===========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-22558
IWERKS ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-4439361
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
4540 West Valerio Street
Burbank, California 91505-1046
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(818) 841-7766
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No .
----- -----
As of February 5, 1998, the Registrant had 12,161,250 shares of Common
Stock, $.001 par value, issued and outstanding.
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<PAGE>
IWERKS ENTERTAINMENT, INC.
Form 10-Q for the Quarter and Six Months Ended
December 31, 1997
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1997 2
Condensed Consolidated Balance Sheets Liabilities and Stockholders'
Equity as of December 31, 1997 and June 30, 1997 3
Condensed Consolidated Statements of Operations for the Three and
Six Months ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1997 and 1996 5
Notes to the Condensed Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- -------------------------- 17
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
- ------------------------------------------
Signatures 18
Page 1
<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
accounts 3,040 5,447
Costs and estimated earnings in
excess of billings on uncompleted
contracts 2,738 6,339
Inventories and other current
assets 3,899 4,402
--------- ----------
Total Current Assets 27,057 35,255
Portable simulation theaters at
cost, net of accumulated depreciation 3,711 4,018
Property and equipment at cost,
net of accumulated depreciation 3,871 2,920
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
Page 2
<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 earnings on uncompleted
contracts 2,507 990
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
Stockholders' equity:
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.
Page 3
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(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 income (loss) $(3,500) $(57) $(4,006) $117
======= ====== ======= =======
Basic and diluted income
(loss) per common share
(note 4) $(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.
Page 4
<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 income (loss) $ (4,006) $ 117
Depreciation and amortization 2,259 2,810
Changes in operating assets and
liabilities 4,673 (2,855)
---------- ----------
Net cash provided by operating
activities 2,926 72
---------- ----------
Investing Activities
Investment in joint ventures (208) (673)
Investment in portable simulation
theaters (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
========= =========
Cash paid during the period for
income taxes $ 8 $ --
========= =========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
IWERKS ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - INTRODUCTION
- ---------------------
The accompanying condensed consolidated financial statements of
Iwerks Entertainment, Inc. (the "Company") have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures made are adequate to make information presented not misleading.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position
of the Company as of 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 the Company's latest Annual Report on Form
10-K as filed with the SEC.
NOTE 2 - INCOME TAXES
- ---------------------
At June 30, 1997, the Company 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, the Company's effective tax rate was
negligible and consequently no income tax provision or benefit was recorded
in the periods presented.
Page 6
<PAGE>
NOTE 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.
NOTE 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.
NOTE 5 - LITIGATION
- -------------------
On or about February 5, 1998, the Company 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. The Company believes that the suit is without merit and intends to
vigorously defend itself.
There are no other material legal proceedings to which the Company 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 the Company's financial position or
results of operations.
Page 7
<PAGE>
NOTE 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 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 the Company.
Under the pooling rules, the costs incurred in consummating the merger are
expensed as incurred, as such the Company has expensed $218,000 and
$531,000 for the three and six months ended December 31, 1997,
respectively. Further, if the merger is consummated, the Company 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
the Company and Showscan, as well as other customary closing conditions. If
shareholder approval is not obtained or other closing conditions are not
satisfied or if the parties mutually agree to terminate or modify the terms
of the merger agreement, the transaction may not be consummated pursuant to
the existing terms of the merger agreement, or at all. The stockholders
meetings are expected to occur in March, 1998.
NOTE 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.
The Company has reviewed those Statements and does not believe that they
will have a material impact on its financial statements and related
disclosures.
Page 8
<PAGE>
Note 8 - Subsequent Events
- --------------------------
In January 1998, the Company reduced its workforce by approximately
13% after which the Company 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. The Company anticipates accruing approximately
$1.7 million in third quarter of fiscal 1998 for severance and related
expense with respect to the foregoing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
The Company is engaged in the business of designing, engineering,
manufacturing, marketing and servicing specialty theatre systems which
employ a variety of projection, show control, ride simulation and software
technologies. The Company is currently in the business of: (a) selling and
installing ride simulation attractions in specialty theatres, (b) selling
and installing giant screen theatres (generally such theatres require
projection technology which utilize film sizes ranging between five
perforations per frame by 70 millimeters (5/70) and fifteen perforations
per frame by 70 millimeter (15/70)), (c) licensing and distributing the
films in its library to ride simulation theatres previously sold by the
Company, (d) producing films in the 5/70, 8/70 and 15/70 film format for
its film library as well as producing films in these formats for third
parties, (e) investing in joint ventures by contributing its ride
simulation technology, design and equipment and participating in the
theatre profits, and (f) operating a fleet of 16 mobile ride simulation
attractions.
The following sections contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve risks and uncertainties such that actual
results may vary materially. Certain factors that may affect the Company's
results and financial condition over the next few quarters are discussed
under the caption "future operating results" below. Other factors that may
affect such results and financial condition are set forth in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
- ---------------------
The Company derives its revenues primarily from three sources: sales
of hardware systems, owned and operated (primarily portable simulation
theatres), and licensing of films. To a lesser extent, revenues are also
earned from service to existing theatre owners and production of films for
third parties. The following table presents summary information regarding
revenues (amounts in thousands):
<TABLE>
<CAPTION>
Periods Ended December 31,
Three Months Six Months
----------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Hardware Sales & Service $ 3,620 $ 7,366 $ 7,092 $ 12,358
Owned and Operated 860 1,278 4,040 4,547
Film Licensing 1,415 1,277 2,759 2,506
Film Production and Other 94 102 150 207
------- -------- -------- ---------
Total $ 5,989 $ 10,023 $ 14,041 $ 19,618
======= ========= ======== =========
</TABLE>
Page 9
<PAGE>
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 (touring) 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' contractual share of the sites' revenues or profits as
applicable. Admission revenues from the portable ride simulation theatres
are subject to variability due to the seasonal nature of these events and
are higher during the summer months. Sponsorship and contract revenues for
the portable theatres are recognized ratably over the term of the contract.
The Company typically licenses its film software under one year film
license agreements. Revenues and related expenses are recognized at the
beginning of the license period at which time the customer is billed the
license fee and film is delivered to the customer.
COMPARISON OF THE 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. The Company has experienced a decline in the signing of new
sales contracts in Asia, which adversely impacted simulation hardware
revenue in the second quarter of fiscal 1998 and will have a negative
impact on sales 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 $418,000 as
compared to the same period last year, primarily due to a reduction in
sponsorship revenue relating to the portable simulation theatres. The
Company expects the lower touring sponsorship sales trends to continue to
adversely affect results for the remainder of fiscal 1998 and may continue
into future periods. The Company continues to actively seek alternatives to
increase the utilization of the 16 touring ride simulators.
Film licensing revenue increased by 10.8% as a result of the increasing
base of installed theatres that license the Company's film software.
COST OF SALES AND GROSS PROFIT MARGIN
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 in the 1997 quarter compared to the same quarter in
1996 is primarily related
Page 10
<PAGE>
to the portable simulation theatre business. This business segment has
significant fixed cost of sales regardless of revenue fluctuations.
Therefore, as 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include, among other
things, personnel costs, trade shows and other promotional expenses, sales
commissions, travel expenses, public relations costs, outside consulting and
professional fees, depreciation on fixed assets, amortization of goodwill,
departmental administrative costs and research and development costs.
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 additional marketing expenses.
INTEREST INCOME AND EXPENSE
Interest income for the three months ended December 31,1997 and 1996
was $272,000 and $296,000, respectively, and is derived from the Company's
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
same period in the prior year. The Company has experienced a decline in the
signing of new sales contracts in Asia, which adversely impacted simulation
hardware revenue in the six months ended December 31, 1997 and will have a
negative impact on sales 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 $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 by 10.1% as a result of the increasing
base of installed theatres that license the Company's film software.
Page 11
<PAGE>
COST OF SALES AND GROSS PROFIT MARGIN
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.
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 additional marketing expenses.
MERGER RELATED EXPENSES
On August 5, 1997, the Company and Showscan Entertainment, Inc.
announced an agreement to merge. The merger agreement was subsequently
amended on December 29, 1997 (see note 6 of Notes to Condensed Consolidated
Financial Statements). The transaction 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, the Company incurred $218,000 and $531,000 of transaction
expenses. The Company expects to incur additional transaction expenses in
the next quarter (regardless of whether the merger is consummated).
IMPACT OF YEAR 2000
Some of the Company's 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.
The Company 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, the
Company 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. The
Company believes that with conversions to new software, the Year 2000 Issue
will not pose significant operational problems for its computer systems.
Page 12
<PAGE>
The costs of the project and the date on which the Company 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.
FUTURE OPERATING RESULTS
- ------------------------
The market for the Company's products is intensely competitive and 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. 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.
The Company has experienced a significant decline in revenues in
recent periods. Historically, a substantial portion of the Company's
revenues from new hardware sales in the ride simulation market have
originated in international markets, particularly in Asia. The Company
began to experience a significant decline in new hardware contracts during
the fourth quarter of fiscal 1997, which trend has continued through the
first six months of fiscal 1998. This trend has been exacerbated by the
recent economic crisis experienced in this region. While the Company is
placing greater focus on other markets, particularly the United States,
Latin America and Europe, the trend of declining sales in Asia is expected
to have a continuing negative impact on the Company's revenues through the
remainder of fiscal 1998 and may have a continuing negative impact in
future periods.
The Company and its principal competitor in the large screen market,
Imax Corporation, are aggressively competing, particularly in the United
States market, for new theater installations. The Company primarily
competes in this market based upon the price and terms of its projection
technology. Imax, the dominant competitor in the market, competes primarily
on the basis of its brand identity and its larger film library. These
factors, and Imax's access to greater financial and other resources, are
expected to continue to place the Company at a competitive disadvantage in
this market and could have a negative impact on the Company's gross margins
over time.
Revenues from the Company's owned and operated attractions (primarily
portable simulation theaters) have been declining since the first quarter
of fiscal 1997 when the Company lost its principal sponsorship contract
with AT&T. While the Company has been aggressively pursuing other
sponsorship opportunities since that time, it has not been successful in
fully replacing this revenue source. Because this segment of the Company's
business has a significant level of fixed costs regardless of fluctuations
in revenues, the Company's gross margins will continue to be adversely
impacted unless it is able to secure alternate sources of revenue or
disposes of all or a portion of this business segment or otherwise
eliminates a portion of the fixed costs associated with its operation.
Page 13
<PAGE>
Iwerks has entered into a merger agreement with Showscan
Entertainment, Inc. with the expectation that the transaction will result
in beneficial synergies for the combined business. 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. Further, 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.
Iwerks currently is evaluating the operations of the business of
Showscan for purposes of developing a plan for the integration of the
business to be acquired with Iwerks' existing operations. Although this
plan is not complete, it is anticipated that a significant restructuring of
the combined operations will be required as a result of the Merger. As a
consequence of this restructuring and the consummation of the Merger,
Iwerks anticipates that the combined companies will incur one-time
restructuring and related charges of $6.9 million of which $1.2 million has
been recorded in the fourth fiscal quarter of 1997 and the first six months
of fiscal 1998. Further, assuming the Merger is consummated in the third
quarter of fiscal 1998 and that the transaction costs associated with the
Merger are paid in that quarter, the combined company expects to have a
significant decline in its cash and short-term investment balances from
those existing at December 31, 1997 which, on a combined basis was $19.6
million.
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
nine months of fiscal 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.
Iwerks 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 theater system
deliveries, contract signing, sponsorships, the mix of theater systems
shipped, the completion of custom film contracts, the existence of world
expos, amount of revenues from portable simulation
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theater 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 theater system sales and deliveries from quarter to quarter
can materially affect quarterly and periodic operating results, and theater
system contract signing can materially affect quarterly or periodic cash
flow. Accordingly, Iwerks' 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 price of Iwerks. 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.
Additionally, the Company plans to continue to evaluate and, when
appropriate, make acquisitions of complimentary technologies, products or
businesses. The Company will continue to evaluate the changing value of its
assets, and when necessary, make adjustments thereto. While the Company
cannot predict what effect these various factors may have on its financial
results, the aggregate effect of these and other factors could result in
significant volatility in the Company's future performance and stock price.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's 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.
At December 31, 1997, the Company had cash and short-term investments
of approximately $17.4 million. In addition, the Company maintains a bank
line of credit in the amount of $5 million. At December 31, 1997 and 1996,
there were no amounts outstanding on the line of credit. At December 31,
1997 the Company was not in compliance with respect to certain financial
covenants relating to the bank line of credit. The Company and the bank
have decided to renegotiate the line of credit pending the merger with
Showscan. The Company 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 proposed
merger with Showscan is consummated, it is anticipated that the transaction
fees associated with the merger after December 31, 1997, which
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affect cash, would be approximately $4.5 million which would be offset by
any cash received from Showscan as a result of the merger. However, with the
existing cash balances and short-term investments in debt securities on
hand at December 31, 1997, the Company believes that it has adequate
liquidity to meet its cash requirements for at least the next twelve
months, after which time it may be required to raise additional cash
through the sale of equity or debt securities. In addition, to the extent
the Company experiences growth in the future, or its cash flow from
operations is less than anticipated, the Company may be required to obtain
additional sources of cash.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
On or about February 5, 1998, the Company received notice of a
complaint filed in the U.S. 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. The Company believes that the suit is without merit and intends to
vigorously defend itself.
