otherwise not permitted by the Delaware Law, without
the further approval of the stockholders. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
11.12 WAIVER. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors, at any time before or after
approval hereof by the stockholders of the Company, may (i) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties of the
other parties contained herein or in any document delivered pursuant hereto, and
(iii) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto shall be valid if set forth
in an instrument in writing signed on behalf of such party by a duly authorized
officer.
11.13 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
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enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
11.14 ENTIRE AGREEMENT. This Agreement, the attached Exhibits and
Schedules, the other schedules referred to in this Agreement and the
Confidentiality Agreement contain the entire understanding of the parties and
there are no further or other agreements or understandings, written or oral, in
effect between the parties relating to the subject matter hereof unless
expressly referred to herein.
11.15 BEST EFFORTS. Subject to the terms and conditions of this
Agreement, each party will use its best efforts to take, or cause to be taken,
all actions and do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement.
11.16 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. The representations, warranties, covenants and agreements contained
herein and in any certificate or other writing delivered pursuant hereto shall
not survive the Effective Time, except Sections 2, 6.10, 6.12, 6.17 and 6.18 and
this Article 11.
11.17 NO THIRD PARTY BENEFICIARIES. The Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement, including, without limitation by way of subrogation, other
than Section 2.6 (which is intended to be for the benefit of the holders of
Company Purchase Rights and Convertible Notes) and Section 6.17 (which is
intended to be for the benefit of the Indemnified Parties).
48
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
IWERKS ENTERTAINMENT, INC.
A DELAWARE CORPORATION
By: /s/ Roy A. Wright
-----------------------------
Name: Roy A. Wright
Title: Chief Executive Officer
SHOWSCAN ENTERTAINMENT INC.
A DELAWARE CORPORATION
By: /s/ Dennis Pope
-----------------------------
Name: Dennis Pope
Title: President & CEO
IWK-1 MERGER CORPORATION
A DELAWARE CORPORATION
By: /s/ Roy A. Wright
------------------------------
Name: Roy A. Wright
Title: Chief Executive Officer
<PAGE>
AMENDMENT NO.1
TO
AGREEMENT AND PLAN OF REORGANIZATION
Amendment No. 1 to Agreement and Plan of Reorganization (the "Amendment No.
1") dated this December 29, 1997, by and among Iwerks Entertainment, Inc., a
Delaware corporation ("Parent"), IWK-1 Merger Corporation, a Delaware
corporation ("Sub") and Showscan Entertainment Inc., a Delaware corporation (the
"Company").
R E C I T A L S
A. Parent, Sub and the Company have entered into that certain Agreement
and Plan of Reorganization (the "Merger Agreement") dated August 4, 1997
pursuant to which Sub shall merge with and into the Company, the separate
existence of Sub shall cease and the Company shall continue as the surviving
corporation. As used herein and in the Merger Agreement the term "Agreement"
shall mean the Merger Agreement as amended by this Amendment No. 1, and the term
"Merger" shall mean the merger contemplated by the Merger Agreement as amended
by this Amendment No. 1. Terms used herein without definition shall have the
meanings given those terms in the Merger Agreement.
B. The consummation of the Merger is subject to the satisfaction of
various conditions, including but not limited to, the approval of the
stockholders of Parent.
C. The Merger Agreement provides, in certain circumstances, that either
Parent or the Company shall have the right to terminate the Merger Agreement if
the Merger is not consummated prior to December 31, 1997.
D. Because of the uncertainty associated with the receipt of approval
from Parent's stockholders and because of the uncertainty associated with the
consummation of the Merger prior to the termination of the Merger Agreement, the
parties have agreed to the amendment of Section 2.5 of the Merger Agreement, and
the other amendments provided for herein.
E. The Boards of Directors of Parent, Company and Sub each has determined
that a business combination among Parent, the Company and Sub is in the best
interest of their respective companies and stockholders, and accordingly have
approved and adopted this Amendment No. 1 and adoption of the Merger Agreement
and Merger as amended hereby by their respective stockholders.
A G R E E M E N T
NOW THEREFORE, in consideration of the foregoing premises and mutual
covenants herein provided, the parties agree as follows:
1. Section 2.5(a)(i) and (ii) of the Merger Agreement is hereby amended
and restated
<PAGE>
to read in its entirety as follows:
"(i) each share of Company Common Stock outstanding immediately
prior to the Effective Time shall entitle the holder thereof to 0.62 validly
issued, fully paid and nonassessable shares of Parent Common Stock (the "Per
Share Consideration");
(ii) each share of Company Preferred Stock outstanding immediately
prior to the Effective Time shall entitle the holder thereof to that number of
validly issued, fully paid and nonassessable shares of Parent Common Stock as is
equal to the number of shares of Company Common Stock into which such share of
Company Preferred Stock is convertible immediately prior to the Effective Time
multiplied by 0.62;"
2. Section 6.16 of the Merger Agreement is hereby amended by adding the
following to the end of such Section:
"The first sentence of this Section 6.16 shall not become applicable until
January 15, 1998, except that the Company shall notify Parent in writing
prior to furnishing any information to, or entering into discussions or
negotiations with, any Person concerning an Alternative Proposal (provided
that nothing herein shall require the Company to identify such Person)."
