<PAGE>
================================================================================
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 March 31, 1998
[ ] 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 May 12, 1998, the Registrant had 12,321,497 shares of Common Stock,
$.001 par value, issued and outstanding.
================================================================================
<PAGE>
IWERKS ENTERTAINMENT, INC.
FORM 10-Q FOR THE QUARTER AND NINE MONTHS ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
Condensed Consolidated Balance Sheets as of March 31, 1998
and June 30, 1997 2
Condensed Consolidated Statements of Operations for the Three and Nine
Months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 1998 and 1997 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
- ------------------------------------------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
- -----------------------------------------
Signatures 19
</TABLE>
1
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- --------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,614 $ 3,608
Short-term investments 7,558 15,459
Trade accounts receivable, net of allowance
for doubtful accounts 3,138 5,447
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,829 6,339
Inventories and other current assets 4,155 4,402
------- -------
Total current assets 24,294 35,255
Portable simulation theaters at cost, net of
accumulated depreciation 3,541 4,018
Property and equipment at cost, net of
accumulated depreciation 4,195 2,920
Film inventory at cost, net of amortization 4,914 3,439
Goodwill, net of amortization 14,898 15,367
Investment in joint ventures and other assets 3,106 3,530
------- -------
Total assets $54,948 $64,529
======= =======
</TABLE>
See accompanying notes.
2
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
-------- --------
(unaudited) (audited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,705 $ 3,435
Accrued expenses 7,645 8,793
Notes payable, current portion -- 81
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,099 990
Deferred revenue 181 278
Capital leases, current portion 693 739
-------- --------
Total current liabilities 14,323 14,316
Capital lease obligations, excluding current portion 1,322 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 57 57
authorized; issued and outstanding
12,321,497 and 12,160,102, respectively
Additional paid-in capital 78,016 78,016
Accumulated deficit (38,770) (29,687)
-------- --------
Total stockholders' equity 39,303 48,386
-------- --------
Total liabilities and stockholders' equity $ 54,948 $ 64,529
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 4,483 $11,042 $18,524 $30,660
Cost of sales 4,195 7,335 14,152 20,527
------------- -------------- -------------- --------------
Gross profit 288 3,707 4,372 10,133
Selling, general, and administrative
expenses 4,637 3,582 12,553 10,285
Proposed merger expenses (note 6) 888 - 1,419 -
------------- -------------- -------------- --------------
Income (loss) from operations (5,237) 125 (9,600) (152)
Interest income 219 235 710 845
Interest expense 59 90 193 306
------------- -------------- -------------- --------------
Net income (loss) $(5,077) $ 270 $(9,083) $ 387
============= ============== ============== ==============
Basic and diluted income (loss) per
common share (note 4) $(0.42) $0.02 $(0.75) $0.03
============= ============== ============== ==============
Weighted average shares outstanding
-basic 12,199 11,918 12,173 11,756
============= ============== ============== ==============
Weighted average shares outstanding -
diluted 12,199 12,174 12,173 12,281
============= ============== ============== ==============
</TABLE>
See accompanying notes.
4
<PAGE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the nine months ended
March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating Activities
Net income (loss) $ (9,083) $ 387
Depreciation and amortization 3,558 4,204
Changes in operating assets and liabilities 6,199 (4,413)
-------- --------
Net cash provided by operating activities 674 178
Investing Activities
Investment in joint ventures 125 (897)
Investment in portable simulation theaters (46) (108)
Purchases of property and equipment (1,970) (702)
Additions to film inventory (3,046) (1,349)
Investment in debt securities 7,901 (853)
Purchase of Pioneer and acquisition of related patent,
net of cash acquired and stock issued (Note 7) -- (1,088)
-------- --------
Net cash provided by (used in) investing activities 2,964 (4,997)
Financing Activities
Repayment of notes payable (81) (1,315)
Payments on capital leases (551) (526)
Exercise of stock options -- 486
-------- --------
Net cash used in financing activities (632) (1,355)
-------- --------
Net increase (decrease) in cash 3,006 (6,174)
Cash and cash equivalents at beginning of period 3,608 12,674
-------- --------
Cash and cash equivalents at end of period $ 6,614 $ 6,500
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 188 $ 327
======== ========
Cash paid during the period for income taxes $ 8 $ --
======== ========
</TABLE>
See accompanying notes.
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,
including those related to the proposed merger (see note 6) and other normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of March 31, 1998 and the results of its operations for the three and
nine months ended March 31, 1998 and 1997 and the cash flows for the nine months
ended March 31, 1998 and 1997 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.
Note 2 - Income Taxes
- ---------------------
At June 30, 1997, the Company had available federal and state tax net
operating loss carryforwards of approximately $20,378,000 and $9,740,000,
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.
