Form 10-K RealD Inc. For: Mar 31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended March 31, 2015 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission file number: 001-34818
RealD Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 77-0620426 (I.R.S. Employer Identification No.) | |
100 N. Crescent Drive, Suite 200
Beverly Hills, California 90210
(Address of principal executive offices)(Zip code)
(310) 385-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $0.0001 per share | New York Stock Exchange | |
(Title of each class) | (Name of each exchange on which registered) | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of the common stock held by non-affiliates of the registrant was $415,290,750 based on the last reported sale price of the registrant's common stock on September 30, 2014 (the last business day of the registrant's most recently completed second fiscal quarter) as reported by the New York Stock Exchange ($9.37 per share). As of June 4, 2015, there were 50,491,890 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference information from the registrant's proxy statement or an amendment to this Annual Report on Form 10-K to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report.
RealD Inc.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
MARCH 31, 2015
TABLE OF CONTENTS
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Unless otherwise noted or the context otherwise requires, references to the "Company," "RealD," "we," "our" or "us" in this Annual Report on Form 10-K refer to RealD Inc. and its subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND
OTHER INDUSTRY DATA
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, about our future expectations, plans or prospects and our business, which are subject to the "safe harbor" created by those sections. All statements contained in this Annual Report on Form 10-K, other than statements of historical fact, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "intends," "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements include, but are not limited to: statements concerning anticipated future financial and operating performance; statements regarding the extent and timing of future licensing, products and services, revenue levels and mix, expenses, margins, net income (loss) per diluted share, income taxes, tax benefits, acquisition costs and related amortization, and other measures of results of operations; our expectations regarding demand and acceptance for our technologies and our ability to successfully commercialize our technologies within a particular time frame, if at all; 3D motion picture releases and conversions scheduled for fiscal year 2016 ending March 31, 2016 and beyond, their commercial success and consumer preferences that, in recent periods, have trended in favor of 2D over 3D; our ability to increase the number of RealD-enabled screens in domestic and international markets and market share; our ability to supply our products to our customers on a timely basis; our relationships with exhibitor and studio partners and the business model for 3D eyewear in North America; any discussion regarding strategic alternatives; the progress, timing and amount of expenses associated with our research and development activities; market and industry growth opportunities and trends in the markets in which we operate, including in 3D content; our plans, strategies and expected opportunities, including the development and evaluation of any potential strategic alternatives; the deployment of and demand for our products and products incorporating our technologies; competitive pressures in domestic and international cinema markets impacting licensing and product revenues; and our ability to execute and achieve anticipated savings or other benefits from our cost reduction efforts.
Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including the risks set forth in the section entitled "Risk factors" in Part I, Item 1A of this Annual Report on Form 10-K and elsewhere in this filing. Forward-looking statements are based on the beliefs and assumptions of our management based on information currently available to management. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform our prior statements to actual results.
This Annual Report on Form 10-K also contains estimates and other information concerning our industry, including business segment and growth rates, that we obtained from industry publications, surveys and forecasts. Unless we otherwise specify, industry and market data is given on a calendar year basis and is current as of December 31, 2014. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. Although we believe the information in these industry publications, surveys and forecasts is reliable, we have not independently verified the accuracy or completeness of the information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled "Risk factors" in Part I, Item 1A of this Annual Report on Form 10-K.
RealD and the RealD logo are trademarks of RealD Inc. All other trademarks and service marks appearing in this Annual Report on Form 10-K are the property of their respective holders and all rights are reserved. The absence of a trademark or service mark or logo from this Annual Report on Form 10-K does not constitute a waiver of trademark or other intellectual property rights of RealD Inc., its affiliates and/or licensors.
Website and Social Media Disclosure
We use our website (www.reald.com), our corporate Facebook account (www.facebook.com/RealD3D) and our corporate Twitter account (@RealD3D) to disseminate information about the Company. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to our filings with the Securities and Exchange Commission, or SEC, public conference calls and press releases. The contents of our website, Facebook account and Twitter account are not, however, a part of this Annual Report on Form 10-K.