The Company is a party to various actions arising in the ordinary
course of business which, in the opinion of management, will not have a
material adverse impact on the Company's financial condition; however,
there can be no assurance that the Company will not become a party to other
lawsuits in the future, and such lawsuits could potentially have a material
adverse effect on the Company's financial condition and results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
10.1 Separation Agreement dated October 31, 1997 between the
Company and Roy A. Wright.
10.2 Separation Agreement dated October 31, 1997 between the
Company and Bruce Hinckley.
10.3 Separation Agreement dated October 31, 1997 between the
Company and William J.
Battison, III.
10.4 Separation Agreement dated October 31, 1997 between the
Company and Catherine Giffen.
10.5 Separation Agreement dated October 31, 1997 between the
Company and Jon Corfino.
10.6 Separation Agreement dated October 31, 1997 between the
Company and Curt Thornton.
11.1 Earnings per share
15.1 Auditors consent regarding unaudited Interim Financial
Information
27.1 Schedule of financial data
99.1 Independent Accountants' Review Report
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997:
A report on Form 8-K was filed December 30, 1997 relating to a press
release announcing the amendment to the proposed Showscan merger.
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of
Burbank, State of California on the 23 day of February, 1998.
IWERKS ENTERTAINMENT, INC.
(Registrant)
By: /S/BRUCE C. HINCKLEY
----------------------
Executive Vice President/Chief Financial Officer (Principal Finance
Officer)
By: /S/JEFFREY M. DAHL
------------------
Vice President / Controller (Principal Accounting Officer)
SEPARATION AGREEMENT
--------------------
This Separation Agreement (this "Agreement") is made and entered into
as of October 31, 1997 by and between Iwerks Entertainment, Inc., a
Delaware corporation (the "Company"), and, Roy A. Wright, an individual
("Executive").
RECITALS:
A. Iwerks Entertainment Inc. (the "Corporation") considers it
essential to the best interests of its stockholders to foster the
continuous employment of key management personnel. In connection with
this, the Corporation's Board of Directors (the "Board") recognizes the
possibility of a change in management personnel or a change in control of
the Corporation may exist and that such possibility, and that such
uncertainty and questions that it may raise among management, could result
in the departure or distraction of management personnel to the detriment of
the Corporation and its stockholders.
B. The Board has decided to reinforce and encourage the continued
attention and dedication of members of the Corporation's management to
their assigned duties without distraction arising from the possibility of a
change in management of control of the Corporation.
C. In order to induce Executive to remain in its employ, the
Corporation has entered into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as set forth below.
1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY
EXECUTIVE.
The Company may terminate Executive's employment at any time with or
without Cause, and Executive may terminate his or her employment at any
time for any reason, in each case by delivery of written notice to the
other party. If the Company terminates Executive's employment with the
Company for Cause or if Executive terminates such employment by reason of
disability, death or voluntary resignation, then Executive shall be
entitled to receive all salary and benefits (including vacation, death,
disability and medical benefits, if any, to the extent such benefits are
accorded to Executive under the Company's benefit plans maintained for
employees generally) accrued and payable to him or her with respect to
services rendered through the date of termination and shall be entitled to
no additional separation or severance payment hereunder. Further, in such
case, this Agreement shall have no effect on, and shall not be deemed to
amend or modify, any of the terms of any stock option granted to Executive
by the Company through the date of termination (collectively, the
"Options") and Executive's rights thereunder shall be limited to the terms
and conditions set forth in the applicable stock option agreement
evidencing such
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<PAGE>
Options. For purposes of this Agreement, "Cause" shall mean and be limited
to the following events: (i) an act of fraud, embezzlement or similar
conduct by Executive involving the Company; or (ii) any action by Executive
involving the arrest of Executive for violation of any criminal statute
constituting a felony or a misdemeanor involving moral turpitude if the
Board reasonably determines that the continuation of Executive's employment
after such event would have an adverse impact on the operations or
reputation of the Company in the financial community; or (iii) gross
misconduct or habitual negligence in the performance of Executive's duties,
or (iv) an act constituting a breach of Executive's fiduciary duty to the
Corporation under the Delaware General Corporation Law, or (v) a
continuing, repeated willful failure or refusal by Executive to perform his
duties; PROVIDED, HOWEVER, that termination shall not be deemed to be for
Cause under this subclause (v) unless Executive shall have first received
written notice from the Board advising Executive of the specific acts or
omissions alleged to constitute a failure or refusal to perform and such
failure or refusal to perform continues after Executive shall have had a
reasonable opportunity to correct the acts or omissions cited in such
notice.
2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the
provisions of Section 4 below, if the Company terminates Executive's
employment with the Company other than for Cause or if the Company causes a
Defacto Termination of Executive (as defined below) (each a "Separation
Termination"), Executive shall receive the "Separation Package." As used
herein, the "Separation Package" shall consist of (i) a cash amount equal
to the base salary which would have been payable to Executive over 24
months (computed at the annual rate in effect at the date of the Separation
Termination), plus (ii) a cash amount equal to the pro rated portion of the
performance bonus (computed by reference to the actual number of days
Executive is employed during the applicable fiscal year) which would have
been paid to Executive under the Company's performance bonus plan for the
fiscal year in which the Separation Termination occurs (if any such plan is
then in effect) if Executive's employment had continued through the end of
the fiscal year and the Company had achieved 100% of its scheduled
performance goals, plus (iii) paid up group medical, supplemental life and
disability and other insurance benefits made available to senior executives
under the Company's employee benefit plans for Executive and his or her
family for the 24 months following the date of the Separation Termination.
Further, notwithstanding any contrary provision in the applicable stock
option agreement, all Options which are not vested as of the date of the
Separation Termination shall become vested and immediately exercisable and
all Options held by Executive as of the date of the Separation Termination
(including those which become exercisable solely as a result of the
provisions of this sentence) shall remain exercisable for a period of 36
months following the date of the Separation Termination. For purposes of
this paragraph, "Defacto Termination" shall include any of the following
events: (i) the Company shall reduce the Executive'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 executive officers compensation in
general; (ii) the Company shall fail to cause Executive to remain Chief
Executive Officer of the Company; (iii) Executive shall not be afforded the
authority, powers, responsibilities and privileges customarily accorded to
an executive with his title; or (iv) the Company shall require Executive's
primary services to be
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rendered in an area other than the Company's principal offices in the
greater Los Angeles metropolitan area.
3. SPECIAL BONUS ARRANGEMENTS. In addition to Executive's base
salary, annual stipend and any Separation Package payable to him and
regardless of whether a Separation Termination occurs, the following
provision shall apply:
3.1 BONUS. Subject to the provisions of Section 4 hereof (if
applicable), and in addition to the Separation Package, Executive shall be
paid a one-time bonus payment in the amount of $250,000 if the Company's
realizes net income per share in an amount which equals or exceeds $0.20
for the six months ended June 30, 1998 (prior to giving effect to the
accrual of the bonus provided for in this Section 3.1), as computed by
reference to the Company's Quarterly Report on Form 10-Q for the six months
ended December 31, 1997 and the Company's financial statements for the year
ended June 30, 1998, as audited by Ernst & Young.
3.2 PAYMENT OF AMOUNTS. The amounts referred to in Sections 3.1
above, if payable, shall be paid in one lump sum on the second business day
following delivery by Ernst & Young of their audit opinion with respect to
the financial statements of the Company for the year ended June 30, 1998.
4. TRANSITION SERVICES. As a condition to the payments referred to
in Sections 2 and 3 hereof, Executive agrees, if requested by the Board of
Directors of the Company, to provide continued employment services to the
Company for a minimum period of three months and a maximum period of six
months from the date of notice of termination without cause or the date of
de facto termination, as applicable, to assist in an orderly transition to
his successor. During such period, Executive shall receive base salary in
an amount equal to twice that of the base salary he was being paid prior to
termination or Defacto termination plus his annual stipend.
5. CHANGE IN CONTROL. The following provisions shall be applicable
in the case of an occurrence of a Change in Control of the Company:
5.1 Executive may (but shall not be obligated to) terminate his
or her employment with the Company effective 30 days after the giving of
such notice given at any time commencing with the sixth month anniversary
of such Change in Control and terminating on the one year anniversary of
the Change in Control, and receive the payments provided for in Section 5.3
hereof.
5.2 If the Company terminates Executive's employment for any
reason (including death, disability, Cause, without Cause or in the case of
a Defacto Termination) at any time within the one year period following the
date of a Change in Control, then Executive shall be entitled to the
payments provided for in Section 5.3 hereof.
5.3 In the circumstances described in Sections 5.1 and 5.2
above, Executive shall be entitled to and receive the Separation Package.
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<PAGE>
5.4 In addition to any amounts payable to Executive pursuant to
Sections 5.1 and 5.2 above, and without regard to whether Executive's
employment is terminated following a Change in Control, upon the occurrence
of a Change in Control, all Options then held by Executive which are not
yet vested shall vest as of the date of a Change in Control and shall
become immediately exercisable. Further, all Options that are exercisable
as of the date of such Change in Control (including those which do so as a
result of the provisions of the preceding sentence) shall remain so for 36
months following the date of such Change in Control.
5.5 For purposes of this Agreement, a Change in Control shall
mean:
5.5.1 The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of
more than 25% of the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that
neither of the following acquisitions shall constitute a Change in Control:
(i) any acquisition by the Company or (ii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company; or
5.5.2 Individuals who, as of the date of this Agreement,
constitute the Board of Directors of the Company (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board;
PROVIDED, HOWEVER, that any individual becoming a director subsequent to
the date of this Agreement whose election, or nomination for election by
the stockholders of the Company, shall be approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board;
or
5.5.3 Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following
such reorganization, merger or consolidation: (i) more than 60% of the
combined voting power of the then outstanding voting securities of the
corporation resulting from such reorganization, merger, or consolidation,
which may be the Company (the "Resulting Corporation") entitled to vote
generally in the election of directors (the "Resulting Corporation Voting
Securities") shall then be owned beneficially, directly or indirectly, by
all or substantially all of the Persons who were the beneficial owners of
Outstanding Voting Securities immediately prior to such reorganization,
merger or consolidation, in substantially the same proportions as their
respective ownership of Outstanding Voting Securities immediately prior to
such reorganization, merger, or consolidation; (ii) no Person (excluding
the Company, any employee benefit plan (or related trust) of the Company,
the Resulting Corporation, and any Person beneficially owning, immediately
prior to such reorganization, merger or consolidation, directly or
indirectly, 25% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 25% or more of
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<PAGE>
the combined voting power of the Resulting Corporation Voting Securities;
and (iii) at least a majority of the members of the Board shall have been
members of the Incumbent Board at the time of the execution of the initial
agreement providing for such reorganization, merger or consolidation; or
5.5.4 Approval by the stockholders of the Company of (x)
a complete liquidation or dissolution of the Company or (y) the sale or
other disposition of all or substantially all of the assets of the Company,
other than to a corporation (the "Buyer") with respect to which (i)
following such sale or other disposition, more than 60% of the combined
voting power of securities of Buyer entitled to vote generally in the
election of directors ("Buyer Voting Securities"), shall be owned
beneficially, directly or indirectly, by all or substantially all of the
Persons who were the beneficial owners of the Outstanding Voting Securities
immediately prior to such sale or other disposition, in substantially the
same proportion as their respective ownership of Outstanding Voting
Securities, immediately prior to such sale or other disposition; (ii) no
Person (excluding the Company and any employee benefit plan (or related
trust) of the Company or Buyer and any Person that shall immediately prior
to such sale or other disposition own beneficially, directly or indirectly,
25% or more of the combined voting power of Outstanding Voting Securities),
shall own beneficially, directly or indirectly, 25% or more of the combined
voting power or, Buyer Voting Securities; and (z) at least a majority of
the members of the board of directors of Buyer shall have been members of
the Incumbent Board at the time of the execution of the initial agreement
or action of the Board providing for such sale or other disposition or
assets of the Company.
6. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive
pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump
sum on the second business day following termination of Executive's
employment with the Company.
7. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and
exercise dates of Options as set forth in other Sections of this Agreement,
Executive's rights under any other agreement or plan under which stock
options, restricted stock or similar awards are granted shall be determined
in accordance with the terms and provisions of such plans or agreements.
8. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
9. GENERAL RELEASE. As a condition to the payment of the Separation
Package, Executive shall execute and deliver a general release to the
Company in the form attached as Exhibit A attached hereto.