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 Nine Months
Ended Ended
March 31, March 31,
--------------------------- ----------------------------
1998 1997 1998 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
Depreciation and amortization on fixed assets $ 247,000 $ 307,000 $ 695,000 $ 881,000
Depreciation on touring equipment 171,000 373,000 523,000 1,113,000
Amortization of film inventory 586,000 469,000 1,571,000 1,502,000
Amortization of goodwill and other 295,000 245,000 769,000 708,000
---------- ---------- ---------- ----------
Total depreciation and amortization $1,299,000 $1,394,000 $3,558,000 $4,204,000
========== ========== ========== ==========
</TABLE>
Depreciation and amortization included in cost of sales was $766,000 and
$853,000 for the quarter ended March 31, 1998 and 1997, respectively, and
$2,122,000 and $2,653,000 for the nine months ended March 31, 1998 and 1997,
respectively.
Note 4 - Net Income (Loss) 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
- -------------------
There are no 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.
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 which was
subsequently
7
<PAGE>
amended December 29, 1997. The agreement was terminated on March 31, 1998 when
the Iwerks' stockholders failed to approve the merger at it's annual meeting
held on that date. In connection with the proposed merger, the Company incurred
$888,000 and $1.4 million of expenses which include investment banking, legal
(including costs to defend an antitrust lawsuit), accounting, printing,
solicitation, filing fees and other related expenses, in the three and nine
months ended March 31, 1998, respectively. The Company does not expect to incur
any additional costs related to this proposed merger with Showscan.
Note 7 - Acquisition of Pioneer and Related Companies
- -----------------------------------------------------
On March 4, 1997 two newly formed wholly-owned subsidiaries of the Company
acquired the stock of Pioneer Marketing Corporation and a related company
(collectively referred to as "Pioneer") in exchange for 299,101 shares of Iwerks
common stock. On the same date in a related transaction, the Company purchased
a patent from a partnership related to Pioneer for approximately $1,114,000 in
cash. These transactions were accounted for as a purchase by Iwerks of Pioneer
resulting in an aggregate purchase price of approximately $2,784,000 including
acquisition costs. The aggregate purchase price of Pioneer in excess of the
fair value of the identifiable assets of Pioneer at the date of acquisition was
$1,536,000 which has been allocated to goodwill. The operations of Pioneer have
been consolidated with the operations of the Company from March 4, 1997.
Note 8 - 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.
8
<PAGE>
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.
During the quarter ended March 31, 1998 the Company had certain management
changes. Charles Goldwater was appointed CEO, Chairman of the Board and
President, replacing Roy Wright. The Company hired two additional officers and
terminated two officers during the quarter. Between January 1, and May 5, 1998
the Company has reduced its full-time workforce by 22%, from 151 to 118
employees resulting in annualized savings of approximately $1.6 million. The
Company is currently in the process of continuing to review its personnel needs.
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):
9
<PAGE>
<TABLE>
<CAPTION>
Periods Ended March 31,
Three Months Nine Months
------------------------------------ -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hardware Sales & Service $1,233 $ 7,831 $ 8,325 $20,189
Owned and Operated 1,272 1,277 5,312 5,824
Film Licensing 1,785 1,864 4,544 4,370
Film Production and Other 193 70 343 277
------ ------- ------- -------
Total $4,483 $11,042 $18,524 $30,660
====== ======= ======= =======
</TABLE>
Revenues on sales of theatre systems are recognized on the percentage-of-
completion method over the life of the contract. Accordingly, the timing of
shipment schedules as dictated by the customer can result in variability of
quarterly revenues and earnings. The gross margin for each contract varies
based upon pricing strategies, competitive conditions and product mix.
Revenues from owned and operated (O&O) consist of portable ride simulation
theatre revenues (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 ventures, 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 MARCH 31, 1998 TO THREE MONTHS ENDED MARCH
- -------------------------------------------------------------------------------
31, 1997
- --------
REVENUES
Hardware sales and service revenue in the three month period ended March
31, 1998 decreased by approximately $6.6 million or 84% as compared to the same
period last year. The Company experienced sharply lower hardware sales in each
of its principal markets during the 1998 quarter when compared to the 1997
quarter. The Company's hardware sales in Asia continue to be negatively impacted
by the economic downturn being experienced in that region. The Company's results
in the 1997 third quarter were benefited by a significant contract with a South
American customer. There were no corresponding revenues realized in that region
in the 1998 third quarter. In addition, the Company experienced a sharp decline
in revenues in North America.
10
<PAGE>
The Company expects that the lower Asia sales trend is likely to continue
into the foreseeable future. The Company signed no new sales contracts in that
region during the third quarter. The Company's current contractual backlog in
the Americas has recently increased, however, and the Company anticipates that
realization on this backlog will contribute to higher revenues from hardware
sales and service in the fourth quarter when compared to the third quarter of
1998, but lower than corresponding revenues recognized in the fourth quarter of
1997. The Company did not realize material revenues in Europe or other
international markets in fiscal 1998 or 1997. The Company is in the process of
searching for a key executive with marketing expertise who will oversee the
sales and marketing operations for the Company. As discussed in greater detail
below under "Future Operating Results," hardware sales can fluctuate
substantially as a result of the timing of theaters system deliveries, contract
signing, the rate of completion of contracts and other factors.
Film licensing revenue decreased by $79,000 or 4.2% due to one Asian
customer which did not renew its license agreement in the current year.
