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: March 31, 2000
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
incorporation or organization) Identification Number)
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 May 11, 2000 was 3,540,918 shares.
IWERKS ENTERTAINMENT, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
and June 30, 1999 3-4
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months ended March 31, 2000 and 1999 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months ended March 31, 2000 and 1999 6
Notes to the Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
Page 2
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
March 31, 2000 June 30, 1999
(Unaudited) (Audited)
------------ -----------
Current Assets:
Cash and cash equivalents (Note 2) $2,005 $4,217
Short-term investments -- 2,500
Accounts receivable, net of allowance for doubtful accounts 4,054 5,619
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,442 1,495
Assets held for sale, current 1,655 --
Inventories and other current assets 4,182 5,555
------------ -----------
Total current assets 14,338 19,386
Portable simulation theatres at cost, net of accumulated depreciation -- 2,783
Property and equipment at cost, net of accumulated depreciation 5,754 5,626
Film inventory at cost, net of accumulated amortization 4,113 4,861
Goodwill, net of accumulated amortization 1,989 14,115
Investments in joint ventures and other assets 4,136 3,997
Assets held for sale, net of current portion 1,511 --
------------ -----------
Total Assets $31,841 $50,768
============ ===========
See accompanying notes
Page 3
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, 2000 June 30, 1999
(Unaudited) (Audited)
-------------- -------------
Current Liabilities:
Accounts payable $3,825 $3,244
Accrued liabilities 6,337 6,115
Notes payable, current portion 987 737
Billings in excess of costs and estimated earnings on uncompleted
contracts 4,537 7,008
Deferred revenue 254 10
Capital lease obligations, current portion 980 792
------------ -----------
Total current liabilities 16,920 17,906
Notes payable, net of current portion 367 797
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; 3,540,844 and 3,539,856 issued and outstanding 57 57
Additional paid-in capital 78,084 78,084
Treasury Stock, 91,600 shares at cost (341) (341)
Common stock warrants 250 --
Accumulated deficit (63,496) (46,025)
------------ -----------
Total stockholders' equity 14,554 31,775
------------ -----------
Total liabilities and stockholders' equity $31,841 $50,768
============ ===========
See accompanying notes.
Page 4
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2000 1999 2000 1999
-------------------- ---------------------
Revenue $5,913 $10,423 $22,681 $26,445
Cost of sales 5,474 7,669 19,742 $19,193
---------- -------- ---------- ---------
Gross profit 439 2,754 2,939 $7,252
Selling, General and Administrative expenses 2,735 3,174 8,686 $9,612
Impairment of Goodwill (11,658) -- (11,658) --
---------- -------- ---------- ---------
Loss from operations (13,954) (420) (17,405) (2,360)
Interest income 4 68 153 284
Interest expense (67) (37) (219) (124)
---------- -------- ---------- ---------
Net loss $(14,017) $ (389) $(17,471) $(2,200)
========== ======== ========== =========
Net loss per common share-basic and diluted $ (4.06) $ (0.11) $(5.07) $(0.62)
========== ======== ========== =========
Weighted average shares outstanding-basic and
diluted 3,449 3,536 3,449 3,532
========== ======== ========== =========
See accompanying notes.
Page 5
IWERKS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the nine months
ended
March 31,
-------------------------
2000 1999
----------- ------------
OPERATING ACTIVITIES
Net loss $ (17,471) $(2,200)
Depreciation and amortization 2,872 3,791
Impairment of Goodwill 11,658 --
Changes in operating assets and liabilities 343 (1,586)
----------- ------------
Net cash (used in) provided by operating activities (2,598) 5
INVESTING ACTIVITIES
Investments in joint ventures (118) (728)
Purchases of property, plant and equipment (794) (1,463)
Additions to film inventory (433) (1,441)
Proceed from sales of debt securities 2,500 2,922
----------- ------------
Net cash provided by (used in) investing activities 1,155 (710)
FINANCING ACTIVITIES
Restricted cash (1,046) --
Principal payments on long-term debt (180) --
Payments on capital leases (587) (607)
Proceeds from issuance of common stock warrants 250 --
Deferred financing fees (252) --
Net proceeds on exercise of stock options -- 88
Other -- 12
----------- ------------
Net cash used in financing activities (1,815) (507)
----------- ------------
Net decrease in cash and cash equivalents (3,258) (1,212)
Cash and cash equivalents at beginning of period 4,217 7,542
=========== ============
Cash and cash equivalents at end of period, net of restricted
cash $959 $6,330
=========== ============
Supplemental disclosures
Interest paid during the period $204 $130
=========== ============
Income taxes paid during the period $10 $15
=========== ============
See accompanying notes
Page 6
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 March
31, 2000 and the results of its operations for the three and nine months ended
March 31, 2000 and 1999 and the cash flows for the nine months ended March 31,
2000 and 1999 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 March 31, 2000 cash and cash equivalents balance is
$1,046,000 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 for Company use.