10. GENERAL PROVISIONS.
10.1 NOTICES. All notices, requirements, requests, demands,
claims or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall
be deemed duly given (i) if personally
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<PAGE>
delivered, when so delivered, (ii) if mailed, two (2) business days after
having been set by registered or certified mail, return-receipt requested,
postage prepaid and addressed to the intended recipient as set forth below,
(iii) if given by telecopier, once such notice or other communication is
transmitted to the telecopier number specified below, and the appropriate
telephonic confirmation is received, provided that such notice or other
communication is promptly thereafter mailed in accordance with the
provisions of clause (ii) above or (iv) if sent through an overnight
delivery service under circumstances by which such service guarantees next
day delivery, the date following the date so sent:
IF TO THE COMPANY, TO: 4540 W. Valerio Street
Burbank, CA 91505
IF TO EXECUTIVE TO: Roy A. Wright
30972 Via Mirador
San Juan Capistrano, CA 92675
Any party may change the address to which notices, requests, demands,
claims and other communications hereunder are to be delivered by giving the
other party notice in the manner herein set forth.
10.2 ASSIGNMENT. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may be
the services to be performed hereunder be assigned by the Company to any
person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the
benefits hereunder may be assigned by the Company to any corporation into
which the Company may be merged or consolidated, and this Agreement and the
benefits hereunder will automatically be deemed assigned to any such
corporation, subject, however, to Executive's right to terminate this
Agreement to the extent provided herein.
10.3 COMPLETE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter
hereof and supersedes and cancels any and all previous written or oral
negotiations, commitments, understandings, agreements and any other
writings or communications in respect of such subject matter.
10.4 AMENDMENTS. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
10.5 SEVERABILITY. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability, without affecting in any way the remaining provisions
hereof in such jurisdiction or rendering that or any other provision of
this Agreement invalid, illegal or unenforceable in any other jurisdiction.
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<PAGE>
10.6 NO WAIVER. Any waiver by either party of a breach of any
provisions of this Agreement shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of either party to insist upon
strict adherence to any term of this Agreement on one or more occasions
shall be considered a waiver or to deprive such party of the right
thereafter to insist upon strict adherence to that term or any other term
of this Agreement.
10.7 BINDING EFFECT. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their permitted
assigns, successors and legal representatives.
10.8 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall
constitute one and the same document.
10.9 GOVERNING LAW. This Agreement has been negotiated and
entered into in the State of California and shall be construed in
accordance with the laws of the State of California.
10.10 ARBITRATION. The parties hereby expressly agree that
any controversy or claim relating to this Agreement, including the
construction, enforcement or application of the terms hereof, shall be
submitted to arbitration in Los Angeles, California by the American
Arbitration Association in accordance with the Commercial Arbitration Rules
of such association. The arbitrator shall be a retired judge of the Los
Angeles Superior Court or other party acceptable to the parties and the
rules of evidence shall apply. The costs of the arbitrator shall be borne
equally. Each party shall be responsible for its own attorneys' fees and
costs. However, the arbitrator shall have the right to award costs and
expenses (including actual attorneys' fees) to the prevailing party as well
as equitable relief. The award of the arbitrator shall be final and
binding and shall be enforceable in any court of competent jurisdiction.
Nothing in this paragraph shall preclude the parties from seeking an
injunction or other equitable relief from a court of competent jurisdiction
under appropriate circumstances.
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<PAGE>
10.11 PRESS RELEASE. Any press release issued in a
circumstance described in Section 2 hereof, shall be in form and substance
mutually acceptable to the Company and Executive, which approval shall not
be unreasonably withheld or delayed.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has
executed the same as of the day and year first above written.
IWERKS ENTERTAINMENT, INC.
/s/ Dag Tellefsen
By: ----------------------
Its: Director
/s/ Roy A. Wright
-------------------------
Roy A. Wright
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<PAGE>
EXHIBIT A
WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard
to any claims which may exist or arise out of the Executive's current or
any prior affiliation with the Company (the "Disputes"), Executive
expressly waives all claims against the Company, including, without
limitation, any and all rights under Section 1542 of the Civil Code of the
State of California which provides as follows:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
Executive waives and releases any right or benefit which he has or may
have under any similar law or rule of any other jurisdiction pertaining to
the Disputes. It is the intention of Executive, through this Agreement,
fully, finally, and forever to settle and release all such matters and
claims relative thereto which have existed, do now exist or may exist
between the parties arising out of or related to the Disputes. In
furtherance of such intention, the release herein given shall be, and
remain in effect as, a full and complete release of such matters
notwithstanding the discovery of the existence of any additional claims or
facts relating thereto.
SEPARATION AGREEMENT
--------------------
This Separation Agreement (this "Agreement") is made and entered into
as of October 31, 1997 by and between Iwerks Entertainment, Inc., a
Delaware corporation (the "Company"), and, Bruce Hinckley, an individual
("Executive").
RECITALS:
A. Iwerks Entertainment Inc. (the "Corporation") considers it
essential to the best interests of its stockholders to foster the
continuous employment of key management personnel. In connection with
this, the Corporation's Board of Directors (the "Board") recognizes the
possibility of a change in management personnel or a change in control of
the Corporation may exist and that such possibility, and that such
uncertainty and questions that it may raise among management, could result
in the departure or distraction of management personnel to the detriment of
the Corporation and its stockholders.
B. The Board has decided to reinforce and encourage the continued
attention and dedication of members of the Corporation's management to
their assigned duties without distraction arising from the possibility of a
change in management of control of the Corporation.
C. In order to induce Executive to remain in its employ, the
Corporation has entered into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as set forth below.
1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY
EXECUTIVE.
The Company may terminate Executive's employment at any time with or
without Cause, and Executive may terminate his or her employment at any
time for any reason, in each case by delivery of written notice to the
other party. If the Company terminates Executive's employment with the
Company for Cause or if Executive terminates such employment by reason of
disability, death or voluntary resignation, then Executive shall be
entitled to receive all salary and benefits (including vacation, death,
disability and medical benefits, if any, to the extent such benefits are
accorded to Executive under the Company's benefit plans maintained for
employees generally) accrued and payable to him or her with respect to
services rendered through the date of termination and shall be entitled to
no additional separation or severance payment hereunder. Further, in such
case, this Agreement shall have no effect on, and shall not be deemed to
amend or modify, any of the terms of any stock option granted to Executive
by the Company through the date of termination (collectively, the
"Options") and Executive's rights thereunder shall be limited
<PAGE>
to the terms and conditions set forth in the applicable stock option
agreement evidencing such Options. For purposes of this Agreement, "Cause"
shall mean and be limited to the following events: (i) an act of fraud,
embezzlement or similar conduct by Executive involving the Company; or (ii)
any action by Executive involving the arrest of Executive for violation of
any criminal statute constituting a felony or a misdemeanor involving moral
turpitude if the Board reasonably determines that the continuation of
Executive's employment after such event would have an adverse impact on the
operations or reputation of the Company in the financial community; or
(iii) gross misconduct or habitual negligence in the performance of
Executive's duties, or (iv) an act constituting a breach of Executive's
fiduciary duty to the Corporation under the Delaware General Corporation
Law, or (v) a continuing, repeated willful failure or refusal by Executive
to perform his duties; PROVIDED, HOWEVER, that termination shall not be
deemed to be for Cause under this subclause (v) unless Executive shall have
first received written notice from the Board advising Executive of the
specific acts or omissions alleged to constitute a failure or refusal to
perform and such failure or refusal to perform continues after Executive
shall have had a reasonable opportunity to correct the acts or omissions
cited in such notice.
2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the
provisions of Section 4 below, if the Company terminates Executive's
employment with the Company other than for Cause or if the Company causes a
Defacto Termination of Executive (as defined below) (each a "Separation
Termination"), Executive shall receive the "Separation Package." As used
herein, the "Separation Package" shall consist of (i) a cash amount equal
to the base salary which would have been payable to Executive over 12
months (computed at the annual rate in effect at the date of the Separation
Termination), plus (ii) a cash amount equal to the pro rated portion of the
performance bonus (computed by reference to the actual number of days
Executive is employed during the applicable fiscal year) which would have
been paid to Executive under the Company's performance bonus plan for the
fiscal year in which the Separation Termination occurs (if any such plan is
then in effect) if Executive's employment had continued through the end of
the fiscal year and the Company had achieved 100% of its scheduled
performance goals, plus (iii) paid up COBRA benefits for Executive and his
or her family for the 12 months following the date of the Separation
Termination. Further, notwithstanding any contrary provision in the
applicable stock option agreement, all Options which are not vested as of
the date of the Separation Termination shall become vested and immediately
exercisable and all Options held by Executive as of the date of the
Separation Termination (including those which become exercisable solely as
a result of the provisions of this sentence) shall remain exercisable for a
period of 15 months following the date of the Separation Termination. For
purposes of this paragraph, "Defacto Termination" shall include any of the
following events: (i) the Company shall reduce the Executive'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 executive officers
compensation in general; (ii) the Company shall fail to cause Executive to
remain an executive officer of the Company; (iii) Executive shall not be
afforded the authority, powers, responsibilities and privileges customarily
accorded to an executive with his or her title; or (iv) the Company shall
require Executive's primary services to be rendered in an area other than
the Company's principal offices in the greater Los Angeles metropolitan
area.
Page 2
<PAGE>
3. CHANGE IN CONTROL. The following provisions shall be applicable
in the case of an occurrence of a Change in Control of the Company:
3.1 Executive may (but shall not be obligated to) terminate his
or her employment with the Company effective 30 days after the giving of
such notice given at any time commencing with the sixth month anniversary
of such Change in Control and terminating on the one year anniversary of
the Change in Control, and receive the payments provided for in Section 3.3
hereof.
3.2 If the Company terminates Executive's employment for any
reason (including death, disability, Cause, without Cause or in the case of
a Defacto Termination) at any time within the one year period following the
date of a Change in Control, then Executive shall be entitled to the
payments provided for in Section 3.3 hereof.
3.3 In the circumstances described in Sections 3.1 and 3.2
above, Executive shall be entitled to and receive the Separation Package.
3.4 In addition to any amounts payable to Executive pursuant to
Sections 3.1 and 3.2 above, and without regard to whether Executive's
employment is terminated following a Change in Control, upon the occurrence
of a Change in Control, all Options then held by Executive which are not
yet vested shall vest as of the date of a Change in Control and shall
become immediately exercisable. Further, all Options that are exercisable
as of the date of such Change in Control (including those which do so as a
result of the provisions of the preceding sentence) shall remain so for 15
months following the date of such Change in Control.
3.5 For purposes of this Agreement, a Change in Control shall
mean:
3.5.1 The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of
more than 25% of the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that
neither of the following acquisitions shall constitute a Change in Control:
(i) any acquisition by the Company or (ii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company; or
3.5.2 Individuals who, as of the date of this
Agreement, constitute the Board of Directors of the Company (the "Incumbent
Board") cease for any reason to constitute at least a majority of the
Board; PROVIDED, HOWEVER, that any individual becoming a director
subsequent to the date of this Agreement whose election, or nomination for
election by the stockholders of the Company, shall be approved by a vote of
at least a majority of the directors
Page 3
<PAGE>
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; or
3.5.3 Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following
such reorganization, merger or consolidation: (i) more than 60% of the
combined voting power of the then outstanding voting securities of the
corporation resulting from such reorganization, merger, or consolidation,
which may be the Company (the "Resulting Corporation") entitled to vote
generally in the election of directors (the "Resulting Corporation Voting
Securities") shall then be owned beneficially, directly or indirectly, by
all or substantially all of the Persons who were the beneficial owners of
Outstanding Voting Securities immediately prior to such reorganization,
merger or consolidation, in substantially the same proportions as their
respective ownership of Outstanding Voting Securities immediately prior to
such reorganization, merger, or consolidation; (ii) no Person (excluding
the Company, any employee benefit plan (or related trust) of the Company,
the Resulting Corporation, and any Person beneficially owning, immediately
prior to such reorganization, merger or consolidation, directly or
indirectly, 25% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 25% or more of
the combined voting power of the Resulting Corporation Voting Securities;
and (iii) at least a majority of the members of the Board shall have been
members of the Incumbent Board at the time of the execution of the initial
agreement providing for such reorganization, merger or consolidation; or
3.5.4 Approval by the stockholders of the Company of (x)
a complete liquidation or dissolution of the Company or (y) the sale or
other disposition of all or substantially all of the assets of the Company,
other than to a corporation (the "Buyer") with respect to which (i)
following such sale or other disposition, more than 60% of the combined
voting power of securities of Buyer entitled to vote generally in the
election of directors ("Buyer Voting Securities"), shall be owned
beneficially, directly or indirectly, by all or substantially all of the
Persons who were the beneficial owners of the Outstanding Voting Securities
immediately prior to such sale or other disposition, in substantially the
same proportion as their respective ownership of Outstanding Voting
Securities, immediately prior to such sale or other disposition; (ii) no
Person (excluding the Company and any employee benefit plan (or related
trust) of the Company or Buyer and any Person that shall immediately prior
to such sale or other disposition own beneficially, directly or indirectly,
25% or more of the combined voting power of Outstanding Voting Securities),
shall own beneficially, directly or indirectly, 25% or more of the combined
voting power or, Buyer Voting Securities; and (z) at least a majority of
the members of the board of directors of Buyer shall have been members of
the Incumbent Board at the time of the execution of the initial agreement
or action of the Board providing for such sale or other disposition or
assets of the Company.