Film production and other revenue increased due to the Company actively
renting its cameras in the current quarter as compared to the prior year's
quarter.
COST OF SALES AND GROSS PROFIT MARGIN
The total gross profit margin percentages for the three months ended March
31, 1998 and 1997 were 6.4% and 33.6%, respectively. The decrease in gross
profit margin in the 1998 third quarter compared to the same quarter in 1997 is
primarily related to the decrease in hardware sales. Included in hardware cost
of sales are certain fixed costs such as facility and certain labor costs which
did not decrease with the decline in hardware sales. 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 relation 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 March 31, 1998 by approximately $1.1 million over the same period in the
prior year. This increase was primarily due to a $1.5 million charge for
severance costs that were made to fifteen employees including the former CEO and
two other officers whose employment terminated in the third quarter of fiscal
1998. In addition, bad debt expense was greater by $0.7 million for the
comparable three month period due to Asia customers and one domestic customer.
These increases were partially offset by a decrease in sales commissions.
11
<PAGE>
As discussed above, between January 1, and May 5, 1998, the Company has
reduced its full time workforce by 22% from 151 to 118 employees resulting in
annualized savings of approximately $1.6 million. A significant portion of
these cutbacks are in the area of SG&A, but will be partially offset in future
periods as the Company adds additional personnel to complete its management
team.
INTEREST INCOME AND EXPENSE
Interest income for the three months ended March 31, 1998 and 1997 was
$219,000 and $235,000, respectively, and is derived from the Company's
investments, primarily in U.S. Treasury Notes and short term commercial paper.
The decrease in interest income resulted primarily from the decrease in the
invested balances in the comparable periods.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 TO NINE MONTHS ENDED MARCH 31,
- -----------------------------------------------------------------------------
1997
- ----
REVENUES
Hardware sales and service revenue in the nine months ended March 31, 1998
decreased by approximately $11.9 million or 58.8% as compared to the same period
last year. The Company experienced sharply lower hardware sales in each of its
principal markets during the 1998 nine months when compared to the 1997 nine
months. As discussed above, the Company's hardware sales in Asia continue to be
negatively impacted by the economic downturn being experienced in that region.
Sales represented by customers located in Asia declined by about $8 million in
the fiscal 1998 period when compared to the comparable period in 1997. In
addition, the Company experienced in 1998 declines in revenues in North and
South America when compared with 1997, primarily in the third quarter. Hardware
sales in the Americas declined by approximately $4.7 million and $4.5 million in
the three month and nine month period, respectively.
Owned and operated revenue decreased by approximately $512,000 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 approximately 4.0% 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 nine months ended March
31, 1998 and 1997 were 23.6% and 33.0%, respectively. The decrease in gross
profit margin was primarily related to the decrease in sales. Included in
hardware cost of sales are
12
<PAGE>
certain fixed costs such as facility and certain labor costs which did not
decrease with the decline in hardware sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased for the nine months
ended March 31, 1998 by approximately $2.3 million over the same period in the
prior year. The increase was mainly due to a $1.5 million charge for severance
costs that were made to fifteen employees including the former CEO and two other
officers whose employment terminated in the third quarter of fiscal 1998. In
addition, bad debt expense was greater by $1.1 million due to greater
delinquencies of receivables from Asian customers and two domestic customers.
Research and development costs and insurance costs were also higher in the nine
months ended March 31, 1998. These increases were partially offset by a
decrease in sales commissions.
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 agreement was terminated on March 31, 1998 when the Iwerks stockholders
failed to approve the merger at its annual meeting held on that date. During the
quarter and nine months ended March 31, 1998, the Company incurred $888,000 and
$1,419,000 of merger related expenses.
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 its initial assessment of its existing software
systems and after reviewing various factors, one of which being the year 2000
issue, has determined that modifications or upgrades to or replacements of
certain software and hardware is required. The Company's most critical software
systems are its assembly and financial software systems. The Company has
determined that these systems will require replacement. The Company's initial
estimate of the cost of such replacement is $400,000, which includes
approximately $300,000 for the purchase and implementation of new software and
hardware (which will be capitalized and amortized over their respective useful
lives) and approximately $100,000 of which will be expensed in the period
incurred. The Company has not yet completed the process of selecting its
preferred systems or vendors and consequently the Company's estimates may change
depending upon the
13
<PAGE>
systems but does not believe they will be material. At March 31, 1998, the
Company had incurred approximately $25,000 in connection with this project.
The Company believes that the required changes to its existing computer
systems will be substantially completed no later than June 30, 1999, which is
prior to any anticipated impact on its operating systems. The Company believes
that with these changes, the year 2000 issue will not pose significant
operational problems for the Company.
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 nine 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 expected to have a continuing
negative impact in future periods.
The Company and it 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.
14
<PAGE>
In addition to competition in the large-screen market, the Company faces
intense competition in the simulation industry from Showscan Entertainment and a
large number of other competitors. The Company competes in this market based
upon the breadth of its product offerings and the size and quality of its film
library. Few of its competitors in this market have sufficient financial
resources to effectively compete with the Company based on these criteria. The
Company's competitive position in this market segment could be materially
affected if any of its existing competitors or a new entrant were to assemble
the financial, technical and creative resources required to effectively compete
with the Company's range of product offerings and film library.
