UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934. For the quarterly period ended: September 30, 1999
or
[ ] 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 of (I.R.S. Employer Identification Number)
incorporation or organization)
4540 West Valerio Street
Burbank, California 91505-1046
(Address of principal executive offices) (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 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 ______.
The number of shares outstanding of the registrant's Common Stock, $0.001 par
value, at November 12, 1999 was 12,390,581 shares
<PAGE>
IWERKS ENTERTAINMENT, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and June 30, 1999 3-4
Condensed Consolidated Statements of Operations
for the Three Months ended September 30, 1999 and
1998 5
Condensed Consolidated Statements of Cash Flows
for the Three Months ended September 30, 1999 and
1998 6
Notes to the Condensed Consolidated Financial
Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Page 2
<PAGE>
<TABLE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Audited)
-------------- ----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents (Note 2) $ 3,425 $ 4,217
Short-term investments - 2,500
Accounts receivable, net of
allowance for doubtful accounts 4,182 5,619
Costs and estimated earnings in
excess of billings on uncompleted
contracts 2,598 1,495
Assets held for sale, current 1,655 -
Inventories and other current assets 6,251 5,555
Total current assets --------- ----------
$ 18,111 $ 19,386
Portable simulation theatres at cost,
net of accumulated depreciation - 2,783
Property and equipment at cost, net of
accumulated depreciation 5,612 5,626
Film inventory at cost, net of
accumulated amortization 4,939 4,861
Goodwill, net of accumulated
amortization 13,959 14,115
Investments in joint ventures and other
assets 3,829 3,997
Assets held for sale, net of current
portion 967 -
Total Assets --------- ----------
$ 47,417 $ 50,768
========= ==========
</TABLE>
See accompanying notes.
Page 3
<PAGE>
<TABLE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Audited)
-------------- ----------
<S> <C> <C>
Current Liabilities:
Accounts Payable $ 2,335 $ 3,244
Accrued liabilities 6,165 6,115
Notes payable, current portion 747 737
Billings in excess of costs and
estimated earnings on uncompleted
contracts 6,079 7,008
Deferred revenue 77 10
Capital lease obligations, current
portion 892 792
Total current liabilities ---------- ----------
16,295 17,906
Notes payable, net of current portion 668 797
Capital lease obligations, net of
current portion - 290
Stockholders' equity:
Preferred stock, $0.001 par value,
1,000,000 authorized, none issued and
outstanding - -
Common stock, $0.001 par value,
50,000,000 shares authorized;
12,390,581 and 12,389,498
issued and outstanding 57 57
Additional paid-in capital 78,084 78,084
Treasury Stock, 320,600 shares at cost (341) (341)
Common stock warrants 250 -
Accumulative deficit (47,596) (46,025)
--------- ----------
Total stockholders' equity 30,454 31,775
Total liabilities and stockholders'
equity -------- ----------
$ 47,417 $ 50,768
======== ==========
</TABLE>
See accompanying notes.
Page 4
<PAGE>
<TABLE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Ended
September 30,
----------------------------------------
1999 1998
<S> <C> <C>
Revenue
$ 7,609 $ 7,373
Cost of sales 6,365 5,378
Gross profit --------- ----------
1,244 1,995
Selling, General and Administrative
expenses 2,775 3,050
--------- ----------
Loss from operations (1,531) (1,055)
Interest income 58 111
Interest expense (98) (46)
Net loss --------- ----------
$ (1,571) $ (990)
========= ==========
Net loss per common share-basic
and diluted $ (0.13) $ (0.08)
========= ==========
Weighted average shares outstanding-
basic and diluted 12,070 12,346
========= ==========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
<TABLE>
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
For the Three Months Ended
September 30,
----------------------------------------
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,571) $ (990)
Depreciation and amortization 855 1,096
Changes in operating assets and
liabilities (2,083) 113
Net cash (used in) provided by --------- ----------
operating activities (2,799) 219
INVESTING ACTIVITIES
Investments in joint ventures - (321)
Purchases of property, plant and
equipment (157) (382)
Additions to film inventory (261) (572)
Investments in debt securities 2,500 (78)
Net cash provided by (used in) --------- ----------
investing activities 2,082 (1,353)
FINANCING ACTIVITIES
Restricted cash (780) (542)
Principal payments on long-term debt (119) -
Payments on capital leases (190) (197)
Proceeds from issuance of common stock
warrants 250 -
Net proceeds on exercise of stock option - 4
Other (16) 92
--------- ----------
Net cash used in financing activities (855) (643)
--------- ----------
Net decrease in cash and cash
equivalents (1,572) (1,777)
Cash and cash equivalents at beginning
of period 4,217 7,542
--------- ----------
Cash and cash equivalents at end of
period, net of restricted cash $ 2,645 $ 5,765
========= ==========
Supplemental disclosures
Interest paid during the period $ 72 $ 48
========= ==========
Income taxes paid during the period $ 10 $ 11
========= ==========
</TABLE>
See accompanying notes.