3. Section 6.18 of the Merger Agreement is hereby amended and restated
to read in its entirety as follows:
"Appointment of Company Nominated Director. Parent hereby agrees to
appoint, immediately after the Effective Time, the Person designated by the
Company, which Person shall be one of the Company's directors on the date of the
Agreement and which shall be designated prior to the effectiveness of the
Registration Statement (the "Company Nominated Director") to serve as a director
on Parent's Board of Directors as a Class I director, all in accordance with
Parent's Bylaws until such time as such director's successor has been duly
elected or appointed and qualified or until the earlier death, resignation or
removal of such director in accordance with Parent's Bylaws. Parent further
agrees, as soon as practicable following the Effective Time, to expand the
number of directors to serve on Parent's Board of Directors to seven and to
commence a search for two additional qualified candidates to serve as a Class II
and a Class III director, respectively, who shall be elected by a majority of
Parent's then existing Board of Directors."
4. Section 8.1 of the Merger Agreement is hereby amended and restated to
read in its entirety as follows:
"The Company shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the
Effective Time."
5. Section 8.2 of the Merger Agreement is hereby amended and restated to
read in its entirety as follows:
"Intentionally omitted."
2
<PAGE>
6. Section 10.1(b) of the Merger Agreement is hereby amended and
restated to read in its entirety as follows:
"by either Parent or the Company, if the Merger shall not have been
consummated by March 31, 1998 (provided that the right to terminate this
Agreement under this Section 10.1(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of or
a substantial contributor to the failure of the Merger to occur on or before
such date);
7. Section 10.3(a) of the Merger Agreement is hereby amended and
restated to read in its entirety as follows:
"The Company shall pay Parent a fee of $1,500,000 (the "Company
Termination Fee") in the event that (i) this Agreement is terminated pursuant to
(x) Section 10.1(d)(i) or 10.1(e), or (y) Section 10.1(f) if prior to the
meeting of the stockholders of the Company contemplated pursuant to Section 6.4
an Alternative Proposal is publicly announced and the Company consummates such
Alternative Proposal within 12 months of the termination of this Agreement
pursuant to Section 10.1(f), or (ii) the condition set forth in Section 7.6 is
not satisfied as a result of either (x) false or inaccurate statements made by
the Company in the representation letter delivered by the Company to Ernst &
Young or (y) a sale or other transfer after the date hereof of the capital stock
of the Company or of Parent by an "affiliate" of the Company, as such term is
defined and used in Accounting Series Releases 130 and 135, as amended; or (z)
any action taken by the Company subsequent to the date of this Agreement;
provided, however, the Company Termination Fee shall not be payable by the
Company if this Agreement is terminated by the Company pursuant to Section
10.1(d)(i) prior to January 15, 1998, in which case the Company shall reimburse
Parent an amount equal to all out of pocket expenses incurred by Parent up to
the date of termination of this Agreement in connection with the Merger, but in
no event shall such reimbursement obligation exceed $1,000,000 (the "Merger
Expenses"). The Company Termination Fee and the Merger Expenses shall be
payable by wire transfer of same day funds either on the date contemplated in
the last sentence of Section 10.1(d) if applicable, or otherwise, within two
business days after such amount becomes due. The Company acknowledges that the
agreements contained in this Section 10.3(a) are an integral part of the
transactions contemplated in this Agreement, and that, without those agreements,
Parent would not enter into this Agreement; accordingly, if the Company fails to
promptly pay the amount due pursuant to this Section 10.3(a) and, in order to
obtain such payment, Parent commences a suit which results in a judgment against
the Company for the fee set forth in this Section 10.3(a) the Company shall pay
to Parent its costs and expenses (including attorneys' fees) in connection with
such suit, together with interest on the amount of the fee at the rate of 10%
per annum."
8. The parties agree that the combined knowledge and experience of the
executive management teams of the respective companies will benefit the
stockholders of the Surviving Corporation. Accordingly, Parent shall use its
commercially reasonable efforts to retain the services of Messrs. Pope and Lemon
to assist in the integration of the two companies for a period of up to six
months following the closing on terms and conditions mutually satisfactory to
Parent and such persons; provided, however, Parent under no circumstances shall
be obligated to compensate either Mr. Pope or Mr. Lemon for such services at a
rate greater than that their current base salaries as
3
<PAGE>
employees of Company; and provided that under no circumstances shall such
retention of Messrs. Pope and Lemon be given any effect under, or have any
effect on, their existing employment, severance and similar arrangements with
the Company.
9. The Company hereby represents and warrants to Parent that the Board of
Directors of the Company has approved this Amendment No. 1, has determined that
the Merger is in the best interests of the Company and its stockholders and has
resolved to recommend the adoption of the Merger Agreement (as amended hereby)
and the Merger by its stockholders. In connection with such actions, the Board
of Directors of the Company has received an opinion of Allen & Company, Inc.,
its financial adviser, to the effect that the consideration to be paid to the
holders of the Company Common Stock and company Preferred Stock pursuant to the
Merger is fair to such holders from a financial point of view.
10. Parent hereby represents and warrants to the Company that the Board of
Directors of Parent has approved this Amendment No. 1, has determined that the
Merger is in the best interests of Parent and its stockholders and has resolved
to recommend the approval of the issuance of Parent Common Stock pursuant to the
terms of the Merger Agreement (as amended hereby) by its stockholders. In
connection with such actions, the Board of Directors of the Parent has received
an opinion of Resource Financial Corporation, it financial adviser, to the
effect that the consideration to be paid to the holders of Company Common Stock
and Company Preferred Stock pursuant to the Merger is fair to Parent's
stockholders from a financial point of view.
11. This Amendment No. 1 may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
12. Except as expressly modified or amended by the terms hereof, each and
everyone of the other provisions of the Merger Agreement shall remain in full
force and effect.