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.
The Company has been aggressively pursuing and has recently signed other
sponsorship contracts since that time. However, 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.
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 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
15
<PAGE>
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 complementary 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 nine months ended March 31, 1998
generated positive cash flow of $674,000. This was mainly due to the net loss of
$9.1 million offset by non-cash charges of $3.6 million for depreciation and
amortization along with changes in operating assets and liabilities of $6.2
million. Investing activities for the nine months ended March 31, 1998 consisted
primarily of redemptions of investments in debt securities of $7.9 million
partially offset by investments in film inventory of $3.0 million and purchases
of property and equipment of $2.0 million. Cash used in financing activities
consisted primarily of payments for notes payable and capital leases.
At March 31, 1998, the Company had cash and short-term investments of
approximately $14.2 million compared to $19.1 million at June 30, 1997. In
addition, the Company has maintained a bank line of credit in the amount of $5
million. At March 31, 1998 and 1997, there were no amounts outstanding on the
line of credit. However, at March 31, 1998 the Company was not in compliance
with respect to certain financial covenants relating to the bank line of credit
and the Company is currently renegotiating changes to certain covenants to the
line of credit. There can be no assurance that the Company will be successful in
extending this line into future periods. The Company believes that its cash
balances, short-term investments in debt securities and expected cash flow from
operations will be adequate to meet its cash requirements over at least the next
twelve months. However, the Company expects that its cash balances will continue
to decline during this period. The Company's operations are expected to be cash
flow positive over this twelve month period. This positive cash flow will be
more than offset by the payment of expenses accrued but not yet paid at March
31, 1998 and planned additions to film inventory and other fixed assets. If the
Company's revenues were to be materially less than that forecasted, the
Company's cash balances, short-term investments in debt securities and cash flow
from operations may not be sufficient to meet its expected cash needs. In such a
case, the Company's liquidity may be dependent upon reinstating its current bank
line or arranging for additional equity or debt financing. If unsuccessful, the
Company would be required to defer capital and other expenditures that are not
then committed. Consequently, the Company is exploring available debt financing
resources in the form of bank financing, film financing and equipment financing.
There can be no assurance that such financing will be available to the Company
or, if available, that such financing could be arranged on terms that the
Company would consider attractive.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On March 31, 1998, the Company held its annual shareholders meeting. The
following three items were voted on:
1. The issuance of shares of Iwerks' Common Stock related to the
Agreement and Plan of Reorganization, as amended, with Showscan
Entertainment, Inc. Votes cast for totaled 4,000,470; votes cast
against totaled 4,729,215; abstentions totaled 14,446; broker non-
votes totaled 2,972,418.
2. Charles Goldwater was elected to the board of directors for a term of
three years. Votes cast for totaled 10,220,876; votes withheld totaled
1,495,943. The continuing directors are Dag Tellefsen, Gary Matus and
Don Iwerks.
3. To amend the 1994 Stock Incentive Plan to increase the shares of
Iwerks Common Stock reserved for issuance thereunder from 1,750,000 to
2,500,000 and to provide a per employee limit on stock option grant in
any one year. Votes cast for totaled 3,047,138; votes cast against
totaled 5,481,750; abstentions totaled 130,862; broker non-votes
totaled 3,057,069.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
10.1 Employment agreement dated March 2, 1998 between the Company and
Dan Griesmer
11.1 Earnings per share
27.1 Schedule of financial data
(b) Reports on Form 8-K filed during the quarter ended March 31, 1998:
17
<PAGE>
i) A Form 8-K was filed on February 2, 1998, Item 5, regarding a press release
dated January 28, 1998.
ii) A Form 8-K was filed on February 12, 1998, Item 5, regarding a press
release dated February 10, 1998.
iii) A Form 8-K was filed on March 23, 1998, Item 5, regarding a press
release dated March 23, 1998.
ii) A Form 8-K was filed on March 25, 1998, Item 5, regarding a press release
dated March 24,.
iii) A Form 8-K was filed on March 26, 1998, Item 5, regarding a press release
dated March 25,.
iv) A Form 8-K was filed on March 27, 1998, Item 5, regarding a press release
dated March 26, 1998.
v) A Form 8-K was filed on March 30, 1998, Item 5, regarding a press release
dated March 26,.
18
<PAGE>
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 14 day of May, 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)
19
<PAGE>
Iwerks Entertainment, Inc.
4540 West Valerio Street
Burbank, California 91505
March 2, 1998
Mr. Dan Griesmer
17144 Cantara Street
Van Nuys, California 91406
Dear Mr. Griesmer:
Iwerks Entertainment, Inc. (the "Company") and you have agreed as follows:
1. Employment and Services:
-----------------------
The Company has employed you as Senior Vice President - General Manager,
and you have agreed, commencing on March 2, 1998 (the "Commencement Date"), to
perform your exclusive and full-time services in that capacity for the Company
upon the terms and conditions herein set forth. You shall report directly to
the Company's Chief Executive Officer or his duly authorized representatives.