NOTE 3 - ASSETS HELD FOR SALE
- -----------------------------
In September 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. The two new members purchased warrants to purchase an
aggregate 442,857 shares of Iwerks common stock. The warrants were issued in
four tranches of equal amounts ranging in a per share price of $5.01 to $10.50.
Certain restrictions apply to the exercise of these warrants, which have a life
of five years. These two board members resigned on January 18, 2000. The
warrants remain outstanding.
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.
Page 7
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
Depreciation on fixed assets $337,000 $288,000 $986,000 $1,016,00
Depreciation on touring equipment -- 160,000 161,000 480,000
Amortization of film 626,000 1,025,000 1,181,000 1,751,000
Amortization of goodwill and 181,000 181,000 544,000 544,000
other
----------- ---------- ---------- ----------
Total depreciation and amortization $1,144,000 $1,654,000 $2,872,000 $3,791,000
=========== ========== ========== ==========
Depreciation and amortization included in cost of sales was $629,000 and
$1,241,000 for the three months ended March 31, 2000 and 1999, respectively, and
$1,352,000 and $2,301,000 for the nine months ended March 31, 2000 and 1999,
respectively.
NOTE 6 - NET LOSS PER COMMON SHARE
- ----------------------------------
For the three and nine months ended March 31, 2000 and 1999 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.
During the nine months ended March 31, 2000, 858 shares of common stock
were issued as a result of exercises of stock options.
On January 13, 2000, the Company's stockholders approved an amendment to
the Company's certificate of incorporation to effect a one for three and
one-half reverse stock split with no change in par values, effective for
stockholders of record on November 12, 1999. The reverse stock split was
effective January 18, 2000. All references to per share amounts and shares
outstanding included herein have been retroactively restated to reflect the
stock split.
NOTE 7 - INCOME TAXES
- ---------------------
At March 31, 2000, the Company had available federal and state tax net
operating loss carryforwards of approximately $36,169,000 and $13,083,000,
respectively. The federal and state net operating loss carryforwards expire, in
varying amounts, through 2019.
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
- -------------------
On or about April 19, 2000, nWave Pictures, a Belgian corporation
("nWave") filed a lawsuit (the "Suit") in the United States District Court for
the Central District of California against Iwerks Entertainment, Inc.
("Iwerks"). The Suit seeks damages and injunctive relief as a result of Iwerks'
alleged breaches of contract, breaches of fiduciary duty, and copyright
infringement relating to ten (10) license agreements that Iwerks and nWave
entered into in the 1990s. The Suit seeks damages from Iwerks in excess of
$475,000, injunctive relief, and an accounting of Iwerks' books and records in
connection with the licensing agreements. Iwerks has not yet responded to the
Suit. Its response must be filed by no later than May 18, 2000.
On March 9, 2000, Charles Goldwater, the former President and Chief
Executive Officer of Company, filed a Complaint in Los Angeles Superior Court
seeking $726,849.84 in severance payments. The parties have reached an agreement
in principle whereby the Company will pay Mr. Goldwater $363,424.92 over 12
months. The payments are to be secured by certain assets of the Company. The
settlement agreement is pending definitive documentation.
Page 8
NOTE 9 - IMPAIRMENT OF GOODWILL
- -------------------------------
The Company has taken a one-time non-cash writedown to Goodwill associated
with the acquisition of Omni Film International (Omni) in 1994. While the
Company continues to service Omni related products, during the three months
ended March 31, 2000 the Company made the decision to discontinue the sale of
these products. In connection with this decision, the Company determined that
the Omni product offerings were more costly to produce and can be replaced with
newer, more reliable and more cost effective technology, which the Company owns.
Thus, the goodwill related to the Omni acquisition was deemed to be impaired.