13. The Amendment No. 1, the Merger Agreement, the Exhibits and Schedules
attached thereto, the other schedules referred to in the Merger Agreement and
the Confidentiality Agreement contain the entire understanding of the parties
and there are no further or other agreements or understandings, written or oral,
in effect between the parties relating to the subject matter hereof unless
expressly referred to herein.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
Agreement and Plan of Reorganization to be duly executed as of the date and year
first above written.
IWERKS ENTERTAINMENT, INC.
a Delaware corporation
By: /s/ Roy A. Wright
------------------------------
Name: Roy A. Wright
Title: Chief Executive Officer
SHOWSCAN ENTERTAINMENT INC.
a Delaware corporation
By: /s/ Dennis Pope
------------------------------
Name: Dennis Pope
Title: President & CEO
IWK-1 MERGER CORPORATION
a Delaware corporation
By: /s/ Roy A. Wright
-----------------------------
Name: Roy A. Wright
Title: Chief Executive Officer
5
<PAGE>
Appendix B
----------
EQUITABLE
Securities Corporation
Member of the New York Times Stock Exchange, Inc.
Investment Banking
December 29, 1997
Board of Directors
Iwerks Entertainment, Inc.
4540 West Valerio Street
Burbank, CA 91505-1046
Gentlemen:
You have asked us to advise you with respect to the fairness to the
shareholders of Iwerks Entertainment, Inc. (the "Company"), from a financial
point of view, of the consideration to be offered and paid to the shareholders
of Showscan Entertainment, Inc. ("Showscan") pursuant to the amended Agreement
and Plan of Reorganization ("Amendment No. 1") dated as of December 29, 1997
relating to the merger of the Company and Showscan (the "Merger"). Amendment
No. l provides that a subsidiary of the Company will merge with and into
Showscan with Showscan remaining as the surviving corporation. Pursuant to
Amendment No. 1, each outstanding share of Showscan Common Stock will be
converted into 0.62 shares of the Company's Common Stock. In addition, each
outstanding share of Showscan Series C Preferred Stock will be converted into
that number of shares of Iwerks Common Stock equal to the number of shares of
Showscan Common Stock into which such share of Preferred Stock is convertible
immediately prior to the effectiveness of the Merger, multiplied by 0.62. The
Company will assume approximately $5.7 million of Showscan's convertible notes
as part of the total consideration (the "Merger Consideration"). The Merger is
expected to be tax-free to the shareholders of Showscan and will be accounted
for as a pooling-of-interests. The terms and conditions of the Merger are more
fully set forth in Amendment No. 1.
Equitable Securities Corporation ("Equitable"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Equitable has received a fee for rendering this opinion; however, our fee was
not contingent upon the consummation of the Merger. We also will receive a fee
for providing financial advisory services to the Company regarding this
transaction, with such additional fee being contingent upon the consummation of
the Merger. We do not currently publish research reports or maintain markets in
or actively trade the common stock of the Company or Showscan.
In connection with our opinion, we have reviewed, among other things, the
Amendment No. 1, and certain financial and other information with respect to
certain other motion-simulation entertainment companies that was publicly
available or furnished to us, including financial analyses, financial forecasts
and reports. We held discussions with the management teams and representatives
of the Company and Showscan concerning the historical and current operations of
the Company and Showscan, their respective financial condition and prospects, as
well as the strategic and operating benefits anticipated from the Merger. In
addition, we (i) considered, to the extent available, the financial terms of
certain other similar transactions recently effected which we considered
comparable to the Merger; (ii) compared financial positions and certain
operating results of the Company and Showscan; (iii) analyzed the book value and
estimated economic value to be acquired in the proposed transaction relative to
the
- --------------------------------------------------------------------------------
800 Nashville City Center Nashville, Tennessee 37219-1743
Telephone 615-780-9300 Facsimile 615-780-9420
<PAGE>
Iwerks Entertainment, Inc.
Page 2
Merger Consideration; (iv) performed a discounted cash flow analysis utilizing
the incremental future cash flows resulting from the proposed combination; (v)
reviewed the potential pro forma financial effects of the Merger to the Company;
and (vi) conducted such other financial studies, analyses and investigations and
reviewed such other factors as we deemed appropriate for purposes of this
opinion.
In rendering this opinion, we have relied, without assuming any
responsibility for independent verification, on the accuracy and completeness of
all financial and other information reviewed by us that was publicly available
or furnished to us by or on behalf of the Company and Showscan. We have assumed
that the financial forecasts which we examined were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the respective managements of the Company and Showscan. We have also assumed,
with your consent that: (a) the strategic and operating benefits anticipated by
the management and representatives of the Company will be realized from the
Merger; (b) the Merger will be accounted for under the pooling-of-interests
method of accounting; (c) the Merger will be a tax-free reorganization; and (d)
all material liabilities (contingent or otherwise) of Showscan are as set forth
in the financial statements of Showscan or as otherwise disclosed to us in
connection with this engagement. We have not made an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Showscan,
nor were we furnished with any such evaluations or appraisals. Our opinion is
based upon economic, market and other similar conditions as they exist and can
be evaluated as of the date of this letter. Our opinion does not constitute a
recommendation to any shareholder of the Company as to whether or not that
shareholder should vote to approve the Merger. Furthermore, we express no
opinion as to the price or trading range at which shares of Common Stock of the
Company will trade following the Merger.