You shall have all the duties customarily accorded to a Senior Vice President -
General Manager of a corporation and such additional duties commensurate with
your offices as are from time to time delegated to you by the Chief Executive
Officer of the Company. You shall devote your business time, energy and efforts
faithfully and diligently to promote the Company's interests. You will render
your services primarily at the Company's offices which shall be in the Los
Angeles metropolitan area and which are presently on West Valerio Street in
Burbank, and shall travel on business on a temporary basis to such other places
as the Company may direct.
2. Term:
----
The term of this Agreement shall be the Initial Period and the Additional
Period, if the Company's option is exercised, unless sooner terminated.
a. Initial Period: The initial period shall commence on the Commencement
--------------
Date and continue for a two year period; and
b. Additional Period: The Company shall have the irrevocable option to
-----------------
extend the Term of this Agreement following the termination of the Initial
Period for an additional two year period (the "Additional Period"), upon the
same terms and conditions as during the Initial Period. Such option is
exercisable by written notice sent on or before September 1, 2000.
<PAGE>
c. Notice at Expiration of Additional Term. If the option referred to in
---------------------------------------
clause b above is exercised by the Company. at your request, the Company shall
provide to you written notice on or prior to September 1, 2002 as to whether it
desires to extend the Term beyond the Additional Term.
3. Salary:
------
As compensation for all your services rendered under this Agreement, and so
long as you are not in default of any material obligation, for the period ending
March 1, 1999, the Company shall pay you a base salary at an annual rate of
$130,000. Commencing on the anniversary of the date of this Agreement, your
base salary for each subsequent contract year during the Term of your employment
(including the Initial Term and the Additional Term) shall be increased by an
amount equal to 4% of the base salary prevailing during the prior contract year.
Such compensation shall be payable in equal installments on the Company's
regular paydays during the Term subject to the usual and required employee
payroll deductions, withholding and reduction to offset payments you receive
from governmental agencies or programs, including, but not limited to, State
Disability Insurance benefits. (You are obligated to seek such payments or
benefits and report them to the Company). The Company is not obligated to
actually utilize your services, subject to its obligations set forth in this
Agreement.
4. Performance Bonus:
-----------------
Commencing in Fiscal 1999, you will be eligible for a performance based
bonus pursuant to a bonus plan adopted by the Compensation Committee of the
Board of Directors. You will be eligible to receive a bonus in an amount of up
to 50% of your then current annual base salary upon achieving 100% of the
established performance goals. It is anticipated that the bonus plan will
provide bonus payments in amounts less than this percentage if the Company
achieves a portion of the stated goals and a percentage greater than 50% (up to
an agreed upon maximum contemplated to be set at 100%) if the Company's
performance exceeds the stated goals. Performance goals will be established by
the Compensation Committee of the Board of Directors after consultation with the
Chief Executive Officer during the first quarter of each fiscal year and shall
be commensurate with the corresponding bonus targets. It is anticipated that
the performance goals will include financial goals for the Company as well as
nonfinancial goals for the Company. During the fiscal year ending June 30, 1998
("Fiscal 1998"), the performance bonus will not be available; however, the Board
of Directors will consider the grant of a discretionary bonus based on your
performance during the third and fourth quarters of Fiscal 1998.
5. Stock Options:
-------------
The Company will grant to you options to purchase 100,000 shares of common
stock of the Company upon commencement of your employment hereunder. Of these
100,000 options, 60,000 options shall be priced at the closing sale price of the
Company's common stock on the Nasdaq National Market on February 27, 1998, the
trading date immediately prior to the effectiveness of this Agreement (the
"Closing Price"). Of the remaining options, 20,000 shall be priced at 125% of
the
2
<PAGE>
Closing Price and 20,000 shall be priced at 150% of the Closing Price. Effective
as of the beginning of each fiscal year in which you are employed by the Company
(commencing with the fiscal year ending June 30, 2000) and if the Company
achieves 100% of the performance goals as established for purposes of the
performance bonus described above for the prior fiscal year, you will be granted
options to purchase an additional 40,000 shares of common stock at the closing
sale price of the common stock on the Nasdaq National Market on the last trading
day of such prior fiscal year. If the Company achieves less than 100% of the
performance goals for any fiscal year, but you qualify for a bonus under the
bonus plan for such fiscal year, you shall be granted options for that number of
shares which bears the same ratio to 60,000 as the percentage bonus actually
received bears to 50%. Of the options described herein, 25,000 shall vest on the
first anniversary of your employment by the Company and the remaining options
shall vest in equal monthly installments over the next three years. All options
described herein shall be subject to accelerated vesting as described below
under "Severance Arrangements" and "Change of Control." All options shall
terminate on the earlier to occur of three years from the date of your
termination of employment and ten years from the date of grant.