NOTE 10
- -------
The Company has been unable to pay all of its trade creditors and certain
other obligations in accordance with their terms and some of its creditors have
refused to provide further product or services except on a C.O.D. basis. The
Company has received a notice of default on its capital lease obligation, which
is secured by five portable ride simulation theatres. This obligation includes
the remaining balance owed of approximately $420,000 plus certain other
obligations due upon the termination of the lease. Absent a successful equity or
debt financing or other strategic transaction , the Company may not be able to
bring all of its trade debt current.
Page 9
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 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 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.
The Company's results for the three and nine months ended March 31, 2000
include revenues of approximately $5.9 million and approximately $22.7 million
as compared to approximately $10.4 million and approximately $26.4 million for
the comparable periods in the prior year. The three and nine months ended March
31, 2000 net loss was approximately $14.0 million and approximately $17.5
million respectively as compared to approximately $389,000 and approximately
$2.2 million. The fiscal 2000 results include a one-time non-cash writedown for
goodwill related to the Omni acquisition in 1994 (see note 9). As a consequence
of these results, including the declining sales, the cash balances have
decreased and the Company currently has negative working capital (see liquidity
section).
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. In September
1999, the Company made the determination to shut down the Touring division and
sell the related assets in an effort to concentrate on its core business.
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 the 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.
Page 10
The following table presents summary information regarding revenues
(amounts in thousands):
Periods Ended March 31,
Three Months Nine Months
--------------------- ---------------------
2000 1999 2000 1999
--------- -------- --------- ---------
Hardware Sales & Service $3,322 $5,545 $13,670 $14,977
Owned and Operated 282 909 2,115 4,010
Film Licensing 1,378 3,016 4,014 6,121
Film Production and Other 931 953 2,882 1,337
--------- -------- --------- ---------
Total $5,913 $10,423 $22,681 $26,445
========= ======== ========= =========
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999.
For the three months ended March 31, 2000 the Company recorded revenues of
approximately $5,913,000 compared to approximately $10,423,000 for the same
period last year. For the three months ended March 31, 2000, the Company
recorded a net loss of approximately $14,017,000 or $4.06 per share compared to
a net loss of approximately $389,000 or $.11 per share for the same period last
year.
REVENUES
Revenue for the three months ended March 31, 2000 decreased approximately
$4.5 million or 43% compared to the three months ended March 31, 1999.
Hardware sales and service decreased by approximately $2,223,000 or 40%
from the prior fiscal year. During the quarter ended March 31, 2000, hardware
sales recognized in the North America region decreased by approximately $1.3
million, hardware sales recognized in Europe and Middle East decreased by
approximately $1.8 million. Hardware sales recognized in Asia increased by
approximately $800,000. Revenue generated from Customer Service was $98,000
greater in the three months ended March 31, 2000 than the three months ended
March 31, 1999. In general, the hardware sales decreased due to the timing of
the recognition of revenue. The Company books revenue on a percentage completion
basis and generally the manufacturing is dependent upon the customer's defined
installation dates. In addition, the Company has experienced a decline in new
bookings as compared to last year.
Owned and Operated revenue decreased by approximately $627,000 as compared
to the same period last year, primarily due to the shut down of the touring
division and lower attendance levels in the joint venture locations.
Film Licensing revenues for the quarter ended March 31, 2000 decreased by
approximately $1,638,000 or 54% compared to the same period last year. This was
primarily due to certain theatres which signed multiple year contracts in the
prior years. The Company recognized this revenue in the prior year, consequently
no revenue was recognized in the current year for these licenses. In addition,
to a lesser extent, certain theaters did not renew license agreements in the
current year.
Film Production and other revenue decreased by approximately $22,000
compared to the same period last year.
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.
Page 11
Cost of sales as a percentage of sales was 93% for the three months ended
March 31, 2000 as compared to 74% for the three months ended March 31, 1999. The
increase is primarily an due to higher cost of hardware sales due to unexpected
cost overruns during the installation phase on one project, the recognition of
one low margin contract and the write off of certain films which did not meet
income expectations.
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 $2.7
million, as compared to approximately $3.2 million for the three months ended
March 31, 2000 and 1999, respectively. The reduction is primarily due to reduced
research and development expenses and marketing expenses partially offset by an
additional expense to settle a claim with a former employee.
IMPAIRMENT OF GOODWILL
The Company has taken a one-time non-cash writedown to Goodwill
associated with the acquisition of Omni Film International (Omni) in 1994. While
the Company continues to service Omni related products, during the three months
ended March 31, 2000 the Company made the decision to discontinue the sale of
these products. In connection with this decision, the Company determined that
the Omni product offerings were more costly to produce and can be replaced with
newer, more reliable and more cost effective technology, which the Company owns.