4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive
pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump
sum on the second business day following termination of Executive's
employment with the Company.
Page 4
<PAGE>
5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and
exercise dates of Options as set forth in other Sections of this Agreement,
Executive's rights under any other agreement or plan under which stock
options, restricted stock or similar awards are granted shall be determined
in accordance with the terms and provisions of such plans or agreements.
6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
7. GENERAL RELEASE. As a condition to the payment of the Separation
Package, Executive shall execute and deliver a general release to the
Company in the form attached as Exhibit A attached hereto.
8. GENERAL PROVISIONS.
8.1 NOTICES. All notices, requirements, requests, demands,
claims or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall
be deemed duly given (i) if personally delivered, when so delivered, (ii)
if mailed, two (2) business days after having been set by registered or
certified mail, return-receipt requested, postage prepaid and addressed to
the intended recipient as set forth below, (iii) if given by telecopier,
once such notice or other communication is transmitted to the telecopier
number specified below, and the appropriate telephonic confirmation is
received, provided that such notice or other communication is promptly
thereafter mailed in accordance with the provisions of clause (ii) above or
(iv) if sent through an overnight delivery service under circumstances by
which such service guarantees next day delivery, the date following the
date so sent:
IF TO THE COMPANY, TO: 4540 W. Valerio Street
Burbank, CA 91505
IF TO EXECUTIVE TO: Bruce Hinckley
1420 Greenbriar Road
Glendale, CA 91207
Any party may change the address to which notices, requests, demands,
claims and other communications hereunder are to be delivered by giving the
other party notice in the manner herein set forth.
8.2 ASSIGNMENT. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may be
the services to be performed hereunder be assigned by the Company to any
person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the
benefits hereunder may be assigned by the Company to any corporation into
which the Company may be merged or consolidated, and this Agreement and the
benefits hereunder will automatically be deemed assigned to any such
corporation, subject, however, to Executive's right to terminate this
Agreement to the extent provided herein.
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<PAGE>
8.3 COMPLETE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter
hereof and supersedes and cancels any and all previous written or oral
negotiations, commitments, understandings, agreements and any other
writings or communications in respect of such subject matter.
8.4 AMENDMENTS. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
8.5 SEVERABILITY. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability, without affecting in any way the remaining provisions
hereof in such jurisdiction or rendering that or any other provision of
this Agreement invalid, illegal or unenforceable in any other jurisdiction.
8.6 NO WAIVER. Any waiver by either party of a breach of any
provisions of this Agreement shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of either party to insist upon
strict adherence to any term of this Agreement on one or more occasions
shall be considered a waiver or to deprive such party of the right
thereafter to insist upon strict adherence to that term or any other term
of this Agreement.
8.7 BINDING EFFECT. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their permitted
assigns, successors and legal representatives.
8.8 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall
constitute one and the same document.
8.9 GOVERNING LAW. This Agreement has been negotiated and
entered into in the State of California and shall be construed in
accordance with the laws of the State of California.
8.10 ARBITRATION. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the
construction, enforcement or application of the terms hereof, shall be
submitted to arbitration in Los Angeles, California by the American
Arbitration Association in accordance with the Commercial Arbitration Rules
of such association. The arbitrator shall be a retired judge of the Los
Angeles Superior Court or other party acceptable to the parties and the
rules of evidence shall apply. The costs of the arbitrator shall be borne
equally. Each party shall be responsible for its own attorneys' fees and
costs. However, the arbitrator shall have the right to award costs and
expenses (including actual attorneys' fees) to the prevailing party as well
as equitable relief. The award of the arbitrator shall be final and
binding and shall be enforceable in any court of competent jurisdiction.
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<PAGE>
Nothing in this paragraph shall preclude the parties from seeking an
injunction or other equitable relief from a court of competent jurisdiction
under appropriate circumstances.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has
executed the same as of the day and year first above written.
IWERKS ENTERTAINMENT, INC.
By: /s/ Roy A. Wright
------------------------
Its: Chairman & CEO
/s/ Bruce Hinckley
-------------------------
Bruce Hinckley
Page 7
<PAGE>
EXHIBIT A
Waiver Under Section 1542 of the California Civil Code. With regard
to any claims which may exist or arise out of the Executive's current or
any prior affiliation with the Company (the "Disputes"), Executive
expressly waives all claims against the Company, including, without
limitation, any and all rights under Section 1542 of the Civil Code of the
State of California which provides as follows:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
Executive waives and releases any right or benefit which he has or may
have under any similar law or rule of any other jurisdiction pertaining to
the Disputes. It is the intention of Executive, through this Agreement,
fully, finally, and forever to settle and release all such matters and
claims relative thereto which have existed, do now exist or may exist
between the parties arising out of or related to the Disputes. In
furtherance of such intention, the release herein given shall be, and
remain in effect as, a full and complete release of such matters
notwithstanding the discovery of the existence of any additional claims or
facts relating thereto.
SEPARATION AGREEMENT
--------------------
This Separation Agreement (this "Agreement") is made and entered into
as of October 31, 1997 by and between Iwerks Entertainment, Inc., a
Delaware corporation (the "Company"), and, William J. Battison, an
individual ("Executive").
RECITALS:
A. Iwerks Entertainment Inc. (the "Corporation") considers it
essential to the best interests of its stockholders to foster the
continuous employment of key management personnel. In connection with
this, the Corporation's Board of Directors (the "Board") recognizes the
possibility of a change in management personnel or a change in control of
the Corporation may exist and that such possibility, and that such
uncertainty and questions that it may raise among management, could result
in the departure or distraction of management personnel to the detriment of
the Corporation and its stockholders.
B. The Board has decided to reinforce and encourage the continued
attention and dedication of members of the Corporation's management to
their assigned duties without distraction arising from the possibility of a
change in management of control of the Corporation.
C. In order to induce Executive to remain in its employ, the
Corporation has entered into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as set forth below.
1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY
EXECUTIVE. The Company may terminate Executive's employment at any time
with or without Cause, and Executive may terminate his or her employment at
any time for any reason, in each case by delivery of written notice to the
other party. If the Company terminates Executive's employment with the
Company for Cause or if Executive terminates such employment by reason of
disability, death or voluntary resignation, then Executive shall be
entitled to receive all salary and benefits (including vacation, death,
disability and medical benefits, if any, to the extent such benefits are
accorded to Executive under the Company's benefit plans maintained for
employees generally) accrued and payable to him or her with respect to
services rendered through the date of termination and shall be entitled to
no additional separation or severance payment hereunder. Further, in such
case, this Agreement shall have no effect on, and shall not be deemed to
amend or modify, any of the terms of any stock option granted to Executive
by the Company through the date of termination (collectively, the
"Options") and Executive's rights thereunder shall be limited
<PAGE>
to the terms and conditions set forth in the applicable stock option
agreement evidencing such Options. For purposes of this Agreement, "Cause"
shall mean and be limited to the following events: (i) an act of fraud,
embezzlement or similar conduct by Executive involving the Company; or (ii)
any action by Executive involving the arrest of Executive for violation of
any criminal statute constituting a felony or a misdemeanor involving moral
turpitude if the Board reasonably determines that the continuation of
Executive's employment after such event would have an adverse impact on the
operations or reputation of the company in the financial community; or
(iii) gross misconduct or habitual negligence in the performance of
Executive's duties, or (iv) an act constituting a breach of Executive's
fiduciary duty to the Corporation under the Delaware General Corporation
Law, or (v) a continuing, repeated willful failure or refusal by Executive
to perform his duties; PROVIDED, HOWEVER, that termination shall not be
deemed to be for Cause under this subclause (v) unless Executive shall have
first received written notice from the Board advising Executive of the
specific acts or omissions alleged to constitute a failure or refusal to
perform and such failure or refusal to perform continues after Executive
shall have had a reasonable opportunity to correct the acts or omissions
cited in such notice.
2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the
provisions of Section 4 below, if the Company terminates Executive's
employment with the Company other than for Cause or if the Company causes a
Defacto Termination of Executive (as defined below) (each a "Separation
Termination"), Executive shall receive the "Separation Package." As used
herein, the "Separation Package" shall consist of (i) a cash amount equal
to the base salary which would have been payable to Executive over 12
months (computed at the annual rate in effect at the date of the Separation
Termination), plus (ii) a cash amount equal to the pro rated portion of the
performance bonus (computed by reference to the actual number of days
Executive is employed during the applicable fiscal year) which would have
been paid to Executive under the Company's performance bonus plan for the
fiscal year in which the Separation Termination occurs (if any such plan is
then in effect) if Executive's employment had continued through the end of
the fiscal year and the Company had achieved 100% of its scheduled
performance goals, plus (iii) paid up COBRA benefits for Executive and his
or her family for the 12 months following the date of the Separation
Termination. Further, notwithstanding any contrary provision in the
applicable stock option agreement, all Options which are not vested as of
the date of the Separation Termination shall become vested and immediately
exercisable and all Options held by Executive as of the date of the
Separation Termination (including those which become exercisable solely as
a result of the provisions of this sentence) shall remain exercisable for a
period of 15 months following the date of the Separation Termination. For
purposes of this paragraph, "Defacto Termination" shall include any of the
following events: (i) the Company shall reduce the Executive'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 executive officers
compensation in general; (ii) the Company shall fail to cause Executive to
remain an executive officer of the Company; (iii) Executive shall not be
afforded the authority, powers, responsibilities and privileges customarily
accorded to an executive with his or her title; or (iv) the Company shall
require Executive's primary services to be rendered in an area other than
the Company's principal offices in the greater Los Angeles metropolitan
area.
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<PAGE>
3. CHANGE IN CONTROL. The following provisions shall be applicable
in the case of an occurrence of a Change in Control of the Company:
3.1 Executive may (but shall not be obligated to) terminate his
or her employment with the Company effective 30 days after the giving of
such notice given at any time commencing with the sixth month anniversary
of such Change in Control and terminating on the one year anniversary of
the Change in Control, and receive the payments provided for in Section 3.3
hereof.
3.2 If the Company terminates Executive's employment for any
reason (including death, disability, Cause, without Cause or in the case of
a Defacto Termination) at any time within the one year period following the
date of a Change in Control, then Executive shall be entitled to the
payments provided for in Section 3.3 hereof.
3.3 In the circumstances described in Sections 3.1 and 3.2
above, Executive shall be entitled to and receive the Separation Package.
3.4 In addition to any amounts payable to Executive pursuant to
Sections 3.1 and 3.2 above, and without regard to whether Executive's
employment is terminated following a Change in Control, upon the occurrence
of a Change in Control, all Options then held by Executive which are not
yet vested shall vest as of the date of a Change in Control and shall
become immediately exercisable. Further, all Options that are exercisable
as of the date of such Change in Control (including those which do so as a
result of the provisions of the preceding sentence) shall remain so for 15
months following the date of such Change in Control.