Page 6
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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 the
information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position of the Company as of
September 30, 1999 and the results of its operations for the three months ended
September 30, 1999 and 1998 and the cash flows for the three months ended
September 30, 1999 and 1998 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. RESTRICTED CASH
Included in the September 30, 1999 cash and cash equivalents balance is
$780,000 of cash received from one customer which is restricted as to its use.
This restriction will remain in effect until the Company reaches a certain
milestone related to the completion of the project. The milestone is expected to
be reached by the first quarter of fiscal 2001 at which time this cash will
become available.
NOTE 3. ASSETS HELD FOR SALE
On September 30, 1999 the Company decided to sell the assets relating to
the Touring Division. These assets are described as the portable motion theatres
and are reflected at cost, net of accumulated depreciation which is less than
management's estimate of their net realizable value.
NOTE 4. ISSUANCE OF WARRANTS
On September 9, 1999 the Company appointed two new outside members to its
Board of Directors bringing the number of outside Directors to eight. Peter
Guber, co-founder of Mandalay Entertainment Group was appointed Chairman of the
Board of Directors and Paul Schaeffer, co-founder of Mandalay Entertainment
Group was appointed Vice Chairman of the Board of Directors. The two new members
received warrants to purchase an aggregate 1,550,000 shares of Iwerks common
stock. The warrants were issued in four tranches of equal amounts ranging in a
per share price of $1.43 to $3.00. Certain restrictions apply to the exercise of
these warrants which have a life of five years.
Page 7
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NOTE 5. 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
September 30,
----------------------------------------
1999 1998
<S> <C> <C>
Depreciation on fixed assets $190,000 $ 241,000
Depreciation on touring equipment 160,000 160,000
Amortization of film 183,000 442,000
Amortization of goodwill and other 322,000 253,000
-------- --------
Total depreciation and
amortization $855,000 $1,096,000
======== ==========
</TABLE>
Depreciation and amortization included in cost of sales was $346,000 and
$609,000 for the quarters ended September 30, 1999 and 1998, respectively.
NOTE 6. NET LOSS PER COMMON SHARE
For the three months ended September 30, 1999 and 1998, the basic and
diluted per share data is based on the weighted average number of common shares
outstanding during the period. Common equivalent shares, consisting of
outstanding stock options and warrants, are not included in the diluted loss per
share calculation since they are antidilutive.
NOTE 7. INCOME TAXES
At June 30, 1999, the Company had available federal and state tax net
operating loss carryforwards of approximately $31,200,000 and $14,800,000,
respectively. The federal and state net operating loss carryforwards expire, in
varying amounts, through 2018. As a result of these net operating loss
carryforwards 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.
NOTE 8. LITIGATION
The proceedings to which the Company is a defendant consist of ordinary
routine litigation in the course of business. In the opinion of management, and,
based in part upon the advice of outside counsel, resolution of these matters
will not have a material adverse impact on the Company's consolidated financial
position or results of operations.
Page 8
<PAGE>
IWERKS ENTERTAINMENT, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Exchange Act and Section
27A of the Securities Act. The words "expect", "estimate", "anticipate",
"predict", "believe" and similar expressions and variations thereof are intended
to identify forward-looking statements. Such statements appear in a number of
places in this filing and include statements regarding the intent, belief or
current expectations of Iwerks, its directors or officers with respect to, among
other things (a) trends affecting the financial condition or results of
operations of Iwerks and (b) the business and growth strategies of Iwerks. The
stockholders of Iwerks are cautioned not to put undue reliance on such forward
looking statements. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in this Report, for the reasons, among
others, discussed in the Sections "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and "Future Operating Results".
Iwerks undertakes no obligation to publicly revise these forward looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the Securities and Exchange Commission,
including the Annual Report on form 10-K filed by the Company on September 28,
1999, the Quarterly Reports on Form 10-Q to be filed by the Company in calendar
years 1999 and 2000 and any Current Reports on Form 8-K filed by the Company.