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PART I
Item 1. Business
Overview
We are a leading global licensor of 3D and other visual technologies. Our extensive intellectual property portfolio is used in applications that enable a premium viewing experience in the theater, the home and elsewhere. We license our RealD Cinema Systems to motion picture exhibitors that show 3D motion pictures and alternative 3D content. We also provide certain of our technologies to consumer electronics manufacturers and content distributors and will continue to leverage our extensive intellectual property portfolio to develop additional revenue opportunities.
Competitive strengths
Our competitive strengths include the following:
Innovative technology
Our technical expertise has allowed us to develop new and innovative visual technologies for viewing 3D content in the theater, the home and elsewhere. Working with Disney to release Chicken Little in 3D in 2005, we became the first company to commercially enable 3D theater screens using digital projection. Our patented RealD Cinema Systems deliver superior light output, providing for a high quality, brighter image and enabling display on larger theater screens than most competing technologies. Many of our licensees, including the top 3 largest exhibition groups in the world, Dalian Wanda Group (Wanda), which owns approximately 78% of American Multi-Cinema, Inc. (AMC), Cinemark USA, Inc. (Cinemark), and Regal Cinemas, Inc. (Regal), deploy our RealD Cinema Systems on their own premium-branded large-screen auditoriums. We have also made available certain of our technologies to consumer electronics manufacturers and content distributors to enable the delivery and viewing of 3D content. Our extensive intellectual property portfolio, which is based on years of research and development, consists of approximately 281 individual issued patents and approximately 359 pending patent applications in approximately 18 jurisdictions worldwide. We will continue to develop technologies to deliver a RealD experience both in theaters and elsewhere and create additional opportunities. Our research, development and engineering teams have expertise in many disciplines, including:
• | polarization control (the manipulation of light); |
• | photonics (the application of electromagnetic energy, incorporating laser technology, electrical engineering, materials science and information storage and processing); |
• | optics (the branch of physics that deals with light and vision); |
• | liquid crystal physics (the application of elements at the border between the solid and liquid phase to the creation of nanoscale devices); and |
• | digital image processing (the use of computer algorithms to perform image processing on digital images). |
Global leader in 3D-enabled theater screens
As of March 31, 2015, our RealD Cinema Systems were deployed on approximately 26,700 theater screens in 70 countries, which we believe are substantially more 3D screens than any of our competitors. Of the world's top 25 motion picture exhibition groups, 18 utilize RealD Cinema Systems in their theaters, including the top 3 largest exhibition groups in the world: Wanda (including AMC), Cinemark and Regal. Our licensees include approximately 1,200 motion picture exhibitors and we are actively engaged with other motion picture exhibitors regarding potential new license agreements. During our fiscal year ended March 31, 2015, domestic box office on RealD-enabled screens represented approximately 77% of total domestic 3D box office and we estimate that worldwide box office on RealD-enabled screens represented approximately 57% of the total worldwide 3D box office.
Premium brand
We believe our brand is well-recognized among licensees and consumers as a result of motion picture studios and exhibitors co-branding with us and moviegoers having worn our branded RealD eyewear more than 1.5 billion times. We believe the prominence of our brand in the motion picture industry will enhance our marketing efforts of other technologies we are developing.
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Scalable licensing model
We license our 3D technologies under a highly scalable business model with recurring revenue from those licensees. As an example, our multi-year (typically five years or longer), generally exclusive agreements with motion picture exhibitors generate revenue on a per-admission, periodic fixed-fee or per-motion picture basis at limited incremental direct cost to us. We believe motion picture exhibitors prefer our licensing model, which includes field upgradeable enhancements and maintenance, because it reduces their capital expenditures and the risk they may purchase equipment that will become obsolete. We believe our motion picture exhibitor licensees also prefer our low-cost RealD eyewear because it requires fewer personnel (no active collecting or washing by motion picture exhibitors) and reduces motion picture exhibitors' loss from theft and breakage.