3.5 For purposes of this Agreement, a Change in Control shall
mean:
3.5.1 The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of
more than 25% of the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that
neither of the following acquisitions shall constitute a Change in Control:
(i) any acquisition by the Company or (ii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company; or
3.5.2 Individuals who, as of the date of this Agreement,
constitute the Board of Directors of the Company (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board;
PROVIDED, HOWEVER, that any individual becoming a director subsequent to
the date of this Agreement whose election, or nomination for election by
the stockholders of the Company, shall be approved by a vote of at least a
majority of the directors
Page 3
<PAGE>
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; or
3.5.3 Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following
such reorganization, merger or consolidation: (i) more than 60% of the
combined voting power of the then outstanding voting securities of the
corporation resulting from such reorganization, merger, or consolidation,
which may be the Company (the "Resulting Corporation") entitled to vote
generally in the election of directors (the "Resulting Corporation Voting
Securities") shall then be owned beneficially, directly or indirectly, by
all or substantially all of the Persons who were the beneficial owners of
Outstanding Voting Securities immediately prior to such reorganization,
merger or consolidation, in substantially the same proportions as their
respective ownership of Outstanding Voting Securities immediately prior to
such reorganization, merger, or consolidation; (ii) no Person (excluding
the Company, any employee benefit plan (or related trust) of the Company,
the Resulting Corporation, and any Person beneficially owning, immediately
prior to such reorganization, merger or consolidation, directly or
indirectly, 25% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 25% or more of
the combined voting power of the Resulting Corporation Voting Securities;
and (iii) at least a majority of the members of the Board shall have been
members of the Incumbent Board at the time of the execution of the initial
agreement providing for such reorganization, merger or consolidation; or
3.5.4 Approval by the stockholders of the Company of (x)
a complete liquidation or dissolution of the Company or (y) the sale or
other disposition of all or substantially all of the assets of the Company,
other than to a corporation (the "Buyer") with respect to which (i)
following such sale or other disposition, more than 60% of the combined
voting power of securities of Buyer entitled to vote generally in the
election of directors ("Buyer Voting Securities"), shall be owned
beneficially, directly or indirectly, by all or substantially all of the
Persons who were the beneficial owners of the Outstanding Voting Securities
immediately prior to such sale or other disposition, in substantially the
same proportion as their respective ownership of Outstanding Voting
Securities, immediately prior to such sale or other disposition; (ii) no
Person (excluding the Company and any employee benefit plan (or related
trust) of the Company or Buyer and any Person that shall immediately prior
to such sale or other disposition own beneficially, directly or indirectly,
25% or more of the combined voting power of Outstanding Voting Securities),
shall own beneficially, directly or indirectly, 25% or more of the combined
voting power or, Buyer Voting Securities; and (z) at least a majority of
the members of the board of directors of Buyer shall have been members of
the Incumbent Board at the time of the execution of the initial agreement
or action of the Board providing for such sale or other disposition or
assets of the Company.
4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive
pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump
sum on the second business day following termination of Executive's
employment with the Company.
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<PAGE>
5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and
exercise dates of Options as set forth in other Sections of this Agreement,
Executive's rights under any other agreement or plan under which stock
options, restricted stock or similar awards are granted shall be determined
in accordance with the terms and provisions of such plans or agreements.
6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
7. GENERAL RELEASE. As a condition to the payment of the Separation
Package, Executive shall execute and deliver a general release to the
Company in the form attached as Exhibit A attached hereto.
8. GENERAL PROVISIONS.
8.1 NOTICES. All notices, requirements, requests, demands,
claims or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall
be deemed duly given (i) if personally delivered, when so delivered, (ii)
if mailed, two (2) business days after having been set by registered or
certified mail, return-receipt requested, postage prepaid and addressed to
the intended recipient as set forth below, (iii) if given by telecopier,
once such notice or other communication is transmitted to the telecopier
number specified below, and the appropriate telephonic confirmation is
received, provided that such notice or other communication is promptly
thereafter mailed in accordance with the provisions of clause (ii) above or
(iv) if sent through an overnight delivery service under circumstances by
which such service guarantees next day delivery, the date following the
date so sent:
IF TO THE COMPANY, TO: 4540 W. Valerio Street
Burbank, CA 91505
IF TO EXECUTIVE TO: William J. Battison
334 Meadow Grove Street
La Canada Flintridge, CA 91011
Any party may change the address to which notices, requests, demands,
claimsand other communications hereunder are to be delivered by giving the
otherparty notice in the manner herein set forth.
8.2 ASSIGNMENT. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may be
the services to be performed hereunder be assigned by the Company to any
person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the
benefits hereunder may be assigned by the Company to any corporation into
which the Company may be merged or consolidated, and this Agreement and the
benefits hereunder will automatically be deemed assigned to any such
corporation, subject, however, to Executive's right to terminate this
Agreement to the extent provided herein.
Page 5
<PAGE>
8.3 COMPLETE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter
hereof and supersedes and cancels any and all previous written or oral
negotiations, commitments, understandings, agreements and any other
writings or communications in respect of such subject matter.
8.4 AMENDMENTS. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
8.5 SEVERABILITY. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability, without affecting in any way the remaining provisions
hereof in such jurisdiction or rendering that or any other provision of
this Agreement invalid, illegal or unenforceable in any other jurisdiction.
8.6 NO WAIVER. Any waiver by either party of a breach of any
provisions of this Agreement shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of either party to insist upon
strict adherence to any term of this Agreement on one or more occasions
shall be considered a waiver or to deprive such party of the right
thereafter to insist upon strict adherence to that term or any other term
of this Agreement.
8.7 BINDING EFFECT. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their permitted
assigns, successors and legal representatives.
8.8 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall
constitute one and the same document.
8.9 GOVERNING LAW. This Agreement has been negotiated and
entered into in the State of California and shall be construed in
accordance with the laws of the State of California.
8.10 ARBITRATION. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the
construction, enforcement or application of the terms hereof, shall be
submitted to arbitration in Los Angeles, California by the American
Arbitration Association in accordance with the Commercial Arbitration Rules
of such association. The arbitrator shall be a retired judge of the Los
Angeles Superior Court or other party acceptable to the parties and the
rules of evidence shall apply. The costs of the arbitrator shall be borne
equally. Each party shall be responsible for its own attorneys' fees and
costs. However, the arbitrator shall have the right to award costs and
expenses (including actual attorneys' fees) to the prevailing party as well
as equitable relief. The award of the arbitrator shall be final and
binding and shall be enforceable in any court of competent jurisdiction.
Page 6
<PAGE>
Nothing in this paragraph shall preclude the parties from seeking an
injunction or other equitable relief from a court of competent jurisdiction
under appropriate circumstances.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has
executed the same as of the day and year first above written.
IWERKS ENTERTAINMENT, INC.
By: /s/ Roy A. Wright
-------------------------
Its: Chairman and CEO
/s/ William J. Battison
--------------------------
William J. Battison
Page 7
<PAGE>
EXHIBIT A
WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard
to any claims which may exist or arise out of the Executive's current or
any prior affiliation with the Company (the "Disputes"), Executive
expressly waives all claims against the Company, including, without
limitation, any and all rights under Section 1542 of the Civil Code of the
State of California which provides as follows:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
Executive waives and releases any right or benefit which he has or may
have under any similar law or rule of any other jurisdiction pertaining to
the Disputes. It is the intention of Executive, through this Agreement,
fully, finally, and forever to settle and release all such matters and
claims relative thereto which have existed, do now exist or may exist
between the parties arising out of or related to the Disputes. In
furtherance of such intention, the release herein given shall be, and
remain in effect as, a full and complete release of such matters
notwithstanding the discovery of the existence of any additional claims or
facts relating thereto.
SEPARATION AGREEMENT
--------------------
This Separation Agreement (this "Agreement") is made and entered into
as of October 31, 1997 by and between Iwerks Entertainment, Inc., a
Delaware corporation (the "Company"), and, Catherine Giffen, an individual
("Executive").
RECITALS:
A. Iwerks Entertainment Inc. (the "Corporation") considers it
essential to the best interests of its stockholders to foster the
continuous employment of key management personnel. In connection with
this, the Corporation's Board of Directors (the "Board") recognizes the
possibility of a change in management personnel or a change in control of
the Corporation may exist and that such possibility, and that such
uncertainty and questions that it may raise among management, could result
in the departure or distraction of management personnel to the detriment of
the Corporation and its stockholders.
B. The Board has decided to reinforce and encourage the continued
attention and dedication of members of the Corporation's managment to their
assigned duties without distraction arising from the possibility of a
change in management of control of the Corporation.
C. In order to induce Executive to remain in its employ, the
Corporation has entered into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as set forth below.
1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY
EXECUTIVE. The Company may terminate Executive's employment at any time
with or without Cause, and Executive may terminate his or her employment at
any time for any reason, in each case by delivery of written notice to the
other party. If the Company terminates Executive's employment with the
Company for Cause or if Executive terminates such employment by reason of
disability, death or voluntary resignation, then Executive shall be
entitled to receive all salary and benefits (including vacation, death,
disability and medical benefits, if any, to the extent such benefits are
accorded to Executive under the Company's benefit plans maintained for
employees generally) accrued and payable to him or her with respect to
services rendered through the date of termination and shall be entitled to
no additional separation or severance payment hereunder. Further, in such
case, this Agreement shall have no effect on, and shall not be deemed to
amend or modify, any of the terms of any stock option granted to Executive
by the Company through the date of termination (collectively, the
"Options") and Executive's rights thereunder shall be limited
<PAGE>
to the terms and conditions set forth in the applicable stock option
agreement evidencing such Options. For purposes of this Agreement, "Cause"
shall mean and be limited to the following events: (i) an act of fraud,
embezzlement or similar conduct by Executive involving the Company; or (ii)
any action by Executive involving the arrest of Executive for violation of
any criminal statute constituting a felony or a misdemeanor involving moral
turpitude if the Board reasonably determines that the continuation of
Executive's employment after such event would have an adverse impact on the
operations or reputation of the Company in the Financial community; or
(iii) gross misconduct or habitual negligence in the performance of
Executive's duties, or (iv) an act constituting a breach of Executive's
fiduciary duty to the Corporation under the Delaware General Corporation
Law, or (v) a continuing, repeated willful failure or refusal by Executive
to perform his duties; PROVIDED, HOWEVER, that termination shall not be
deemed to be for Cause under this subclause (v) unless Executive shall have
first received written notice from the Board advising Executive of the
specific acts or omissions alleged to constitute a failure or refusal to
perform and such failure or refusal to perform continues after Executive
shall have had a reasonable opportunity to correct the acts or omissions
cited in such notice.
2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the
provisions of Section 4 below, if the Company terminates Executive's
employment with the Company other than for Cause or if the Company causes a
Defacto Termination of Executive (as defined below) (each a "Separation
Termination"), Executive shall receive the "Separation Package." As used
herein, the "Separation Package" shall consist of (i) a cash amount equal
to the base salary which would have been payable to Executive over six
months (computed at the annual rate in effect at the date of the Separation
Termination), plus (ii) a cash amount equal to the pro rated portion of the
performance bonus (computed by reference to the actual number of days
Executive is employed during the applicable fiscal year) which would have
been paid to Executive under the Company's performance bonus plan for the
fiscal year in which the Separation Termination occurs (if any such plan is
then in effect) if Executive's employment had continued through the end of
the fiscal year and the Company had achieved 100% of its scheduled
performance goals, plus (iii) paid up COBRA benefits for Executive and his
or her family for the 12 months following the date of the Separation
Termination. Further, notwithstanding any contrary provision in the
applicable stock option agreement, all Options which are not vested as of
the date of the Separation Termination shall become vested and immediately
exercisable and all Options held by Executive as of the date of the
Separation Termination (including those which become exercisable solely as
a result of the provisions of this sentence) shall remain exercisable for a
period of 12 months following the date of the Separation Termination. For
purposes of this paragraph, "Defacto Termination" shall include any of the
following events: (i) the Company shall reduce the Executive'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 executive officers
compensation in general; (ii) the Company shall fail to cause Executive to
remain an executive officer of the Company; (iii) Executive shall not be
afforded the authority, powers, responsibilities and privileges customarily
accorded to an executive with his or her title; or (iv) the Company shall
require Executive's primary services to be rendered in an area other than
the Company's principal offices in the greater Los Angeles metropolitan
area.
Page 2
<PAGE>
3. CHANGE IN CONTROL. The following provisions shall be applicable
in the case of an occurrence of a Change in Control of the Company:
3.1 Executive may (but shall not be obligated to) terminate his
or her employment with the Company effective 30 days after the giving of
such notice given at any time commencing with the sixth month anniversary
of such Change in Control and terminating on the one year anniversary of
the Change in Control, and receive the payments provided for in Section 3.3
hereof.
3.2 If the Company terminates Executive's employment for any
reason (including death, disability, Cause, without Cause or in the case of
a Defacto Termination) at any time within the one year period following the
date of a Change in Control, then Executive shall be entitled to the
payments provided for in Section 3.3 hereof.
3.3 In the circumstances described in Sections 3.1 and 3.2
above, Executive shall be entitled to and receive the Separation Package.
3.4 In addition to any amounts payable to Executive pursuant to
Sections 3.1 and 3.2 above, and without regard to whether Executive's
employment is terminated following a Change in Control, upon the occurrence
of a Change in Control, all Options then held by Executive which are not
yet vested shall vest as of the date of a Change in Control and shall
become immediately exercisable. Further, all Options that are exercisable
as of the date of such Change in Control (including those which do so as a
result of the provisions of the preceding sentence) shall remain so for 12
months following the date of such Change in Control.