6. Benefits:
--------
During the period for which the Company actually utilizes your services and
so long as you are not in default of any material obligation:
a. Vacation. You shall be entitled to three weeks paid vacation for each
calendar year during your employment; provided, however, that vacation shall
-------- -------
only be taken at such times as not to interfere with the necessary performance
of your duties and obligations under this Agreement. Vacation time shall accrue
and may be carried over only in accordance with Company policy. It shall be
your responsibility to schedule and take all accrued vacation prior to the
expiration of the Term hereof.
b. Automobile. The Company shall provide you with an automobile
allowance in an amount equal to $ 1,000.00 per month .
c. Reimbursement. You shall be entitled to reimbursement from the
Company for the reasonable costs and expenses incurred in connection with the
performance of the duties and obligations provided for in this Agreement in
accordance with the Company's travel policies. Reimbursement shall be paid upon
prompt presentation of expense statements or vouchers and such other supporting
information as the Company may from time to time require.
d. Other Benefits; Insurance. During the term of your employment under
this Agreement, if and to the extent eligible, you shall be entitled to
participate in all operative employee benefit and welfare plans of the Company
then in effect ("Company Officer Benefit Plans"), including, to the extent then
in effect, group life, medical, disability and other insurance plans, all on the
same basis generally applicable to the executives of the Company; provided,
--------
however, that nothing contained in this Section 6.d shall, in any manner
- -------
whatsoever, directly or indirectly, require or otherwise prohibit the Company
from amending, modifying, curtailing, discontinuing or
3
<PAGE>
otherwise terminating, any Company Officer Benefit Plan at any time (whether
during or after the Term hereof).
7. Severance Arrangements:
----------------------
In the event of a termination not "for cause" or a "defacto termination",
(either prior to or at the expiration of the Initial Term or Additional Term, as
applicable (i.e. whether you are terminated during the Initial Term or the
Additional Term, as applicable, or your employment is terminated as a result of
the Company's failure to renew your employment at the end of the Initial Term or
Additional Term, as applicable), you will be entitled to receive the following
(the "Severance Amount"): (i) a cash amount equal to the base salary which
would have been payable to you over the remaining Term (but not less than 15
months), as computed based on your base salary at the date of notice of
termination, (ii) a cash amount equal to the pro rated portion (based on time
served) of the performance bonus which would have been paid to you under the
performance bonus plan for the fiscal year in which the termination occurs, if
your employment had continued through the end of the fiscal year and the Company
had achieved 100% of its scheduled performance goals, and (iii) the automobile
allowance, (iv) COBRA benefits for you and your family (medical and dental, if
applicable), and (v) other applicable benefits under other Company Officer
Benefit Plans for the remaining Term (but not less than 15 months). In
addition, if termination occurs for any of the foregoing reasons prior to or at
the expiration of the Initial Term or Additional Term, as applicable, all of the
stock options then held by you which would vest during the remainder of the
Initial Term or Additional Term, as applicable, and during the 12 months
thereafter, shall become vested and immediately exercisable and the time for
exercise shall be extended until the expiration of three years from the date of
termination of employment. Notwithstanding the foregoing, (x) if a termination
giving rise to an obligation by the Company to pay the Severance Amount occurs
at any time during the Initial Term or upon the expiration of the Initial Term,
each reference to 15 months above shall be deemed to refer to 18 months, and (y)
if during the fiscal year in which a termination giving rise to an obligation by
the Company to pay the Severance Amount occurs the Company achieves 100% of its
scheduled performance goals, the Company shall pay to you 100% of the
performance bonus (in lieu of the pro rated portion referred to above) as part
of the Severance Amount. The amounts payable to you pursuant to this Section 7
shall be paid to you within 10 days of your termination
"For cause" is defined to mean (a) an act of fraud, embezzlement or similar
conduct by you involving the Company, (b) any action by you involving your
arrest for violation of any criminal statute constituting a felony or a
misdemeanor involving moral turpitude if the Board of Directors reasonably
determines that the continuation of your employment after such event would have
an adverse impact on the operations or reputation of the Company in the
financial community, (c) gross misconduct or habitual negligence in the
performance of your duties, (d) an act constituting a breach of your fiduciary
duty to the Company under the Delaware General Corporation Law, or (e) a
continuing, repeated and willful failure or refusal by you to perform your
duties. A "defacto termination" is defined to include any of the following
events: (a) the Company reduces your base salary in an aggregate amount in
excess of 10% from that paid in the prior fiscal year, except as part of a
general reduction of compensation of executive officers, (b) the Company fails
to cause you to remain an executive officer of the Company, (c) you were not
afforded the authority, powers,
4
<PAGE>
responsibilities and privileges customarily accorded to an executive with your
title, or (d) the Company requires your primary services to be rendered in an
area other than the Company's principal offices in the greater Los Angeles
metropolitan area.