RESULTS OF OPERATIONS
HARDWARE SALES AND SERVICE
Revenues on sales of theatre systems are recognized on the percentage-
of-completion method over the life of the contract. The gross margin for each
contract varies based upon pricing strategies, competitive conditions and
product mix.
OWNED AND OPERATED
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 revenues for the portable theatres are recognized ratably
over the term of the contract. The Company has made the determination to shut
down the touring division and sell the relating assets in an effort to
concentrate on its core business.
Page 9
<PAGE>
FILM LICENSING
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.
FILM PRODUCTION AND OTHER
Revenue from film production and other is generated primarily through the
leasing of camera equipment, the rental of post production facilities, and the
production of films for third parties.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998.
For the three months ended September 30, 1999 the Company recorded revenues
of $7,609,000 compared to $7,373,000 for the same period last year. For the
three months ended September 30, 1999, the Company recorded a net loss of
$1,571,000 or $.13 per share compared to a net loss of $990,000 or $.08 per
share for the same period last year.
REVENUES
Revenue for the fiscal period ended September 30, 1999 increased $0.2
million or 3% from the fiscal period ended September 30, 1998.
The following table presents summary information regarding revenues
(amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------------
1999 1998
<S> <C> <C>
Hardware Sales & Service $ 4,760 $ 3,258
Owned and Operated 1,105 2,193
Film Licensing 927 713
Film Production and Other 817 209
-------- -----------
Total $ 7,609 $ 7,373
======== ===========
</TABLE>
Hardware sales and service increased by $1.5 million or 46% from the prior
fiscal year. With the exception of North America, all geographic regions
contributed to the increase in hardware sales. During the first quarter of
fiscal year 2000, the Asia-Pacific region increased by approximately $1.0
million, Europe and the Middle East increased by $1.3 million while North
America hardware sales decreased by approximately $1.2 million. Revenue
generated from Customer Service was $164,000 greater in fiscal 2000 than in
fiscal 1999.
Page 10
<PAGE>
Owned and Operated revenue decreased by approximately $1.1 million as
compared to the same period last year, primarily due to declining sales in the
touring division. The Company has made the determination to shut down the
touring division and sell the relating assets in an effort to concentrate on its
core business. Revenues generated from the touring division were approximately
$745,000 during the quarter ended September 30, 1999 compared to $1,774,000
during the quarter ended September 30, 1998.
Film Licensing revenues for the quarter ended September 30, 1999 decreased
by approximately $786,000 or 46% compared to the same period last year. These
results were due to the number of multi-year agreements signed during the first
quarter of fiscal 1999. There were no such deals during the first quarter of
fiscal 2000.
Film Production and other revenue increased by approximately $608,000. This
was primarily due to the Company securing one major film production deal and
concluding another during the quarter ended September 30, 1999 compared to none
during the quarter ended September 30, 1998.
COST OF SALES
Cost of sales primarily includes costs of theatre systems sold, expenses
associated with operating portable ride simulation theatres, and costs
associated with film production and licensing fees. The cost of theatre systems
include the cost of components, customization, engineering, project management,
assembly, system integration and installation. Also included in cost of sales
are royalties payable to a former joint venture partner and estimated warranty
expenses. The costs associated with film license fees primarily reflect
amortization of film production costs over the lives of certain films and
royalties paid to third parties. The cost of sales associated with operating
portable ride simulation theatres include costs for personnel, event fees, fuel,
insurance and maintenance.
Cost of sales as a percentage of sales was 82% for the fiscal period ended
September 30, 1999 as compared to 73% for the fiscal period ended September 30,
1998. The primary reason for the increase in cost of sales in the first quarter
ended September 30, 1999 compared with the comparable period in 1998, as a
percentage of sales, was primarily due to a significant decline in revenues
attributable to the touring operations, while costs, mostly fixed (such as
depreciation, lease and insurance), remained relatively stable. The Company
believes that shutting down the touring operation and selling the related assets
will improve the overall cost of sales as a percentage of sales in future
results. Additionally, an increase in film production revenues, which typically
have higher cost of sales, adversely affected the overall cost of sales
percentage.
Page 11
<PAGE>
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 were approximately $2.8
million and $3.0 million, for the quarters ended September 30, 1999 and 1998,
respectively. This decrease was primarily due to a reduction in bad debt expense
from the prior year's quarter due to the resurgence of the Asian economy along
with a reduction in research and development costs.