Thus, the goodwill related to the Omni acquisition was deemed to be impaired.
INTEREST INCOME & EXPENSE
Interest income for the three months ended March 31, 2000 and 1999 was
approximately $4,000 and $68,000, respectively. The decrease resulted primarily
from a reduction in the invested cash balances during the three months ended
March 31, 2000 compared to the comparable period in the prior year.
Interest expense for the three months ended March 31, 2000 and 1999 was
approximately $67,000 and $37,000, respectively. The increase relates to a note
payable recorded in the quarter ended June 30, 1999.
NET LOSS
The Company recorded a net loss of approximately $14 million in the
quarter ended March 31, 2000, compared to a net loss of approximately $389,000
in the quarter ended March 31, 1999 due primarily to the reasons mentioned
above.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED
MARCH 31, 1999
For the nine months ended March 31, 2000 the Company recorded revenues of
approximately $22.7 million compared to approximately $26.4 million for the same
period last year. For the nine months ended March 31, 2000, the Company recorded
a net loss of approximately $17.5 million or $5.07 per share compared to a net
loss of approximately $2.2 million or $.62 per share for the same period last
year.
REVENUES
Hardware sales and service decreased by approximately $1.3 million or 9%
from the prior fiscal year. During the nine months ended March 31, 2000,
hardware sales recognized in the Asia-Pacific region increased by approximately
$1.9 million, hardware sales recognized in the South America region increased by
approximately $1.0 million, hardware sales recognized in Europe and the Middle
East decreased by approximately $369,000 while hardware sales recognized in the
North American region decreased by approximately $4.3 million. In addition,
revenue generated from Customer Service was $436,000 greater in the nine months
ended March 31, 2000, than the nine months ended March 31, 1999. In general, the
hardware sales decreased due to the timing of the recognition of revenue. The
Company books revenue on a percentage completion basis and generally the
manufacturing is dependent upon the customer's defined installation dates. In
addition, the Company has experienced a decline in new bookings as compared to
last year.
Page 12
Owned and Operated revenue decreased by approximately $1.9 million as
compared to the same period last year, primarily due to the shut down of the
touring division. The Company has made the determination to shut down the
touring division and sell the related assets in an effort to concentrate on its
core business. Revenues generated from the touring division were approximately
$1.2 million during the nine months ended March 31, 2000, compared to $2.8
million during the nine months ended March 31, 1999. In addition, revenue from
the joint venture venues decreased by approximately $281,000. This was primarily
due to lower attendance at the joint venture locations.
Film Licensing revenues for the nine months ended March 31, 2000 decreased
by approximately $2.1 million or 34% compared to the same period last year.
These results were due to an increased number of theatres which signed multiple
year agreements during fiscal 1999, along with certain other theatres not
renewing license agreements.
Film production and other revenue increased by approximately $1.5 million.
This was primarily due to the Company securing one major film production deal
and concluding two others during the nine months ended March 31, 2000 compared
to one film production deal during the nine months ended March 31, 1999.
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 were 87% for the nine months ended
March 31, 2000 as compared to 73% for the nine months ended March 31, 1999. The
primary reason for the increase compared with the comparable period in 1999, as
a percentage of sales, was due to an increase in the cost of hardware sales due
to unexpected cost overruns during the installation phase of certain projects.
In addition, the Company took a writedown on certain films during the current
quarter, along with an increase in film production revenues, which typically
have higher cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to approximately
$8.7 million, for the nine months ended March 31, 2000 compared to $9.6 million,
for the nine months ended March 31, 1999, respectively. This decrease was
primarily due to reduced researched and development expenses, marketing
expenses, a tax refund received in October of 1999 relating to a prior period,
partially offset by an additional expense incurred in the current quarter to
settle a claim with a former employee.
INTEREST INCOME & EXPENSE
Interest income for the nine months ended March 31, 2000 and 1999 was
approximately $153,000 and $284,000, respectively. The decrease resulted
primarily from the reduction in the invested cash balances.
Interest expense for the nine months ended March 31, 2000 and 1999 was
approximately $219,000 and $124,000, respectively. The increase was due to a
note payable recorded in June 30, 1999.