3.5 For purposes of this Agreement, a Change in Control shall
mean:
3.5.1 The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of
more than 25% of the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that
neither of the following acquisitions shall constitute a Change in Control:
(i) any acquisition by the Company or (ii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company; or
3.5.2 Individuals who, as of the date of this Agreement,
constitute the Board of Directors of the Company (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board;
PROVIDED, HOWEVER, that any individual becoming a director subsequent to
the date of this Agreement whose election, or nomination for election by
the stockholders of the Company, shall be approved by a vote of at least a
majority of the directors
Page 3
<PAGE>
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; or
3.5.3 Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following
such reorganization, merger or consolidation: (i) more than 60% of the
combined voting power of the then outstanding voting securities of the
corporation resulting from such reorganization, merger, or consolidation,
which may be the Company (the "Resulting Corporation") entitled to vote
generally in the election of directors (the "Resulting Corporation Voting
Securities") shall then be owned beneficially, directly or indirectly, by
all or substantially all of the Persons who were the beneficial owners of
Outstanding Voting Securities immediately prior to such reorganization,
merger or consolidation, in substantially the same proportions as their
respective ownership of Outstanding Voting Securities immediately prior to
such reorganization, merger, or consolidation; (ii) no Person (excluding
the Company, any employee benefit plan (or related trust) of the Company,
the Resulting Corporation, and any Person beneficially owning, immediately
prior to such reorganization, merger or consolidation, directly or
indirectly, 25% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 25% or more of
the combined voting power of the Resulting Corporation Voting Securities;
and (iii) at least a majority of the members of the Board shall have been
members of the Incumbent Board at the time of the execution of the initial
agreement providing for such reorganization, merger or consolidation; or
3.5.4 Approval by the stockholders of the Company of (x)
a complete liquidation or dissolution of the Company or (y) the sale or
other disposition of all or substantially all of the assets of the Company,
other than to a corporation (the "Buyer") with respect to which (i)
following such sale or other disposition, more than 60% of the combined
voting power of securities of Buyer entitled to vote generally in the
election of directors ("Buyer Voting Securities"), shall be owned
beneficially, directly or indirectly, by all or substantially all of the
Persons who were the beneficial owners of the Outstanding Voting Securities
immediately prior to such sale or other disposition, in substantially the
same proportion as their respective ownership of Outstanding Voting
Securities, immediately prior to such sale or other disposition; (ii) no
Person (excluding the Company and any employee benefit plan (or related
trust) of the Company or Buyer and any Person that shall immediately prior
to such sale or other disposition own beneficially, directly or indirectly,
25% or more of the combined voting power of Outstanding Voting Securities),
shall own beneficially, directly or indirectly, 25% or more of the combined
voting power or, Buyer Voting Securities; and (z) at least a majority of
the members of the board of directors of Buyer shall have been members of
the Incumbent Board at the time of the execution of the initial agreement
or action of the Board providing for such sale or other disposition or
assets of the Company.
4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive
pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump
sum on the second business day following termination of Executive's
employment with the Company.
Page 4
<PAGE>
5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and
exercise dates of Options as set forth in other Sections of this Agreement,
Executive's rights under any other agreement or plan under which stock
options, restricted stock or similar awards are granted shall be determined
in accordance with the terms and provisions of such plans or agreements.
6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
7. GENERAL RELEASE. As a condition to the payment of the Separation
Package, Executive shall execute and deliver a general release to the
Company in the form attached as Exhibit A attached hereto.
8. GENERAL PROVISIONS.
8.1 NOTICES. All notices, requirements, requests, demands,
claims or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall
be deemed duly given (i) if personally delivered, when so delivered, (ii)
if mailed, two (2) business days after having been set by registered or
certified mail, return-receipt requested, postage prepaid and addressed to
the intended recipient as set forth below, (iii) if given by telecopier,
once such notice or other communication is transmitted to the telecopier
number specified below, and the appropriate telephonic confirmation is
received, provided that such notice or other communication is promptly
thereafter mailed in accordance with the provisions of clause (ii) above or
(iv) if sent through an overnight delivery service under circumstances by
which such service guarantees next day delivery, the date following the
date so sent:
IF TO THE COMPANY, TO: 4540 W. Valerio Street
Burbank, CA 91505
IF TO EXECUTIVE TO: Catherine Kwong Giffen
11901 Eddleston Drive
Northridge, CA 91326
Any party may change the address to which notices, requests, demands,
claims and other communications hereunder are to be delivered by giving the
other party notice in the manner herein set forth.
8.2 ASSIGNMENT. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may be
the services to be performed hereunder be assigned by the Company to any
person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the
benefits hereunder may be assigned by the Company to any corporation into
which the Company may be merged or consolidated, and this Agreement and the
benefits hereunder will automatically be deemed assigned to any such
corporation, subject, however, to Executive's right to terminate this
Agreement to the extent provided herein.
Page 5
<PAGE>
8.3 COMPLETE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter
hereof and supersedes and cancels any and all previous written or oral
negotiations, commitments, understandings, agreements and any other
writings or communications in respect of such subject matter.
8.4 AMENDMENTS. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
8.5 SEVERABILITY. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability, without affecting in any way the remaining provisions
hereof in such jurisdiction or rendering that or any other provision of
this Agreement invalid, illegal or unenforceable in any other jurisdiction.
8.6 NO WAIVER. Any waiver by either party of a breach of any
provisions of this Agreement shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of either party to insist upon
strict adherence to any term of this Agreement on one or more occasions
shall be considered a waiver or to deprive such party of the right
thereafter to insist upon strict adherence to that term or any other term
of this Agreement.
8.7 BINDING EFFECT. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their permitted
assigns, successors and legal representatives.
8.8 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall
constitute one and the same document.
8.9 GOVERNING LAW. This Agreement has been negotiated and
entered into in the State of California and shall be construed in
accordance with the laws of the State of California.
8.10 ARBITRATION. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the
construction, enforcement or application of the terms hereof, shall be
submitted to arbitration in Los Angeles, California by the American
Arbitration Association in accordance with the Commercial Arbitration Rules
of such association. The arbitrator shall be a retired judge of the Los
Angeles Superior Court or other party acceptable to the parties and the
rules of evidence shall apply. The costs of the arbitrator shall be borne
equally. Each party shall be responsible for its own attorneys' fees and
costs. However, the arbitrator shall have the right to award costs and
expenses (including actual attorneys' fees) to the prevailing party as well
as equitable relief. The award of the arbitrator shall be final and
binding and shall be enforceable in any court of competent jurisdiction.
Page 6
<PAGE>
Nothing in this paragraph shall preclude the parties from seeking an
injunction or other equitable relief from a court of competent jurisdiction
under appropriate circumstances.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has
executed the same as of the day and year first above written.
IWERKS ENTERTAINMENT, INC.
By: /s/ Roy A. Wright
---------------------------
Its: Chairman & CEO
By: /s/ Catherine Giffen 10/31/97
---------------------------
Catherine Giffen
Page 7
<PAGE>
EXHIBIT A
WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard
to any claims which may exist or arise out of the Executive's current or
any prior affiliation with the Company (the "Disputes"), Executive
expressly waives all claims against the Company, including, without
limitation, any and all rights under Section 1542 of the Civil Code of the
State of California which provides as follows:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
Executive waives and releases any right or benefit which he has or may
have under any similar law or rule of any other jurisdiction pertaining to
the Disputes. It is the intention of Executive, through this Agreement,
fully, finally, and forever to settle and release all such matters and
claims relative thereto which have existed, do now exist or may exist
between the parties arising out of or related to the Disputes. In
furtherance of such intention, the release herein given shall be, and
remain in effect as, a full and complete release of such matters
notwithstanding the discovery of the existence of any additional claims or
facts relating thereto.
SEPARATION AGREEMENT
---------------------
This Separation Agreement (this "Agreement") is made and entered into
as of October 31, 1997 by and between Iwerks Entertainment, Inc., a
Delaware corporation (the "Company"), and, Jon Corfino, an individual
("Executive").
RECITALS:
A. Iwerks Entertainment Inc. (the "Corporation") considers it
essential to the best interests of its stockholders to foster the
continuous employment of key management personnel. In connection with
this, the Corporation's Board of Directors (the "Board") recognizes the
possibility of a change in management personnel or a change in control of
the Corporation may exist and that such possibility, and that such
uncertainty and questions that it may raise among management, could result
in the departure or distraction of management personnel to the detriment of
the Corporation and its stockholders.
B. The Board has decided to reinforce and encourage the continued
attention and dedication of members of the Corporation's management to
their assigned duties without distraction arising from the possibility of a
change in management of control of the Corporation.
C. In order to induce Executive to remain in its employ, the
Corporation has entered into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as set forth below.
1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY
EXECUTIVE. The Company may terminate Executive's employment at any time
with or without Cause, and Executive may terminate his or her employment at
any time for any reason, in each case by delivery of written notice to the
other party. If the Company terminates Executive's employment with the
Company for Cause or if Executive terminates such employment by reason of
disability, death or voluntary resignation, then Executive shall be
entitled to receive all salary and benefits (including vacation, death,
disability and medical benefits, if any, to the extent such benefits are
accorded to Executive under the Company's benefit plans maintained for
employees generally) accrued and payable to him or her with respect to
services rendered through the date of termination and shall be entitled to
no additional separation or severance payment hereunder. Further, in such
case, this Agreement shall have no effect on, and shall not be deemed to
amend or modify, any of the terms of any stock option granted to Executive
by the Company through the date of termination (collectively, the
"Options") and Executive's rights thereunder shall be limited to the terms
and conditions set forth in the applicable stock option agreement
evidencing such Options. For purposes of this Agreement, "Cause" shall
mean and be limited
<PAGE>
to the following events: (i) an act of fraud, embezzlement or similar
conduct by Executive involving the Company; or (ii) any action by Executive
involving the arrest of Executive for violation of any criminal statute
constituting a felony or a misdemeanor involving moral turpitude if the
Board reasonably determines that the continuation of Executive's employment
after such event would have an adverse impact on the operations or
reputation of the Company in the financial community; or (iii) gross
misconduct or habitual negligence in the performance of Executive's duties,
or (iv) an act constituting a breach of Executive's fiduciary duty to the
Corporation under the Delaware General Corporation Law, or (v) a
continuing, repeated willful failure or refusal by Executive to perform his
duties; PROVIDED, HOWEVER, that termination shall not be deemed to be for
Cause under this subclause (v) unless Executive shall have first received
written notice from the Board advising Executive of the specific acts or
omissions alleged to constitute a failure or refusal to perform and such
failure or refusal to perform continues after Executive shall have had a
reasonable opportunity to correct the acts or omissions cited in such
notice.
2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the
provisions of Section 4 below, if the Company terminates Executive's
employment with the Company other than for Cause or if the Company causes a
Defacto Termination of Executive (as defined below) (each a "Separation
Termination"), Executive shall receive the "Separation Package." As used
herein, the "Separation Package" shall consist of (i) a cash amount equal
to the base salary which would have been payable to Executive over six
months (computed at the annual rate in effect at the date of the Separation
Termination), plus (ii) a cash amount equal to the pro rated portion of the
performance bonus (computed by reference to the actual number of days
Executive is employed during the applicable fiscal year) which would have
been paid to Executive under the Company's performance bonus plan for the
fiscal year in which the Separation Termination occurs (if any such plan is
then in effect) if Executive's employment had continued through the end of
the fiscal year and the Company had achieved 100% of its scheduled
performance goals, plus (iii) paid up COBRA benefits for Executive and his
or her family for the 12 months following the date of the Separation
Termination. Further, notwithstanding any contrary provision in the
applicable stock option agreement, all Options which are not vested as of
the date of the Separation Termination shall become vested and immediately
execisable and all Options held by Executive as of the date of the
Separation Termination (including those which become exercisable solely as
a result of the provisions of this sentence) shall remain exercisable for a
period of 12 months following the date of the Separation Termination. For
purposes of this paragraph, "Defacto Termination" shall include any of the
following events: (i) the Company shall reduce the Executive'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 executive officers
compensation in general; (ii) the Company shall fail to cause Executive to
remain an executive officer of the Company; (iii) Executive shall not be
afforded the authority, powers, responsibilities and privileges customarily
accorded to an executive with his or her title; or (iv) the Company shall
require Executive's primary services to be rendered in an area other than
the Company's principal offices in the greater Los Angeles metropolitan
area.
3. CHANGE IN CONTROL. The following provisions shall be applicable
in the case of an occurrence of a Change in Control of the Company:
3.1 Executive may (but shall not be obligated to) terminate his
or her employment with the Company effective 30 days after the giving of
such notice given at any time
Page 2
<PAGE>
commencing with the sixth month anniversary of such Change in Control and
terminating on the one year anniversary of the Change in Control, and
receive the payments provided for in Section 3.3 hereof.
3.2 If the Company terminates Executive's employment for any
reason (including death, disability, Cause, without Cause or in the case of
a Defacto Termination) at any time within the one year period following the
date of a Change in Control, then Executive shall be entitled to the
payments provided for in Section 3.3 hereof.
3.3 In the circumstances described in Sections 3.1 and 3.2
above, Executive shall be entitled to and receive the Separation Package.