It is understood that this opinion is not to be otherwise quoted or
referred to, in whole or in part (including excerpts or summaries), in any
filing, report, document, release or other communication used in connection with
the Merger (unless required to be quoted or referred to by applicable regulatory
requirements), nor shall this opinion be used for any other purposes, without
Equitable's prior written consent, which consent shall not be unreasonably
withheld. Furthermore, this opinion is directed to the Company's Board of
Directors and does not constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote at a shareholders' meeting that
may be held in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, at the
current share price, the Merger Consideration to be offered and paid to the
shareholders of Showscan in the proposed Merger is fair, from a financial point
of view, to the Company's shareholders.
Very truly yours,
EQUITABLE SECURITIES CORPORATION
<PAGE>
APPENDIX C
----------
EQUITABLE
Securities Corporation
Member New York Stock Exchange, Inc.
Investment Banking
August 1, 1997
Board of Directors
Iwerks Entertainment, Inc.
4540 West Valerio Street
Burbank, CA 91505-1046
Gentlemen:
You have asked us to advise you with respect to the fairness to the
shareholders of Iwerks Entertainment, Inc. (the "Company"), from a financial
point of view, of the consideration to be offered and paid to the shareholders
of Showscan Entertainment, Inc. ("Showscan") pursuant to an Agreement and Plan
of Reorganization (the "Merger Agreement") dated as of August 1, 1997 (the
"Merger"). The Merger Agreement provides that a subsidiary. of the Company will
merge with and into Showscan with Showscan remaining as the surviving
corporation. Pursuant to the Merger Agreement, each outstanding share of
Showscan Common Stock will be converted into 0.85 shares of the Company's Common
Stock. In addition, each outstanding share of Showscan Series C Preferred Stock
will be converted into that number of shares of Iwerks Common Stock equal to the
number of shares of Showscan Common Stock into which such share of Preferred
Stock is convertible immediately prior to the effectiveness of the Merger,
multiplied by 0.85. The Company will assume approximately $5.7 million of
Showscan's convertible notes and account for approximately 937,000 in-the-money
options with a cost of approximately $1.1 million (after receipt of exercise
proceeds) as part of the total consideration (The "Merger Consideration"). The
merger is expected to be tax-free to the shareholders of Showscan and will be
accounted for as a pooling-of-interests. The terms and conditions of the Merger
are more fully set forth in the Merger Agreement.
Equitable Securities Corporation ("Equitable"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Equitable has received a fee for rendering this opinion; however, our fee was
not contingent upon the consummation of the Merger. We also will receive a fee
for providing financial advisory services to the Company regarding this
transaction, with such additional fee being contingent upon the consummation of
the Merger. We do not currently publish research retorts or maintain markets in
or actively trade the common stock of the Company or Showscan.
<PAGE>
Iwerks Entertainment, Inc.
Page 2
In connection with our opinion, we have reviewed, among other things, the
Merger Agreement, and certain financial and other information with respect to
certain other motion-simulation entertainment companies that was publicly
available or furnished to us, including financial analyses, financial forecasts
and reports. We held discussions with the management teams and representatives
of the Company and Showscan concerning the historical and current operations of
the Company and Showscan, their respective financial condition and prospects, as
well as the strategic and operating benefits anticipated from the Merger. In
addition, we (i) considered, to the extent available, the financial terms of
certain other similar transactions recently effected which we considered
comparable to the Merger; (ii) compared financial positions and certain
operating results of the Company and Showscan; (iii) analyzed the book value and
estimated economic value to be acquired in the proposed transaction relative to
the Merger Consideration; (iv)performed a discounted cash flow analysis
utilizing the incremental future cash flows resulting from the proposed
combination; (v) reviewed the potential pro forma financial effects of the
Merger to the Company; and (vi) conducted such other financial studies, analyses
and investigations and reviewed such other factors as we deemed appropriate for
purposes of this opinion.
In rendering this opinion, we have relied, without assuming any
responsibility for independent verification, on the accuracy and completeness of
all financial and other information reviewed by us that was publicly available
or furnished to us by or on behalf of the Company and Showscan. We have assumed
that the financial forecasts which we examined were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the respective managements of the Company and Showscan. We have also assumed,
with your consent that: (a) the strategic and operating benefits anticipated by
the management and representatives of the Company will be realized from the
Merger; (b) the Merger will be accounted for under the pooling-of-interests
method of accounting; (c) the Merger will be a tax-free reorganization; and (d)
all material liabilities (contingent or otherwise) of Showscan are as set forth
in the financial statements of Showscan or as otherwise disclosed to us in
connection with this engagement. We have not made an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Showscan,
nor were we furnished with any such evaluations or appraisals. Our opinion is
based upon economic, market and other similar conditions as they exist and can
be evaluated as of the date of this letter. Our opinion does not constitute a
recommendation to any shareholder of the Company as to whether or not that
shareholder should vote to approve the Merger. Furthermore, we express no
opinion as to the price or trading range at which shares of Common Stock of the
Company will trade following the Merger.
It is understood that this opinion is not to be otherwise quoted or
referred to, in whole or in part (including excerpts or summaries), in any
filing, report, document, release or other communication used in connection with
the Merger (unless required to be quoted or referred to by applicable regulatory
requirements), nor shall this opinion be used for any other purposes, without
Equitable's prior written consent, which consent shall not be unreasonably
withheld. Furthermore, this opinion is directed to the Company's Board of
Directors and does not constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote at a shareholders' meeting that
may be held in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, at the
current share price, the Merger Consideration to be offered and paid to the
shareholders of Showscan in the proposed Merger is fair, from a financial point
of view, to the Company's shareholders.