8. Change in Control:
-----------------
If there is a "change in control" of the Company during the Initial Term or
the Additional Term, as applicable, upon the expiration of 90 days (or such
longer period as is then mutually agreeable to you and the Company) following
the date of such Change in Control (if you are requested to serve during such
period) and for a 180 day period thereafter you shall be entitled to terminate
your employment by delivery of written notice and receive (i) a cash amount
equal to the base salary which would have been payable to you over the remaining
Term (but not less than 18 months), as computed based on your base salary at the
date of notice of termination, (ii) a cash amount equal to the performance bonus
which would have been paid to you under the performance bonus plan for the
fiscal year in which the termination occurs, if your employment had continued
through the end of the fiscal year and the Company had achieved 100% of its
scheduled performance goals, and (iii) the automobile allowance, (iv) COBRA
benefits for you and your family (medical and dental, if applicable), and (v)
other applicable benefits under other Company Officer Benefit Plans for the
remaining Term (but not less than 18 months). In addition, all options held by
you on the date of the Change in Control which are unvested shall vest and
become exercisable at the time of the Change in Control and will remain
exercisable (if they are not terminated as a result of the Change in Control)
for a period ending at the end of the third year following the date of such
Change in Control. Nothing contained in this Section 8 shall modify or alter
the Company's obligations under Paragraph 7 above with respect to termination
without cause or defacto termination during the period following a Change in
Control; provided, however, if a termination without cause or a defacto
termination occurs between the date of a Change in Control and the expiration of
the period in which you are entitled to terminate your employment pursuant to
this Section 8, the Severance Amount payable to you shall be the benefits
described in this Section 8 and not the benefits described in Section 7. The
amounts payable to you pursuant to this Section 8 shall be paid to you within 10
days of your termination.
A "change in control" is defined to mean (a) the acquisition by any
individual, entity or group (within the meaning of the Exchange Act of 1934, as
amended) of 25% or more of the combined voting power of the then outstanding
voting securities of the Company entitled to vote in the election of directors,
(b) a liquidation, dissolution, reorganization, merger or consolidation of the
Company, except where (i) more than 60% of the combined voting power of the then
outstanding voting securities of the resulting corporation entitled to vote in
the election of directors shall be owned by substantially all of the persons who
were owners immediately prior to such event in substantially the same
proportions as their respective ownership immediately prior to such event, or
(ii) no person owns 25% or more of the combined voting power of the resulting
corporation, or (iii) at least a majority of the members of the Board of
Directors shall have been members of the Board of Directors at the time of the
execution of the initial agreement providing for such event, or (c) a change in
the membership of the Board of Directors such that the directors sitting on the
Board of Directors on the effective date of this Agreement cease to constitute
at least a majority of the Board of Directors following the event.
5
<PAGE>
9. No Mitigation:
-------------
The payments required to be paid to you by the Company pursuant to Sections
7 and 8 shall not be reduced by or mitigated by amounts which you earn or are
capable of earning during any period following your termination date.
10. Indemnification:
---------------
The Company and you are parties to an Indemnification Agreement, pursuant
to which, inter alia, the Company has agreed, on the terms and conditions
----- ----
therein set forth, to indemnify you against certain claims arising by reason of
the fact that you were an officer or director of the Company.
11. Trade Secrets:
-------------
The Company and you are parties to a separate confidentiality agreement in
a form which is required of all employees pursuant to the Company's personnel
policies.
12. Injunctive Relief
-----------------
You hereby recognize, acknowledge and agree that in the event of any
material breach by you of any of your covenants, agreements, duties or
obligations hereunder, the Company would suffer great and irreparable harm,
injury and damage, the Company would encounter extreme difficulty in attempting
to prove the actual amount of damages suffered by the Company as a result of
such breach, and the Company would not be reasonably or adequately compensated
in damages in any action at law. You therefore agree that, in addition to any
other remedy the Company may have at law, in equity, by statute or otherwise, in
the event of any material breach by you of any of the covenants, agreements,
duties or obligations hereunder, and after written notice is provided to you
with a reasonable opportunity to cure, the Company or its subsidiaries shall be
entitled to seek and receive temporary, preliminary and permanent injunctive and
other equitable relief from any court of competent jurisdiction to enforce any
of the rights of the Company or its subsidiaries or any of the covenants,
agreements, duties or obligations of you hereunder, or otherwise to prevent the
violation of any of the terms or provisions hereof, all without the necessity of
proving the amount of any actual damage to the Company or its subsidiaries
thereof resulting therefrom; provided, however, that nothing contained in this
Section 12 shall be deemed or construed in any manner whatsoever as a waiver by
the Company or its subsidiaries of any of the rights which any of them may have
against you at law, in equity, by statute or otherwise arising out of, in
connection with or resulting from the breach by you of any of your covenants,
agreements, duties or obligations hereunder.
13. Survivability:
-------------
Without prejudice to the survival of any of your other rights or
obligations and/or any of the Company's other rights or obligations, you and we
expressly acknowledge that your obligations and/or the Company's rights under
paragraphs 7, 8, 9, 12 and 13 will survive the expiration or termination of this
Agreement.
6
<PAGE>
14. Notices:
-------
All notices, requests, consents and other communications required or
permitted to be given hereunder shall be written and shall be deemed to have
been duly given if delivered personally or sent by prepared telegram, by
facsimile, or mailed first-class, postage prepaid, as follows:
Employee: Mr. Dan Griesmer
17144 Cantara Street
Van Nuys, California 91406
the Company: Iwerks Entertainment, Inc.