NET LOSS
The Company recorded a net loss of approximately $17.5 million in the nine
months ended March 31, 2000, compared to a net loss of approximately $2.2
million in the nine months ended March 31, 1999 due to the Goodwill write-down
in the three months ended March 31, 2000 and due to the reasons mentioned above.
Page 13
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 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. In addition, the Company's ability to compete effectively in the
market is hampered by restrictions placed on its operations as a result of its
limited cash resources.
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 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 specialty 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. Ultimately, the
success of the Company in this market will be dependent upon its ability to
produce and distribute new film product and continue to improve and
technologically enhance its hardware products. Currently, the Company has had to
restrict expenditures in these areas pending receipt of new financing.
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. The
Company is aggressively pursuing the sale of the touring division.
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 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, and 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.
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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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 the Company had cash and cash equivalents of
approximately $2.0 million of which $1.0 was restricted from use by the Company
due to it being held as collateral for a standby letter of credit on a hardware
project. At that date, the Company had accounts payable of $3.8 million and
accrued liabilities and current notes payable of $7.3 million. Total negative
working capital was $2.6 million. The Company has been unable to pay all of its
trade creditors and certain other obligations in accordance with their terms and
some of its creditors have refused to provide further product or services except
on a C.O.D. basis. The Company has received a notice of default on its capital
lease obligation, which is secured by five portable ride simulation theatres.
This obligation includes the remaining balance owed of approximately $420,000
plus certain other obligations due upon the termination of the lease. Absent a
successful equity or debt financing or other strategic transaction (see below),
the Company may not be able to bring all of its trade debt current.
Because of the substantial, reduction in the Company's cash balances over
the last nine months, and contractual restrictions on the use of some of its
cash balances, the Company may not be able to continue operations at its current
levels. The Company is dependent upon current cash collections to meet its
operating needs and pay its current liabilities. The Company has experienced
significant difficulty in accurately projecting its cash balances historically.
The Company's cash flow is dependent on the timing of delivery of hardware
systems, collections and the signing of new contracts, all of which are
difficult to predict with accuracy. Further complicating its ability to project
cash balances is that the timing of progress payments of the hardware projects
are dependent upon achieving certain performance milestones under its hardware
sales agreements. In addition, progress payments on some of the Company's
hardware sales agreements are not sufficient to provide for the cost of assembly
and delivery of the systems, requiring the Company to fund the cash cost of
performing on the agreements.
The Company has made the determination to sell its touring units, which
would generate cash and is considering a number of other options to improve the
financial condition of the Company. There can be no assurance that any of these
assets will be sold. The Company is also aggressively seeking additional debt or
equity financing and other strategic alternatives. However, recent operating
losses, the Company's declining cash balances, the Company's historical stock
performance, the recent decline in revenue, and a general decrease in investor
interest in the Company's industry, may make it difficult for the Company to
attract equity investments or debt financing or strategic partners on terms that
are deemed to be favorable to the Company. The Company has been aggressively
seeking additional equity or debt financing for more than the last nine months
and to date has been unsuccessful in attracting new financing. If the Company's
financial condition continues to worsen and is unable to successfully attract
equity or debt financing or other strategic transactions, the Company could be
forced to consider steps that would protect its assets against its creditors.
In order to preserve cash, the Company has been required to reduce
expenditures for capital projects (including new films) and research and
development, and is considering further reductions in its corporate
infrastructure, any of which may have a material adverse affect on the Company's
future operations. Further reductions in its cash balances could require the
Company to make more significant cuts in its operations, which would have a
material adverse impact on its future operations. There can be no assurance that
the Company could achieve these reductions over a short enough period of time in
order to allow it to continue as a going concern.
On March 22, 2000, the Company was notified by NASDAQ that the Company
must maintain the continuing listing requirements for the national market, which
it currently does not, on or before June 22, 2000. In the event the Company
fails to comply, the Company's securities will either be transferred to the
NASDAQ Smallcap market or delisted from the NASDAQ stock market. The move from
the National Market to the Smallcap Market or a delisting, could adversely
effect the Company's ability to raise additional capital.
Page 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see note 8 to the Financial
Statements. In addition to the legal proceedings described herein, the Company
is a party to other litigation which arises in the ordinary course of business,
none of which is material.
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 MARCH 31,
2000: NONE
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
IWERKS ENTERTAINMENT, INC.
(Registrant)
By: /S/ JEFFREY M. DAHL
Senior Vice President
Chief Financial Officer
(Principal Finance Officer)
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