Very truly yours,
EQUITABLE SECURITIES CORPORATION
<PAGE>
RESOURCE Appendix D
FINANCIAL ----------
CORPORATION
INVESTMENT BANKERS
MILWAUKEE . CHICAGO . NEW YORK
December 29, 1997
Board of Directors
Iwerks Entertainment, Inc.
4540 West Valerio Street
Burbank, CA 91505-1046
Gentlemen:
IWK-1 Merger Corporation ("Mergeco"), a wholly-owned subsidiary of Iwerks
Entertainment, Inc., ("Iwerks") and Showscan Entertainment, Inc., ("Showscan")
have entered into an Agreement and Plan of Reorganization dated as of August 4,
1997, as amended (the "Agreement") pursuant to which Mergeco will be merged with
and into Showscan (the "Merger"). With respect to the Merger, each outstanding
share of Showscan's Common Stock is to be converted into .62 shares of Iwerks'
common stock, par value $0.001 per share. In addition, each outstanding share of
Showscan's Series C Preferred Stock entitles the holder thereof to a number of
shares of Iwerks' Common Stock equal to the number of shares of Showscan Common
Stock, into which each such share of Showscan Series C Preferred Stock is
convertible immediately prior to the effective date of the Merger, again,
multiplied by .62, all as specified in the Agreement. In addition, Iwerks will
assume approximately $6.7 million of Showscan indebtedness, and approximately
$2.5 million of transaction expenses, excluding discretionary expenses which, if
advanced, are expected to yield a return. Both Iwerks and Showscan expect the
transaction to be tax-free to the shareholders of Showscan, such transaction
being accounted for as a pooling-of-interests. The exact terms and conditions of
the Merger are more fully set forth in the Agreement.
You have asked us whether, in our opinion, the conversion ratios
contemplated by the Agreement are fair to Iwerks from a financial point of view.
Because of significant time constraints requested by Iwerks, our review was
limited as hereinafter stated.
THE MILWAUKEE CENTER
111 EAST KILBOURN AVE., STE. 1000
MILWAUKEE, WISCONSIN 53202
PHONE (414) 224-7000 FAX (414) 224-7015
<PAGE>
Board of Directors
December 29, 1997
Page 2 of 4
In arriving at the opinion set forth below, we have, among other things:
1. Reviewed Iwerks' Annual Reports, Form 10K and related information for
the five fiscal years ended June 30, 1997;
2. Reviewed Iwerks' Current Reports on Form 8-K filed on August 7, 1997,
with respect to events occurring on July 15, 1997, and August 5, 1997;
3. Reviewed 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;
4. Reviewed Showscan's Annual Reports, Form 10K and related financial
information for the five fiscal years ended March 31, 1997, including
Amendments Nos. 1 and 2 to the year ended March 31, 1997 Annual Report
on Form 10-K/A, and Showscan's Form 10Q and the related unaudited
financial information for the quarterly period ending June 30, 1997;
5. Reviewed certain other filings with the Securities and Exchange
Commission made by both Iwerks and Showscan during the last five years;
6. Reviewed certain information, including financial forecasts, relating to
the business, earnings, dividends, cash flow, assets and prospects of
both Iwerks and Showscan furnished to us by Iwerks and Showscan
respectively;
7. Conducted discussions with members of senior management of both Iwerks
and Showscan concerning their respective businesses, regulatory
environments, prospects and strategic objectives and possible operating,
administrative and capital synergies which might be realized for the
combined companies following the Merger;
8. Reviewed the historical market prices and trading activity for Iwerks
and Showscan shares;
<PAGE>
Board of Directors
December 29, 1997
Page 3 of 4
9. Compared proposed financial terms of the Merger with the financial terms
of certain other mergers and acquisitions, which we deemed to be
relevant;
10. Analyzed the relative valuation of Iwerks' shares and Showscan's shares
using various valuation methodologies which we deemed appropriate;
11. Considered the pro forma effect of the Merger, in terms of net income
available to Common Stockholders, book value per share and
capitalization, on Iwerks' shares;
12. Reviewed the Agreement; and
13. Reviewed such other financial studies and analyses and made such
inquiry and took into account such other matters as we deemed necessary
or appropriate.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by Iwerks and
Showscan, although, we have not independently verified such information or any
underlying assumptions, conducted a physical inspection of the properties or
facilities of Iwerks or Showscan, or undertaken or obtained any evaluation or
independent appraisal of the assets or liabilities (stated, contingent or
otherwise) of Iwerks or Showscan.
Further, we have assumed that the financial forecasts and projected
synergies furnished by Iwerks and Showscan have been reasonably prepared in
accordance with accepted industry practices and reflect the best current
available estimates and judgment of Iwerks and Showscan management as to the
expected future financial performance of Iwerks and Showscan, respectively, and
as to the expected future projected outcomes of various contingencies.
We have also assumed that the Merger will be free of federal taxes to
Iwerks and Showscan and the respective holders of Iwerks and Showscan shares,
and we further assume that the Merger will be accounted for as a pooling of
interests. Our opinion is based upon general, economic, market, and monetary and
other conditions as they exist and can be evaluated, and the information made
available to us, as of the date hereof. We have also taken into account actual
performance as compared to forecasts of both companies since the announcement of
the merger.
<PAGE>
Board of Directors
December 29, 1997
Page 4 of 4
This opinion is prepared for the confidential use of Iwerks Board of
Directors and may not be reproduced, summarized, described or referred to
without Resource Financial Corporation's prior written consent.
On the basis of, and subject to the foregoing, we are of the opinion that
the conversion ratios contemplated by the Agreement, as amended, are fair to
Iwerks from a financial point of view.