INTEREST INCOME & EXPENSE
Interest income for the quarters ended September 30, 1999 and 1998 was
approximately $58,000 and $111,000, respectively. The decrease from 1999 to 2000
resulted primarily from a reduction in the invested cash balances during the
first quarter of the new fiscal year.
Interest expense for the quarters ended September 30, 1999 and 1998 was
approximately $98,000 and $46,000, respectively. The increase was due to a new
note payable which was recorded in the quarter ended June 30, 1999.
NET LOSS
The Company recorded a net loss of approximately $1.5 million in the
quarter ended September 30, 1999, compared to a net loss of approximately $1.0
million in the quarter ended September 30, 1998 due to the reasons mentioned
above.
IMPACT OF YEAR 2000
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in 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 determined that it will be required to modify or replace
significant portions of its software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. The Company presently
believes that with modifications or replacements of existing software and
certain hardware, the Year 2000 Issue can be mitigated.
Page 12
<PAGE>
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT.
On May 3, 1999 the Company went live with its new general ledger, billing
and inventory system modules. There will be an ongoing implementation of other
modules the Company felt were of less critical nature.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000
The Company does not interface directly with third party vendors with
regard to shared information systems. The Company has queried its significant
suppliers and subcontractors that do not share information systems with the
Company (external agents). To date, the Company is not aware of any external
agent with a Year 2000 issue that would materially impact the Company's results
of operations, liquidity, or capital resources. However, the Company has no
means of ensuring that external agents will be Year 2000 ready. The inability of
external agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
COSTS
The Company will utilize both internal and external resources to replace,
test, and implement the software and certain hardware for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $600,000
and will be funded through operating cash flows or leasing of hardware and
software. To date, the Company has incurred approximately $570,000 related to
all phases of the Year 2000 project. Of the total remaining project costs,
approximately $30,000 is attributable to remaining consulting time, which will
be capitalized.
RISKS
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. Disruptions in the economy
generally resulting from Year 2000 issues could adversely affect the Company.
The Company could be subject to litigation for computer systems product failure,
for example, equipment shutdown or failure to properly date business records.
The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
Due to the general uncertainty inherent in the Year 2000 problem, resulting
in part from the uncertainty of the Year 2000 readiness of third parties and the
inter-connection of national and international businesses, the Company cannot
ensure that it will be able to timely and cost-effectively resolve problems
associated with the Year 2000 issue which may affect its business operations, or
expose it to third party liability.
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.
Page 13
<PAGE>
There is 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 and its principal competitor in the giant screen market, Imax
Corporation, are aggressively competing, particularly in the United States
market, for new 15 perforation, 70 millimeter format (15/70) theatre
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
base of installed theatres. 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 in this market. However, the Company believes there
is potential and is pursuing the 8 perforation, 70 millimeter (8/70) format
theatre market in addition to its 15/70 sales efforts. Imax does not offer an
8/70 product.
In addition to competition in the giant screen market, the Company faces
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.
The Company recognizes these competitive issues and is in the process of
creating new products, such as developing a 3D/4D FX TM speciality attraction
system which include multiple sensory effects and the development of a new
generation of smaller ride simulation configurations that can accommodate the
potential opportunity in the mass retail environment and movie theatres. The
Company has already made one sale of its new 3D/4D FX TM theatre system in China
which will open in the third quarter of fiscal 2000. There can be no assurance
that these new products will be developed, and if developed, that the Company
will have the financial resources to appropriately market them to its full
advantage or that they will be commercially accepted.
Revenues from the Company's owned and operated attractions (primarily
portable simulation theatres) have been declining since the first quarter of
fiscal 1998 when the Company lost its principal sponsorship contract. 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 are expected
to 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.
The Company is aggressively pursuing the sale of these portable simulators.
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 theatre system deliveries, contract
signing, sponsorships, the mix of theatre systems shipped, the completion of
custom film contracts, the existence of world expos, the amount of revenues from
portable simulation theatre and film licensing agreements, the timing of sales
of ride simulation attractions, the timing of
Page 14
<PAGE>
delivery and installation of such sales (pursuant to percentage of completion
accounting) and any delays therein caused by permitting or construction delays
at the customer's site, the size, type and configuration of the attractions
sold, the timing of film rental payments from existing attractions and the
performance of those attractions that pay film rental based on a percentage of
box office and the timing of sales and marketing efforts and related
expenditures. In particular, fluctuations in theatre system sales and deliveries
from quarter to quarter can materially affect quarterly and periodic operating
results, and theatre system contract 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. 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. 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.