3.4 In addition to any amounts payable to Executive pursuant to
Sections 3.1 and 3.2 above, and without regard to whether Executive's
employment is terminated following a Change in Control, upon the occurrence
of a Change in Control, all Options then held by Executive which are not
yet vested shall vest as of the date of a Change in Control and shall
become immediately exercisable. Further, all Options that are exercisable
as of the date of such Change in Control (including those which do so as a
result of the provisions of the preceding sentence) shall remain so for 12
months following the date of such Change in Control.
3.5 For purposes of this Agreement, a Change in Control shall
mean:
3.5.1 The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of
more than 25% of the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that
neither of the following acquisitions shall constitute a Change in Control:
(i) any acquisition by the Company or (ii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company; or
3.5.2 Individuals who, as of the date of this Agreement,
constitute the Board of Directors of the Company (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board;
PROVIDED, HOWEVER, that any individual becoming a director subsequent to
the date of this Agreement whose election, or nomination for election by
the stockholders of the Company, shall be approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board;
or
3.5.3 Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following
such reorganization, merger or consolidation: (i) more than 60% of the
combined voting power of the then outstanding voting securities of the
corporation resulting from such reorganization, merger, or consolidation,
which may be the Company (the "Resulting Corporation") entitled to vote
generally in the election of directors (the "Resulting Corporation Voting
Securities") shall then be owned beneficially, directly
Page 3
<PAGE>
or indirectly, by all or substantially all of the Persons who were the
beneficial owners of Outstanding Voting Securities immediately prior to
such reorganization, merger or consolidation, in substantially the same
proportions as their respective ownership of Outstanding Voting Securities
immediately prior to such reorganization, merger, or consolidation; (ii) no
Person (excluding the Company, any employee benefit plan (or related trust)
of the Company, the Resulting Corporation, and any Person beneficially
owning, immediately prior to such reorganization, merger or consolidation,
directly or indirectly, 25% or more of the combined voting power of
Outstanding Voting Securities) shall own beneficially, directly or
indirectly 25% or more of the combined voting power of the Resulting
Corporation Voting Securities; and (iii) at least a majority of the members
of the Board shall have been members of the Incumbent Board at the time of
the execution of the initial agreement providing for such reorganization,
merger or consolidation; or
3.5.4 Approval by the stockholders of the Company of (x)
a complete liquidation or dissolution of the Company or (y) the sale or
other disposition of all or substantially all of the assets of the Company,
other than to a corporation (the "Buyer") with respect to which (i)
following such sale or other disposition, more than 60% of the combined
voting power of securities of Buyer entitled to vote generally in the
election of directors ("Buyer Voting Securities"), shall be owned
beneficially, directly or indirectly, by all or substantially all of the
Persons who were the beneficial owners of the Outstanding Voting Securities
immediately prior to such sale or other disposition, in substantially the
same proportion as their respective ownership of Outstanding Voting
Securities, immediately prior to such sale or other disposition; (ii) no
Person (excluding the Company and any employee benefit plan (or related
trust) of the Company or Buyer and any Person that shall immediately prior
to such sale or other disposition own beneficially, directly or indirectly,
25% or more of the combined voting power of Outstanding Voting Securities),
shall own beneficially, directly or indirectly, 25% or more of the combined
voting power or, Buyer Voting Securities; and (z) at least a majority of
the members of the board of directors of Buyer shall have been members of
the Incumbent Board at the time of the execution of the initial agreement
or action of the Board providing for such sale or other disposition or
assets of the Company.
4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive
pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump
sum on the second business day following termination of Executive's
employment with the Company.
5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and
exercise dates of Options as set forth in other Sections of this Agreement,
Executive's rights under any other agreement or plan under which stock
options,
restricted stock or similar awards are granted shall be determined in
accordance with the terms and provisions of such plans or agreements.
6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
Page 4
<PAGE>
7. GENERAL RELEASE. As a condition to the payment of the Separation
Package, Executive shall execute and deliver a general release to the
Company in the form attached as Exhibit A attached hereto.
8. GENERAL PROVISIONS.
8.1 NOTICES. All notices, requirements, requests, demands,
claims or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall
be deemed duly given (i) if personally delivered, when so delivered, (ii)
if mailed, two (2) business days after having been set by registered or
certified mail, return-receipt requested, postage prepaid and addressed to
the intended recipient as set forth below, (iii) if given by telecopier,
once such notice or other communication is transmitted to the telecopier
number specified below, and the appropriate telephonic confirmation is
received, provided that such notice or other communication is promptly
thereafter mailed in accordance with the provisions of clause (ii) above or
(iv) if sent through an overnight delivery service under circumstances by
which such service guarantees next day delivery, the date following the
date so sent:
IF TO THE COMPANY, TO: 4540 W. Valerio Street
Burbank, CA 91505
IF TO EXECUTIVE TO: Jon Corfino
25597 Via Velador
Valencia, CA 91355
Any party may change the address to which notices, requests, demands,
claims and other communications hereunder are to be delivered by giving the
other party notice in the manner herein set forth.
8.2 ASSIGNMENT. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may be
the services to be performed hereunder be assigned by the Company to any
person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the
benefits hereunder may be assigned by the Company to any corporation into
which the Company may be merged or consolidated, and this Agreement and the
benefits hereunder will automatically be deemed assigned to any such
corporation, subject, however, to Executive's right to terminate this
Agreement to the extent provided herein.
8.3 COMPLETE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter
hereof and supersedes and cancels any and all previous written or oral
negotiations, commitments, understandings, agreements and any other
writings or communications in respect of such subject matter.
8.4 AMENDMENTS. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
Page 5
<PAGE>
8.5 SEVERABILITY. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability, without affecting in any way the remaining provisions
hereof in such jurisdiction or rendering that or any other provision of
this Agreement invalid, illegal or unenforceable in any other jurisdiction.
8.6 NO WAIVER. Any waiver by either party of a breach of any
provisions of this Agreement shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of either party to insist upon
strict adherence to any term of this Agreement on one or more occasions
shall be considered a waiver or to deprive such party of the right
thereafter to insist upon strict adherence to that term or any other term
of this Agreement.
8.7 BINDING EFFECT. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their permitted
assigns, successors and legal representatives.
8.8 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall
constitute one and the same document.
8.9 GOVERNING LAW. This Agreement has been negotiated and
entered into in the State of California and shall be construed in
accordance with the laws of the State of California.
8.10 ARBITRATION. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the
construction, enforcement or application of the terms hereof, shall be
submitted to arbitration in Los Angeles, California by the American
Arbitration Association in accordance with the Commercial Arbitration Rules
of such association. The arbitrator shall be a retired judge of the Los
Angeles Superior Court or other party acceptable to the parties and the
rules of evidence shall apply. The costs of the arbitrator shall be borne
equally. Each party shall be responsible for its own attorneys' fees and
costs. However, the arbitrator shall have the right to award costs and
expenses (including actual attorneys' fees) to the prevailing party as well
as equitable relief. The award of the arbitrator shall be final and
binding and shall be enforceable in any court of competent jurisdiction.
Nothing in this paragraph shall preclude the parties from seeking an
injunction or other equitable relief from a court of competent jurisdiction
under appropriate circumstances.
Page 6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has
executed the same as of the day and year first above written.
IWERKS ENTERTAINMENT, INC.
By: /s/ Roy A. Wright
-----------------------
Its: Chairman and CEO
/s/ Jon Corfino
---------------------------
Jon Corfino
Page 7
<PAGE>
EXHIBIT A
WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard
to any claims which may exist or arise out of the Executive's current or
any prior affiliation with the Company (the "Disputes"), Executive
expressly waives all claims against the Company, including, without
limitation, any and all rights under Section 1542 of the Civil Code of the
State of California which provides as follows:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
Executive waives and releases any right or benefit which he has or may
have under any similar law or rule of any other jurisdiction pertaining to
the Disputes. It is the intention of Executive, through this Agreement,
fully, finally, and forever to settle and release all such matters and
claims relative thereto which have existed, do now exist or may exist
between the parties arising out of or related to the Disputes. In
furtherance of such intention, the release herein given shall be, and
remain in effect as, a full and complete release of such matters
notwithstanding the discovery of the existence of any additional claims or
facts relating thereto.
SEPARATION AGREEMENT
--------------------
This Separation Agreement (this "Agreement") is made and entered into
as of October 31, 1997 by and between Iwerks Entertainment, Inc., a
Delaware corporation (the "Company"), and, Curt Thornton, an individual
("Executive").
RECITALS:
A. Iwerks Entertainment Inc. (the "Corporation") considers it
essential to the best interests of its stockholders to foster the
continuous employment of key management personnel. In connection with
this, the Corporation's Board of Directors (the "Board") recognizes the
possibility of a change in management personnel or a change in control of
the Corporation may exist and that such possibility, and that such
uncertainty and questions that it may raise among management, could result
in the departure or distraction of management personnel to the detriment of
the Corporation and its stockholders.
B. The Board has decided to reinforce and encourage the continued
attention and dedication of members of the Corporation's management to
their assigned duties without distraction arising from the possibility of a
change in management of control of the Corporation.
C. In order to induce Executive to remain in its employ, the
Corporation has entered into this Agreement with Executive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as set forth below.
1. TERMINATION BY THE COMPANY FOR "CAUSE" OR VOLUNTARILY BY
EXECUTIVE. The Company may terminate Executive's employment at any time
with or without Cause, and Executive may terminate his or her employment at
any time for any reason, in each case by delivery of written notice to the
other party. If the Company terminates Executive's employment with the
Company for Cause or if Executive terminates such employment by reason of
disability, death or voluntary resignation, then Executive shall be
entitled to receive all salary and benefits (including vacation, death,
disability and medical benefits, if any, to the extent such benefits are
accorded to Executive under the Company's benefit plans maintained for
employees generally) accrued and payable to him or her with respect to
services rendered through the date of termination and shall be entitled to
no additional separation or severance payment hereunder. Further, in such
case, this Agreement shall have no effect on, and shall not be deemed to
amend or modify, any of the terms of any stock option granted to Executive
by the Company through the date of termination (collectively, the
"Options") and Executive's rights thereunder shall be limited
<PAGE>
to the terms and conditions set forth in the applicable stock option
agreement evidencing such Options. For purposes of this Agreement, "Cause"
shall mean and be limited to the following events: (i) an act of fraud,
embezzlement or similar conduct by Executive involving the Company; or (ii)
any action by Executive involving the arrest of Executive for violation of
any criminal statute constituting a felony or a misdemeanor involving moral
turpitude if the Board reasonably determines that the continuation of
Executive's employment after such event would have an adverse impact on the
operations or reputation of the Company in the financial community; or
(iii) gross misconduct or habitual negligence in the performance of
Executive's duties, or (iv) an act constituting a breach of Executive's
fiduciary duty to the Corporation under the Delaware General Corporation
Law, or (v) a continuing, repeated willful failure or refusal by Executive
to perform his duties; PROVIDED, HOWEVER, that termination shall not be
deemed to be for Cause under this subclause (v) unless Executive shall have
first received written notice from the Board advising Executive of the
specific acts or omissions alleged to constitute a failure or refusal to
perform and such failure or refusal to perform continues after Executive
shall have had a reasonable opportunity to correct the acts or omissions
cited in such notice.
2. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. Subject to the
provisions of Section 4 below, if the Company terminates Executive's
employment with the Company other than for Cause or if the Company causes a
Defacto Termination of Executive (as defined below) (each a "Separation
Termination"), Executive shall receive the "Separation Package." As used
herein, the "Separation Package" shall consist of (i) a cash amount equal
to the base salary which would have been payable to Executive over six
months (computed at the annual rate in effect at the date of the Separation
Termination), plus (ii) a cash amount equal to the pro rated portion of the
performance bonus (computed by reference to the actual number of days
Executive is employed during the applicable fiscal year) which would have
been paid to Executive under the Company's performance bonus plan for the
fiscal year in which the Separation Termination occurs (if any such plan is
then in effect) if Executive's employment had continued through the end of
the fiscal year and the Company had achiever 100% of its scheduled
performance goals, plus (iii) paid up COBRA benefits for Executive and his
or her family for the 12 months following the date of the Separation
Termination. Further, notwithstanding any contrary provision in the
applicable stock option agreement, all Options which are not vested as of
the date of the Separation Termination shall become vested and immediately
exercisable and all Options held by Executive as of the date of the
Separation Termination (including those which become exercisable solely as
a result of the provisions of this sentence) shall remain exercisable for a
period of 12 months following the date of the Separation Termination. For
purposes of this paragraph, "Defacto Termination" shall include any of the
following events: (i) the Company shall reduce the Executive'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 executive officers
compensation in general; (ii) the Company shall fail to cause Executive to
remain an executive officer of the Company; (iii) Executive shall not be
afforded the authority, powers, responsibilities and privileges customarily
accorded to an executive with his or her title; or (iv) the Company shall
require Executive's primary services to be rendered in an area other than
the Company's principal offices in the greater Los Angeles metropolitan
area.