Very truly yours,
/s/ Resource Financial Corporation
RESOURCE FINANCIAL CORPORATION
<PAGE>
ALLEN & COMPANY Appendix E
INCORPORATED ----------
711 FIFTH AVENUE - NEW YORK, N.Y. 10022 - (212) 832-8000
December 29, 1997
Members of the Board of Directors
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232 - 2315
Gentlemen:
You have requested our opinion, as of this date, as to the fairness,
from a financial point of view, to the holders of the outstanding shares of
Common Stock, par value $0.001 per share (the "Company's Common Stock"), and the
holders of the outstanding shares of Series C Convertible Preferred Stock, par
value $0.001 per share (the "Company's Preferred Stock"), of Showscan
Entertainment Inc., a Delaware corporation (the "Company"), of the consideration
to be received by such holders in connection with the Proposed Transaction
referred to hereinafter.
Pursuant to the Agreement and Plan of Reorganization, as amended by
Amendment No. 1 thereto (as so amended, the "Merger Agreement"), to be entered
into by and between the Company, Iwerks Entertainment, Inc., a Delaware
corporation (the "Purchaser"), and a wholly owned special purpose subsidiary of
the Purchaser ("Merger Sub"), the Company will enter into a business combination
transaction (the "Merger") pursuant to which Merger Sub will be merged into the
Company (the "Proposed Transaction"). Pursuant to the terms of the Merger
Agreement, each outstanding share of the Company's Common Stock will be
converted into .62 shares of common stock, par value $0.001 per share, of the
Purchaser (the "Purchaser's Common Stock"), and each outstanding share of the
Company's Preferred Stock will entitle the holder thereof to that number of
shares of the Purchaser's Common Stock as is equal to the number of shares of
the Company's Common Stock into which such share of the Company's Preferred
Stock is convertible immediately prior to the effective time of the Merger,
multiplied by .62, as specified in the Merger Agreement. We understand the
Proposed Transaction has been structured as a tax-free reorganization pursuant
to Section 368(a) of the Internal Revenue Code, and that the Transaction will
qualify for accounting purposes as a pooling of interests transaction.
We understand that all approvals required for the consummation of the
Proposed Transaction have been or, prior to consummation of the Proposed
Transaction, will be obtained. As you know, pursuant to its agreement with the
Company, Allen & Company Incorporated ("Allen") will receive a fee for its
services to the Company.
<PAGE>
Members of the Board of Directors
Showscan Entertainment Inc.
December 29, 1997
Page 2
In arriving at our opinion, we have among other things:
(i) reviewed the terms and conditions of the Merger Agreement and
related documents;
(ii) analyzed publicly available historical business and financial
information relating to the Company and the Purchaser, as
presented in documents filed with the Securities and Exchange
Commission;
(iii) reviewed the Company's and the Purchaser's operations, visited
the Company's and Purchaser's respective headquarters and
considered the views of professional analysts covering the
Company and the Purchaser;
(iv) reviewed certain non-public information relating to the Company
and the Purchaser, including financial and operating results of
the Company and the Purchaser and management's forecasts
prepared by the Company and the Purchaser;
(v) conducted discussions with certain members of the senior
management of the Company and the Purchaser with respect to the
financial condition, business, operations, strategic objectives
and prospects of the Company and the Purchaser, respectively;
(vi) reviewed and analyzed public information, including certain
stock market data and financial information relating to
selected public companies which we deemed generally comparable
to the Company and the Purchaser;
(vii) reviewed the trading history of the Company's Common Stock and
the Purchaser's Common Stock, including each company's
respective performance in comparison to market indices and to
selected companies in comparable businesses;
(viii) considered premiums paid in all-stock merger and acquisition
transactions we deemed to be of a size comparable to the
Proposed Transaction; and
<PAGE>
Members of the Board of Directors
Showscan Entertainment Inc.
December 29, 1997
Page 3
(ix) conducted such other financial analyses and investigations as
we deemed necessary or appropriate for the purposes of the
opinion expressed herein.
In rendering our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information respecting the Company
and the Purchaser and any other information provided to us, and we have not
assumed any responsibility for any independent verification of such information
or any independent valuation or appraisal of any of the assets of the Company or
the Purchaser. With respect to the financial forecasts referred to above, we
have assumed that they have been reasonably prepared on a basis reflecting the
best currently available judgments of the management of the Company and the
Purchaser as to the future financial performance of the Company and the
Purchaser, respectively.
In addition to our review and analysis of the specific information set
forth above, our opinion herein reflects and gives effect to our assessment of
general economic, monetary and market conditions existing as of the date hereof
as they may affect the business and prospects of the Company.
The opinion rendered herein does not constitute a recommendation of
the Proposed Transaction over any other alternative transactions which may be
available to the Company. Furthermore, the opinion rendered herein does not
constitute a recommendation by Allen as to the manner in which any stockholder
of the Company should vote with respect to any stockholder action required to
approve the Proposed Transaction. Allen consents to the inclusion of the text
of this opinion in any notification or appropriate disclosure to the Company's
stockholders and in any filings the Company is required by applicable law to
make with the Securities and Exchange Commission.
Based on and subject to the foregoing, we are of the opinion that, as of
this date, the consideration to be received by the holders of the Company's
Common Stock and the holders of the Company's Preferred Stock pursuant to the
Proposed Transaction is fair to such holders from a financial point of view.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ Richard L. Fields
-----------------------------
Richard L. Fields
Managing Director
<PAGE>
ALLEN & COMPANY Appendix F
Incorporated ----------
711 FIFTH AVENUE - NEW YORK, N.Y. 10022 - (212) 832-8000
July 31, 1997
Members of the Board of Directors
Showscan Entertainment Inc.