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
Net cash used by operating activities for the three months ended September
30, 1999 was approximately $2.8 million. This was primarily attributable to the
net loss of approximately $1.6 million along with negative changes in operating
assets and liabilities of approximately $2.1 million partially offset by
non-cash charges of approximately $0.9 million for depreciation and
amortization. Investing activities for the three months ended September 30, 1999
consisted primarily of maturities of debt securities partially offset by
investments in film inventory and purchases of property and equipment. Cash used
in financing activities consisted primarily of payments on capital leases, notes
payable and restricted cash.
At September 30, 1999, the Company had cash and cash equivalents of
approximately $3.4 million of which $0.8 was restricted from use by the Company
due to it being held as collateral for a standby letter of credit on a hardware
project.
Page 15
<PAGE>
Because of the reduction in the Company's cash balances over the last six
months, and contractual restrictions on the use of some of its cash balances
(which become available in the first quarter of fiscal 2001), the Company's
ability to continue operations at current levels through the remainder of fiscal
2000 is dependent upon achieving its current cash flow projections. The
Company's ability to meet its cash flow projections is dependent upon its sales
forecast for those periods.
If the Company is unable to achieve its projected cash flow from
operations, the Company may experience significantly reduced cash and short-term
investments, which could result in the Company not being able to meet its
operating needs. The Company has made the determination to sell its touring
units which would genterate cash. While the Company is actively seeking buyers
for these assets, there can be no assurance that any of these assets will be
sold. The Company is also aggressively seeking additional debt or equity
financing. However, recent operating losses, the Company's declining cash
balances, the Company's historical stock performance, and a general decrease in
investor interest in the Company's industry, may make it difficult for the
Company to attract equity investments on terms that are deemed to be favorable
to the Company.
In addition, the losses in fiscal 1998, fiscal 1999 and the first three
months of fiscal 2000 make it more difficult for the Company to attract
significant debt financing. In the event that cash flow from operations is less
than that anticipated and the Company is unable to raise additional debt or
equity financing, in order to preserve cash, the Company would be required to
reduce expenditures for capital projects (including new films) and research and
development, or effect further reductions in its corporate infrastructure (a
number of which we have already implemented), any of which could have a material
adverse affect on the Company's future operations. At September 30, 1999 the
Company was committed to approximately $800,000 of capital expenditures to be
made during the remainder of fiscal 2000.
Page 16
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. EXHIBITS:
i) Exhibit 27.1 Financial Data Schedule
b. REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED SEPTEMBER 30,
1999:
i) A form 8-K was filed on July 23, 1999 regarding an
amendment to the right agreement.
ii) A form 8-K was filed on September 23, 1999 regarding the
appointment of Peter Guber as Chairman of the Board of
Directors and Paul Schaeffer as Vice Chairman of the Board
of Directors.
Page 17
<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 12th day of November, 1999.
IWERKS ENTERTAINMENT, INC.
(Registrant)
By: /S/ JEFFREY M. DAHL
-----------------------------------
Senior Vice President
Chief Financial Officer
(Principal Finance Officer)
By: /S/ BRUCE E. PALMORE
-----------------------------------
Vice President / Controller
(Principal Accounting Officer)
Date: November 12, 1999
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,425
<SECURITIES> 0
<RECEIVABLES> 6,122
<ALLOWANCES> (1,940)
<INVENTORY> 4,186
<CURRENT-ASSETS> 18,111 <F1>
<PP&E> 37,242 <F2>
<DEPRECIATION> (26,691) <F3>
<TOTAL-ASSETS> 47,417 <F4>
<CURRENT-LIABILITIES> 16,295
<BONDS> 0
0
0
<COMMON> 78,391
<OTHER-SE> (47,596) <F5>
<TOTAL-LIABILITY-AND-EQUITY> 47,417
<SALES> 7,609
<TOTAL-REVENUES> 7,667 <F6>
<CGS> 6,365
<TOTAL-COSTS> 6,365
<OTHER-EXPENSES> 2,775
<LOSS-PROVISION> 118
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> (1,571)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,571)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,571)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
<FN>
<F1> Includes Costs and estimated earnings in excess of billings on uncompleted
contracts of $2,368, assetes held for sale of $1,655 and other current
assets of $1,366.
<F2> Includes film inventory of $22,585.
<F3> Includes film inventory of $17,646.
<F4> Includes long-term portion of assets held for sale of $967.
<F5> Accumulated deficit.
<F6> Includes interest income of $58.
</FN>
</TABLE>