Page 2
<PAGE>
3. CHANGE IN CONTROL. The following provisions shall be applicable
in the case of an occurrence of a Change in Control of the Company:
3.1 Executive may (but shall not be obligated to) terminate his
or her employment with the Company effective 30 days after the giving of
such notice given at any time commencing with the sixth month anniversary
of such Change in Control and terminating on the one year anniversary of
the Change in Control, and receive the payments provided for in Section 3.3
hereof.
3.2 If the Company terminates Executive's employment for any
reason (including death, disability, Cause, without Cause or in the case of
a Defacto Termination) at any time within the one year period following the
date of a Change in Control, then Executive shall be entitled to the
payments provided for in Section 3.3 hereof.
3.3 In the circumstances described in Sections 3.1 and 3.2
above, Executive shall be entitled to and receive the Separation Package.
3.4 In addition to any amounts payable to Executive pursuant to
Sections 3.1 and 3.2 above, and without regard to whether Executive's
employment is terminated following a Change in Control, upon the occurrence
of a Change in Control, all Options then held by Executive which are not
yet vested shall vest as of the date of a Change in Control and shall
become immediately exercisable. Further, all Options that are exercisable
as of the date of such Change in Control (including those which do so as a
result of the provisions of the preceding sentence) shall remain so for 12
months following the date of such Change in Control.
3.5 For purposes of this Agreement, a Change in Control shall
mean:
3.5.1 The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of
more than 25% of the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); PROVIDED, HOWEVER, that
neither of the following acquisitions shall constitute a Change in Control:
(i) any acquisition by the Company or (ii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company; or
3.5.2 Individuals who, as of the date of this Agreement,
constitute the Board of Directors of the Company (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board;
PROVIDED, HOWEVER, that any individual becoming a director subsequent to
the date of this Agreement whose election, or nomination for election by
the stockholders of the Company, shall be approved by a vote of at least a
majority of the directors
Page 3
<PAGE>
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; or
3.5.3 Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following
such reorganization, merger or consolidation: (i) more than 60% of the
combined voting power of the then outstanding voting securities of the
corporation resulting from such reorganization, merger, or consolidation,
which may be the Company (the "Resulting Corporation") entitled to vote
generally in the election of directors (the "Resulting Corporation Voting
Securities") shall then be owned beneficially, directly or indirectly, by
all or substantially all of the Persons who were the beneficial owners of
Outstanding Voting Securities immediately prior to such reorganization,
merger or consolidation, in substantially the same proportions as their
respective ownership of Outstanding Voting Securities immediately prior to
such reorganization, merger, or consolidation; (ii) no Person (excluding
the Company, any employee benefit plan (or related trust) of the Company,
the Resulting Corporation, and any Person beneficially owning, immediately
prior to such reorganization, merger or consolidation, directly or
indirectly, 25% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 25% or more of
the combined voting power of the Resulting Corporation Voting Securities;
and (iii) at least a majority of the members of the Board shall have been
members of the Incumbent Board at the time of the execution of the initial
agreement providing for such reorganization, merger or consolidation; or
3.5.4 Approval by the stockholders of the Company of (x)
a complete liquidation or dissolution of the Company or (y) the sale or
other disposition of all or substantially all of the assets of the Company,
other than to a corporation (the "Buyer") with respect to which (i)
following such sale or other disposition, more than 60% of the combined
voting power of securities of Buyer entitled to vote generally in the
election of directors ("Buyer Voting Securities"), shall be owned
beneficially, directly or indirectly, by all or substantially all of the
Persons who were the beneficial owners of the Outstanding Voting Securities
immediately prior to such sale or other disposition, in substantially the
same proportion as their respective ownership of Outstanding Voting
Securities, immediately prior to such sale or other disposition; (ii) no
Person (excluding the Company and any employee benefit plan (or related
trust) of the Company or Buyer and any Person that shall immediately prior
to such sale or other disposition own beneficially, directly or indirectly,
25% or more of the combined voting power of Outstanding Voting Securities),
shall own beneficially, directly or indirectly, 25% or more of the combined
voting power or, Buyer Voting Securities; and (z) at least a majority of
the members of the board of directors of Buyer shall have been members of
the Incumbent Board at the time of the execution of the initial agreement
or action of the Board providing for such sale or other disposition or
assets of the Company.
4. PAYMENT OF TERMINATION AMOUNTS. All amounts payable to Executive
pursuant to Sections 1, 2 or 5 hereof, shall be paid to Executive in a lump
sum on the second business day following termination of Executive's
employment with the Company.
Page 4
<PAGE>
5. STOCK AND SIMILAR RIGHTS. Except with regard to the vesting and
exercise dates of Options as set forth in other Sections of this Agreement,
Executive's rights under any other agreement or plan under which stock
options, restricted stock or similar awards are granted shall be determined
in accordance with the terms and provisions of such plans or agreements.
6. NO MITIGATION OR OFFSET. Payment of any sum under this Agreement
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
7. GENERAL RELEASE. As a condition to the payment of the Separation
Package, Executive shall execute and deliver a general release to the
Company in the form attached as Exhibit A attached hereto.
8. GENERAL PROVISIONS.
8.1 NOTICES. All notices, requirements, requests, demands,
claims or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall
be deemed duly given (i) if personally delivered, when so delivered, (ii)
if mailed, two (2) business days after having been set by registered or
certified mail, return-receipt requested, postage prepaid and addressed to
the intended recipient as set forth below, (iii) if given by telecopier,
once such notice or other communication is transmitted to the telecopier
number specified below, and the appropriate telephonic confirmation is
received, provided that such notice or other communication is promptly
thereafter mailed in accordance with the provisions of clause (ii) above or
(iv) if sent through an overnight delivery service under circumstances by
which such service guarantees next day delivery, the date following the
date so sent:
IF TO THE COMPANY, TO: 4540 W. Valerio Street
Burbank, CA 91505
IF TO EXECUTIVE TO: Curt Thornton
3149 Divernon Avenue
Simi Valley, CA 93063
Any party may change the address to which notices, requests, demands,
claims and other communications hereunder are to be delivered by giving the
other party notice in the manner herein set forth.
8.2 ASSIGNMENT. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may be
the services to be performed hereunder be assigned by the Company to any
person, firm or corporation; PROVIDED HOWEVER, that this Agreement and the
benefits hereunder may be assigned by the Company to any corporation into
which the Company may be merged or consolidated, and this Agreement and the
benefits hereunder will automatically be deemed assigned to any such
corporation, subject, however, to Executive's right to terminate this
Agreement to the extent provided herein.
Page 5
<PAGE>
8.3 COMPLETE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter
hereof and supersedes and cancels any and all previous written or oral
negotiations, commitments, understandings, agreements and any other
writings or communications in respect of such subject matter.
8.4 AMENDMENTS. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
8.5 SEVERABILITY. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability, without affecting in any way the remaining provisions
hereof in such jurisdiction or rendering that or any other provision of
this Agreement invalid, illegal or unenforceable in any other jurisdiction.
8.6 NO WAIVER. Any waiver by either party of a breach of any
provisions of this Agreement shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of either party to insist upon
strict adherence to any term of this Agreement on one or more occasions
shall be considered a waiver or to deprive such party of the right
thereafter to insist upon strict adherence to that term or any other term
of this Agreement.
8.7 BINDING EFFECT. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their permitted
assigns, successors and legal representatives.
8.8 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall
constitute one and the same document.
8.9 GOVERNING LAW. This Agreement has been negotiated and
entered into in the State of California and shall be construed in
accordance with the laws of the State of California.
8.10 ARBITRATION. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the
construction, enforcement or application of the terms hereof, shall be
submitted to arbitration in Los Angeles, California by the American
Arbitration Association in accordance with the Commercial Arbitration Rules
of such association. The arbitrator shall be a retired judge of the Los
Angeles Superior Court or other party acceptable to the parties and the
rules of evidence shall apply. The costs of the arbitrator shall be borne
equally. Each party shall be responsible for its own attorneys' fees and
costs. However, the arbitrator shall have the right to award costs and
expenses (including actual attorneys' fees) to the prevailing party as well
as equitable relief. The award of the arbitrator shall be final and
binding and shall be enforceable in any court of competent jurisdiction.
Page 6
<PAGE>
Nothing in this paragraph shall preclude the parties from seeking an
injunction or other equitable relief from a court of competent jurisdiction
under appropriate circumstances.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has
executed the same as of the day and year first above written.
IWERKS ENTERTAINMENT, INC.
By: /s/ Roy A. Wright
--------------------------
Its: Chairman and CEO
/s/ Curt Thornton
--------------------------
Curt Thornton
Page 7
<PAGE>
EXHIBIT A
WAIVER UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE. With regard
to any claims which may exist or arise out of the Executive's current or
any prior affiliation with the Company (the "Disputes"), Executive
expressly waives all claims against the Company, including, without
limitation, any and all rights under Section 1542 of the Civil Code of the
State of California which provides as follows:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
Executive waives and releases any right or benefit which he has or may
have under any similar law or rule of any other jurisdiction pertaining to
the Disputes. It is the intention of Executive, through this Agreement,
fully, finally, and forever to settle and release all such matters and
claims relative thereto which have existed, do now exist or may exist
between the parties arising out of or related to the Disputes. In
furtherance of such intention, the release herein given shall be, and
remain in effect as, a full and complete release of such matters
notwithstanding the discovery of the existence of any additional claims or
facts relating thereto.
EXHIBIT 11.1
IWERKS ENTERTAINMENT, INC.
EARNINGS PER SHARE
(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>
Denominator for Basic Earnings
per Share - Weighted average
shares outstanding 12,161 11,715 12,160 11,675
Effect of dilutive securities:
Options and warrants (a) (a) (a) 660
--------- -------- -------- --------
Denominator for Diluted Earnings
per Share 12,161 11,715 12,160 12,335
========= ======== ======== ========
Net income (loss) $ (3,500) $ (57) $(4,006) $ 117
========= ======= ======== ========
Basic income (loss) per share $ (0.29) $ 0.00 $ (0.33) $ 0.01
========= ======= ======== ========
Diluted income (loss) per share $ (0.29) $ 0.00 $ (0.33) $ 0.01
========= ======== ======== ========
</TABLE>
(a) These common equivalent shares were antidilutive.
EXHIBIT 15.1
February 10, 1998
The Board of Directors
Iwerks Entertainment, Inc.
We are aware of the incorporation by reference in the Registration
Statement (Form S-8 No. 33-77816) pertaining to the Employees' incentive
stock options and other stock option and warrant agreements of Iwerks
Entertainment, Inc. of our report dated February 10, 1998 relating to the
unaudited condensed consolidated interim financial statements of Iwerks
Entertainment, Inc. that are included in its Form 10-Q for the quarter
ended December 31, 1997.
/S/ERNST & YOUNG LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
(AMOUNTS IN THOUSANDS)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,662
<SECURITIES> 13,718
<RECEIVABLES> 4,135
<ALLOWANCES> (1,095)
<INVENTORY> 3,195
<CURRENT-ASSETS> 27,057<F1>
<PP&E> 39,131<F2>
<DEPRECIATION> (26,577)<F3>
<TOTAL-ASSETS> 57,850
<CURRENT-LIABILITIES> 11,959
<BONDS> 1,511<F4>
0
0
<COMMON> 78,073
<OTHER-SE> (33,693)<F5>
<TOTAL-LIABILITY-AND-EQUITY> 57,850
<SALES> 14,041
<TOTAL-REVENUES> 14,532<F6>
<CGS> 9,957
<TOTAL-COSTS> 9,957
<OTHER-EXPENSES> 8,447
<LOSS-PROVISION> 418
<INTEREST-EXPENSE> 134
<INCOME-PRETAX> (4006)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4006)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,006)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
<FN>
<F1> Includes Costs and estimated earnings in excess of billings
on uncompleted contracts of $2,738 and other current assets
of $704.
<F2> Includes portable simulation theaters and film inventory.
<F3> Includes portable simulation theaters and film inventory
<F4> Includes the non-current portions of capital leases.
<F5> Accumulated deficit.
<F6> Includes interest income of $491.
</FN>
</TABLE>
EXHIBIT 99.1
Independent Accountants' Review Report
The Board of Directors
Iwerks Entertainment, Inc.
We have reviewed the accompanying unaudited condensed consolidated balance
sheet of Iwerks Entertainment, Inc. and subsidiaries as of December 31,
1997, and the related unaudited condensed consolidated statements of
operations for the three and six month periods ended December 31, 1997 and
1996, and the unaudited condensed consolidated statements of cash flows for
the six-month periods ended December 31, 1997 and 1996. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data, and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, which will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Iwerks Entertainment, Inc. as
of June 30, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended not presented
herein and in our report dated August 5, 1997 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance
sheet as of June 30, 1997 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
February 10, 1998, except for Note 8 as to which the date is
February 20, 1998
/S/ ERNST & YOUNG LLP