3939 Landmark Street
Culver City, California 90232-2315
Gentlemen:
You have requested our opinion, as of this date, as to the fairness,
from a financial point of view, to the holders of the outstanding shares of
Common Stock, par value $0.001 per share (the "Company's Common Stock"), and the
holders of the outstanding shares of Series C Convertible Preferred Stock, par
value $0.001 per share (the "Company's Preferred Stock"), of Showscan
Entertainment Inc., a Delaware corporation (the "Company"), of the consideration
to be received by such holders in connection with the Proposed Transaction
referred to hereinafter.
Pursuant to the Agreement and Plan of Reorganization (the "Merger
Agreement"), to be entered into by and between the Company, Iwerks
Entertainment, Inc., a Delaware corporation (the "Purchaser"), and a wholly
owned special purpose subsidiary of the Purchaser ("Merger Sub"), the Company
will enter into a business combination transaction (the "Merger") pursuant to
which Merger Sub will be merged into the Company (the "Proposed Transaction").
Pursuant to the terms of the Merger Agreement, each outstanding share of the
Company's Common Stock will be converted into .85 shares of common stock, par
value $0.001 per share, of the Purchaser (the "Purchaser's Common Stock"), and
each outstanding share of the Company's Preferred Stock will entitle the holder
thereof to that number of shares of the Purchaser's Common Stock as is equal to
the number of shares of the Company's Common Stock into which such share of the
Company's Preferred Stock is convertible immediately prior to the effective time
of the Merger, multiplied by .85, as specified in the Merger Agreement. We
understand the Proposed Transaction has been structured as a tax-free
reorganization pursuant to Section 368(a) of the Internal Revenue Code, and that
the Proposed Transaction will qualify for accounting purposes as a pooling of
interests transaction.
We understand that all approvals required for the consummation of the
Proposed Transaction have been or, prior to consummation of the Proposed
Transaction, will be
<PAGE>
Members of the Board of Directors
Showscan Entertainment Inc.
July 31, 1997
Page 2
obtained. As you know, pursuant to its agreement with the Company, Allen &
Company Incorporated ("Allen") will receive a fee for its services to the
Company.
In arriving at our opinion, we have among other things:
(i) reviewed the terms and conditions of the draft Merger Agreement
and related documents;
(ii) analyzed publicly available historical business and financial
information relating to the Company and the Purchaser, as
presented in documents filed with the Securities and Exchange
Commission;
(iii) reviewed the Company's and the Purchaser's operations, visited
the Company's and Purchaser's respective headquarters and
considered the views of professional analysts covering the
Company and the Purchaser;
(iv) reviewed certain non-public information relating to the Company
and the Purchaser, including financial and operating results of
the Company and the Purchaser and management's forecasts
prepared by the Company and the Purchaser;
(v) conducted discussions with certain members of the senior
management of the Company and the Purchaser with respect to the
financial condition, business, operations, strategic objectives
and prospects of the Company and the Purchaser, respectively;
(vi) reviewed and analyzed public information, including certain
stock market data and financial information relating to
selected public companies which we deemed generally comparable
to the Company and the Purchaser;
(vii) reviewed the trading history of the Company's Common Stock and
the Purchaser's Common Stock, including each company's
respective performance in comparison to market indices and to
selected companies in comparable businesses;
<PAGE>
Members of the Board of Directors
Showscan Entertainment Inc.
July 31, 1997
Page 3
(viii) considered premiums and multiples paid in merger and
acquisition transactions we deemed to be comparable to the
Proposed Transaction; and
(ix) conducted such other financial analyses and investigations as
we deemed necessary or appropriate for the purposes of the
opinion expressed herein.
In rendering our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information respecting the Company
and the Purchaser and any other information provided to us, and we have not
assumed any responsibility for any independent verification of such information
or any independent valuation or appraisal of any of the assets of the Company or
the Purchaser. With respect to the financial forecasts referred to above, we
have assumed that they have been reasonably prepared on a basis reflecting the
best currently available judgments of the management of the Company as to the
future financial performance of the Company.
In addition to our review and analysis of the specific information set
forth above, our opinion herein reflects and gives effect to our assessment of
general economic, monetary and market conditions existing as of the date hereof
as they may affect the business and prospects of the Company.
The opinion rendered herein does not constitute a recommendation of
the Proposed Transaction over any other alternative transactions which may be
available to the Company. Furthermore, the opinion rendered herein does not
constitute a recommendation by Allen as to the manner in which any stockholder
of the Company should vote with respect to any stockholder action required to
approve the Proposed Transaction. Allen consents to the inclusion of the text
of this opinion in any notification or appropriate disclosure to the Company's
stockholders and in any filings the Company is required by applicable law to
make with the Securities and Exchange Commission.
<PAGE>
Members of the Board of Directors
Showscan Entertainment Inc.
July 31, 1997
Page 4
Based on and subject to the foregoing, we are of the opinion that, as
of this date, the consideration to be received by the holders of the Company's
Common Stock and the holders of the Company's Preferred Stock pursuant to the
Proposed Transaction is fair to such holders from a financial point of view.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ Richard L. Fields
--------------------------
Richard L. Fields
Managing Director
<PAGE>
IWERKS ENTERTAINMENT, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
The undersigned, a stockholder of IWERKS ENTERTAINMENT, INC. a Delaware
corporation, (the "Company") hereby appoints Charles Goldwater and Bruce
Hinckley, and each of them, as the proxies of the undersigned, with full power
of substitution, to attend, vote and act for the undersigned at the Annual
Meeting of Stockholders of the Company, to be held on March 31, 1998, and any
postponements or adjournments thereof, and in connection herewith, to vote and
represent all of the shares of the Company which the undersigned would be
entitled to vote, as follows:
The Board of Directors recommends a WITH vote on Proposal 1 and a FOR vote
on Proposals 2 and 3.
