March 18, 1998
Mr. Herbert A. Denton
President
Providence Capital, Inc.
730 Fifth Avenue, Suite 2102
New York, NY 10019
Mr. Denton:
I was dismayed to read the press release issued by your firm yesterday stating
that Providence is urging Iwerks' shareholders to oppose the merger of Iwerks
with Showscan. I am particularly disappointed that you decided to take this
action unilaterally rather than continuing the discussions we initiated last
week in our meetings with your colleagues at Providence. Had we pursued what I
thought was a very productive dialogue and continued to exchange information
relating to the merger proposal, I believe that we would have addressed your
concerns.
Unfortunately, since you could not attend the meeting in person
for its full length, and since you chose to not follow up with me --
notwithstanding my existing offer to meet with you personally -- I believe that
you still have some inaccurate impressions about Iwerks' business generally and
the merger proposal specifically. Therefore, I am writing in order to address
the issues raised in your press release.
Overall, the strategic and financial benefits of the Showscan merger coincide
perfectly with our strategy for returning Iwerks to profitability. First, the
expansion of our theater network and film library offers two positive
advantages. One is an immediate increase in our recurring revenue stream from
existing film distribution which, as you know, is the most consistent producer
of cash flow in our business. The other is an immediate increase in the value
of our film properties since they will be able to be distributed over a broader
network of theaters. Second, the merger would eliminate redundant costs for
items such as distribution, personnel, film development and SG&A, thereby
increasing the efficiency of both operations, on a combined basis,
substantially. At the same time, these efficiencies will extend to the
utilization of our marketing resources, which we will be able to apply more
effectively to stimulate the "health" of our installed attractions, a priority
for our ride simulation customers.
Your statement that Showscan has experienced losses over the past few years is
fact, although well over half of the losses you mentioned were incurred five to
six years ago. However, as you recognize, those past losses do not bear on the
current value of Showscan's assets or the benefits of this transaction to
Iwerks. Chiefly, these include Showscan's extensive film library and base of
theaters, which have generated significant and stable recurring revenues.
Specifically, Showscan's revenues from film distribution were $ 6.2 million for
fiscal 1997, and have increased by six percent in the first nine months of
their current fiscal year over the comparable period one year earlier.
These recurring revenues -- some of which have been gained at
Iwerks' expense -- are critical, since they are not only significant, but
stable, in contrast to the variable nature of revenues generated by all other
areas of our business. Further, they will help solidify our position in our
core simulation business, thereby contributing to the generation of earnings
necessary to drive our continued expansion into the giant screen arena.
I believe that your contention regarding the cash position of Iwerks represents
a clear misunderstanding on your part about our business strategy. Our
paramount objective -- as it must be in order to grow this Company in line with
shareholder expectations -- is to invest our cash in a consistent stream of
recurring revenues that will build the long-term value of our stock. That's
precisely what the Showscan merger does. Even so, we are confident that, based
on our calculations as well as the counsel of our financial advisors, Iwerks
will maintain sufficient cash and liquidity to move our business forward in the
ensuing months.
In regard to your concern over the transaction costs of the merger, I would ask
you to consider that in assessing the value of such a transaction to the
company's future, our primary consideration must be the cost versus the long-
term benefits ... all in. In fact, a considerable portion of those transaction
costs are dedicated to achieving the synergies that make this merger so
attractive to Iwerks. With these synergies, we will be able to extract out of
Showscan's operations many of the costs that have contributed to their recent
losses, and fuel our own growth by focusing on the profitable recurring revenue
portion of their business.
Your inference that the merger costs are too high fails to take into account
the distinction between the costs Iwerks would incur to acquire Showscan and
those one-time charges that will produce on-going cost savings, such as the
consolidation of facilities and marketing commitments, write-downs of
Showscan's lease obligations, and severance payments related to redundant
positions, among others. Given these demonstrated synergies, we believe that
the "all in" transaction costs are reasonable when considered in the context of
the strategic long-term benefits they will yield.
I would like to also address one other specific point contained
in your press release -- the implication that the recent departures of certain
senior executives at Iwerks should have some bearing on the shareholder vote.
As you know, Messrs. Wright and Batrison continue to be retained by Iwerks to
assist in ensuring completion of the transaction and the integration with
Showscan that will follow. In addition, the Board of Directors, whose
composition has not changed since the first announcement of the merger, has
received numerous detailed presentations about the transaction, its financial
implications and strategic benefits, and continues to strongly support the
merger. And, though I have been with Iwerks only a short time, I have taken
sufficient time to familiarize myself and become confident with all aspects of
the merger proposal. Any implication that I have not had ample opportunity to
consider it fully is mistaken and misleading to our shareholders.
In summary, I would like you to understand that this merger is strategically
significant to Iwerks in that it directly supports our ability to compete even
more effectively with Imax by generating incremental cash flows -- derived from
being the premier provider of ride simulation attractions -- that can then be
invested in accelerating our giant screen business expansion.
Finally, I would like you to know that I am puzzled by the contents and timing
of your press release. I know you are aware that, in contrast to Providence
Capital's recently acquired position of less than 200,000 shares of Iwerks
stock, the management team and directors of Iwerks who support the merger
beneficially hold more than 1.6 million shares. These are positions they have
held in some cases for many years. They have reviewed this merger proposal and
concluded unequivocally that it is in the best interests of Iwerks'
shareholders in the long term. Unfortunately, they -- and we -- do not have the
luxury of pursuing a short-term fix, or realizing a quick profit, at the
expense of Iwerks' long-term prospects.
Please be aware that we intend to aggressively pursue completion of our merger
with Showscan and oppose any efforts on Providence's part to profit at our
shareholders' expense. We believe strongly that this merger is critical to our
ability to lead Iwerks back to profitability and, ultimately, prosperity for
our shareholders who have stuck with us patiently over the recent years.
Once again, I extend my offer to meet with you personally to discuss these
matters and any other concerns you may have at your earliest convenience.
Sincerely,
Charles Goldwater
President, Chief Executive Officer and Chairman of the Board
cc: Iwerks Board of Directors
Iwerks Entertainment Inc. is one of the world's leading providers and
distributors of immersive entertainment attractions such as 2-D and 3-D ride
simulation, 2-D and 3-D giant screen theaters, 360-degree video dance clubs and
other attractions. Serving prestigious entertainment, information and marketing
providers, more than 250 Iwerks attractions can be found worldwide at location-
based entertainment centers, casinos, resorts, nightclubs, restaurants,
museums, fairs, festivals and more. Visit Iwerks Entertainment on the Internet
at www.iwerks.com.
Forward-Looking Statement Disclosure
Note: With the exception of the historical information, the matters discussed
above include forward-looking statements that involve risks and uncertainties.
Certain important factors could cause actual results to differ materially from
those indicated in the forward-looking statements. The ability of the combined
company to achieve cost savings and revenue growth will depend on its ability
to quickly and effectively merge the operations and the product lines and
manage the resulting larger operations. Other factors impacting future results
include revenue, costs of sales and the ability of the company to maintain
pricing at a level necessary to maintain gross profit margins, the level of
selling, general and administrative costs, the performance by the company under
its existing purchase contracts and the ability to obtain new contracts, the
success of the company's owned and operating strategy, the ability of the
company to find additional sponsors for its Reactors or alternative sources of
revenue, the ability of the company to identify and successfully negotiate
arrangements with joint venture and other strategic partners, the success of
the company's film software, the effects of technological developments,
competition, general economic conditions and acts of God and other events
outside the control of the company.