4540 West Valerio Street
Burbank, California 91505
with a copy to: Troop Meisinger Steuber & Pasich LLP
10940 Wilshire Boulevard, Suite 800
Los Angeles, California 90024
Attn: C.N. Franklin Reddick III, Esq.
or at such other addresses as either party may specify by written notice to the
other.
15. General:
-------
a. During the Term of this Agreement, except within the final one hundred
eighty (180) days of the Term or a Change in Control (whichever is the first to
occur), you shall not seek, or negotiate for, employment other than with the
Company.
b. This Agreement sets forth the entire agreement and understanding of the
parties hereto, and, effective on the Commencement Date hereof, supersedes all
prior agreements, arrangements, and understandings. No representation, promise
or inducement has been made by either party that is not embodied in this
Agreement.
c. Nothing herein contained shall be construed so as to require the
commission of any act contrary to law. Wherever there is any conflict between
any provision of this Agreement and any present or future statute, law,
ordinance or regulation, the latter shall prevail, but in such event the
provision of this Agreement affected shall be curtailed and limited only to the
extent necessary to bring it within legal requirements. Without limiting the
generality of the foregoing, in the event any compensation payable hereunder
shall be in excess of the amount permitted by any statute, law, ordinance or
regulation, payment of the maximum amount allowed thereby shall constitute full
compliance by the Company with the payment requirements of this Agreement.
d. The section headings contained herein are for reference purposes only
and shall not in any way affect the meaning or interpretation of this Agreement.
7
<PAGE>
e. The provisions of this Agreement are severable, and if any one or more
provisions are determined to be judicially unenforceable, in whole or in part,
the remaining provisions shall nevertheless be binding and enforceable.
f. This Agreement and all obligations and benefits of you and the Company
hereunder shall bind and inure to the benefit of you and the Company and your
and the Company's respective affiliates, successors and assigns; provided,
however, you shall not be entitled to assign any of your obligations under this
Agreement and the Company's right to assign this Agreement is subject to the
provisions of Section 8 hereof.
g. No amendment or waiver of any term or provision of this Agreement shall
be effective unless made in writing. Any written amendment or waiver shall be
effective only in the instance given and then only with respect to the specific
term or provision (or portion thereof) of this Agreement to which it expressly
relates, and shall not be deemed or construed to constitute a waiver of any
other term or provision (or portion thereof) waived in any other instance.
h. This Agreement has been made and entered into in the State of
California and shall be construed in accordance with the laws of the State of
California without regard to the conflict of laws principles thereof.
i. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
j. You have read this Agreement, fully understand its contents and terms,
and have had the opportunity to ask the Company about any questions, concerns or
issues you may have in connection with the Agreement or the terms of the
Agreement. You also have had the opportunity, and taken it to the extent you
choose, to consult legal counsel or any other advisers of your choice in
connection with this Agreement.
Very truly yours,
IWERKS ENTERTAINMENT, INC.
By:____________________________________
Charles Goldwater
Chief Executive Officer
AGREED:
_________________________________
Dan Griesmer
8
<PAGE>
EXHIBIT 11.1
IWERKS ENTERTAINMENT, INC.
EARNINGS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
----------------- ------------------ ----------------- --------------------
<S> <C> <C> <C> <C>
Denominator for Basic Earnings
per Share - Weighted average
shares outstanding 12,199 11,918 12,173 11,756
Effect of dilutive securities:
Options and warrants - 256 - 525
----------------- ------------------ ----------------- --------------------
Denominator for Diluted
Earnings per Share 12,199 12,174 12,173 12,281
================= ================== ================= ====================
Net income (loss) $(5,077) $ 270 $(9,083) $ 387
================= ================== ================= ====================
Basic and diluted income
(loss) per share $ (0.42) $ 0.02 $ (0.75) $ 0.03
================= ================== ================= ====================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE ACCOMPANYING
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 6,614
<SECURITIES> 7,558
<RECEIVABLES> 5,045
<ALLOWANCES> (1,907)
<INVENTORY> 3,445
<CURRENT-ASSETS> 24,294<F1>
<PP&E> 40,230<F2>
<DEPRECIATION> (27,580)<F3>
<TOTAL-ASSETS> 54,948
<CURRENT-LIABILITIES> 14,323
<BONDS> 1,322<F4>
0
0
<COMMON> 78,073
<OTHER-SE> (38,770)<F5>
<TOTAL-LIABILITY-AND-EQUITY> 54,948
<SALES> 18,524
<TOTAL-REVENUES> 19,234<F6>
<CGS> 14,152
<TOTAL-COSTS> 14,152
<OTHER-EXPENSES> 13,972
<LOSS-PROVISION> 1,198
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> (9,083)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,083)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
<FN>
<F1>Includes Costs and estimated earnings in excess of billings on uncompleted
contracts of $2,829 and other current assets of $710.
<F2>Includes portable simulation theaters and film inventory.
<F3>Includes portable simulation theaters and film inventory.
<F4>Includes the non-current portions of capital losses.
<F5>Accumulated deficit.
<F6>Includes interest income of $710.
</FN>
</TABLE>