1. ELECTION OF CLASS III DIRECTOR, as provided in the Company's Proxy
Statement:
[_] WITH [_] WITHOUT Authority to vote for the nominee listed below.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY FOR THE NOMINEE, LINE THROUGH OR
OTHERWISE STRIKE OUT NAME BELOW)
Charles Goldwater
2. The approval of the issuance of shares of Iwerks Common Stock in exchange
for shares of Showscan Capital Stock pursuant to that certain Agreement
and Plan of Reorganization, dated as of August 4, 1997, as amended by
Amendment No. 1 to Agreement and Plan of Reorganization dated as of
December 29, 1997, by and among Iwerks Entertainment, Inc., IWK-1 Merger
Corporation and Showscan Entertainment Inc.
[_] FOR [_] AGAINST [_] ABSTAIN
3. The approval of the amendment to the Iwerks Entertainment, Inc. 1994
Stock Incentive Plan (the "Plan") to increase the number of shares of
Iwerks Common Stock reserved for issuance under the Plan from 1,750,000
to 2,500,000 shares and to provide a per employee limit on stock option
grants in any one year.
[_] FOR [_] AGAINST [_] ABSTAIN
The undersigned hereby revokes any other proxy to vote at such Meeting, and
hereby ratifies and confirms all that said proxy may lawfully do by virtue
hereof. WITH RESPECT TO SUCH OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE
MEETING AND ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF, SAID PROXY IS AUTHORIZED
TO VOTE IN ACCORDANCE WITH ITS BEST JUDGMENT.
This Proxy will be voted in accordance with the instructions set forth above.
THIS PROXY WILL BE TREATED AS A GRANT OF AUTHORITY TO VOTE FOR THE ELECTION OF
THE CLASS III DIRECTOR NAMED, THE ISSUANCE OF IWERKS COMMON STOCK IN EXCHANGE
FOR SHOWSCAN CAPITAL STOCK AND THE AMENDMENT TO THE 1994 STOCK INCENTIVE PLAN,
AND AS SAID PROXY SHALL DEEM ADVISABLE ON SUCH OTHER BUSINESS AS MAY COME
BEFORE THE MEETING, UNLESS OTHERWISE DIRECTED.
The undersigned acknowledges receipt of a copy of the Notice of Annual
Meeting and accompanying Proxy Statement dated March 4, 1998 relating to the
Meeting.
Dated: ________________ , 1998
------------------------------
----------------------
Signature(s) of
Stockholder(s)
(See Instructions Below)
The signature(s)
hereon should
correspond exactly
with the name(s) of
the stockholder(s)
appearing on the
Stock Certificate. If
stock is jointly
held, all joint
owners should sign.
When signing as
attorney, executor,
administrator,
trustee or guardian,
please give full
title as such. If
signer is a
corporation, please
sign the full
corporation name, and
give title of signing
officer.
THIS PROXY IS SOLICITED BY
THE BOARD OF DIRECTORS OF IWERKS ENTERTAINMENT, INC.
<PAGE>
SHOWSCAN ENTERTAINMENT INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS, MARCH 31, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SHOWSCAN ENTERTAINMENT INC.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
of Stockholders and the Proxy Statement with respect thereto, each dated March
4, 1998, and does hereby constitute and appoint William D. Eberle and Dennis
Pope (the "Proxies"), and each of them, with full power of substitution, as the
Proxies of the undersigned to represent the undersigned and to vote all shares
of Common Stock, $.001 par value, of Showscan Entertainment Inc. which the
undersigned would be entitled to vote if personally present at the Special
Meeting of Stockholders, to be held on March 31, 1998, at 10:00 a.m. (local
time), at 3939 Landmark Street, Culver City, California 90232, and at any
adjournments or postponements thereof.
The Board of Directors unanimously recommends a vote FOR the following
proposal:
1. APPROVAL AND ADOPTION of the Agreement and Plan of Reorganization dated
as of August 5, 1997, as amended by Amendment No. 1 to Agreement and Plan
of Reorganization dated as of December 29, 1997 (as amended, the "Merger
Agreement"), by and among Showscan Entertainment Inc., Iwerks
Entertainment, Inc. and IWK-1 Merger Corporation ("IWK-1"), and the
merger of IWK-1 with and into Showscan Entertainment Inc. upon the terms
and conditions set forth in the Merger Agreement.
[_] FOR [_] AGAINST [_] ABSTAIN
(To be completed and signed on the reverse side)
The shares represented hereby will be voted as directed. Where no direction
is made, the shares will be voted FOR proposal 1. This proxy confers authority
for each of the above-named Proxies to vote in his discretion with respect to
such other business as may properly come before the Special Meeting and any
adjournments or postponements thereof. This proxy may be revoked at any time
before it is exercised.
Dated: ______________________, 1998
-----------------------------------
(Signature)
-----------------------------------
(Signature, if held jointly)
Please sign exactly as your name
or names appear hereon, and when
signing as attorney, executor,
administrator, trustee or
guardian, give your full title as
such. If the signatory is a
corporation, sign the full
corporate name by a duly
authorized officer.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