Extensive industry relationships and strong technical expertise
Our experienced management team, including Michael V. Lewis, our Chairman and Chief Executive Officer, Andrew A. Skarupa, our Chief Financial Officer, and Leo Bannon, our Executive Vice President, Global Operations, has operational expertise and extensive, long-term relationships with content producers and distributors, major motion picture studios and exhibitors, and consumer electronics manufacturers that help us drive the proliferation of 3D content, delivery and viewing in theaters and elsewhere. Our research and development team, primarily based in our Boulder, Colorado facility, is comprised of leaders in the invention, development and commercialization of innovative 3D and other technologies.
Strategy
Key elements of our strategy include:
Continue to innovate and develop new technologies
We continue to develop proprietary technologies to perfect the visual image and create additional revenue opportunities. We endeavor to improve our RealD Cinema Systems and other cinema technologies to deliver an even better and more immersive viewing experience to consumers in theaters in both 3D and 2D. We license our 3D technologies for use in professional and other non-theatrical applications, which we believe will continue to provide a strong foundation for our development of new 3D and other technologies. We have made available certain of our technologies to consumer electronics manufacturers and content distributors to enable the delivery and viewing of 3D content. In 2013, we introduced RealD TrueImage, a content enhancement technology, which was originally developed to increase our technological advantage in cinema through improved 3D image quality, but which has 2D cinema and consumer applications as well. We have developed intelligent backlight technology for liquid crystal displays (LCDs), which directs the LCD's light field, allowing for power savings, outdoor readability, privacy and glasses-free 3D. We may also selectively pursue technology acquisitions to expand and enhance our intellectual property portfolio in areas that complement our existing and new market opportunities and to supplement our internal research and development efforts.
Increase our leading global share in 3D-enabled theater screens, particularly in international markets
We continue to work with our existing motion picture exhibitor licensees to deploy additional RealD Cinema Systems. We also plan to enter into agreements with new motion picture exhibitor licensees to increase the number of deployed RealD Cinema Systems worldwide. We believe there is a significant opportunity for us to continue to expand our business internationally and to license our 3D technologies to international motion picture exhibitors based on a licensing model that is similar to our domestic model. In particular, China is a fast-growing cinema market where movie-going consumers have strongly embraced 3D films. Rapid growth in Chinese cinema screens has helped to drive an increase in total Chinese box office receipts of more than 30% for the past several years. China's total box office is widely expected to surpass North America to become the largest cinema market worldwide by 2020.
Encourage filmmakers and studios to create additional 3D films
We continue to work with film studios and filmmakers to encourage their production of additional 3D films. Our efforts include further educating the filmmaking community about 3D trends and ensuring that the entire ecosystem fully appreciates the powerful economic benefits of 3D filmmaking, particularly in growing cinema markets overseas where moviegoers' interest in 3D cinema has increased in recent years. A positive driver of the compelling economics for studios is that the incremental cost of 3D filmmaking has declined considerably in recent years, while the quality of 3D filmmaking has continued to improve. Our efforts also include encouraging studios and film directors to consider 3D as a creative tool for films beyond the typical 3D genres.
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Build upon the strength of our RealD brand
It is our goal to make RealD the best known 3D technology brand in the world, associated with delivering the highest quality 3D viewing experience in the global marketplace. We will further leverage the strength of our brand to generate stronger licensee and consumer preference for a RealD experience in theaters. We continue to actively encourage motion picture studios and exhibitors to prominently feature our brand in their motion picture advertising and marketing, at theater locations and online. We will also continue our advertising efforts to strengthen our brand in the theatrical and consumer electronics industries. We plan to use our brand to drive the continued adoption of our other technologies in existing and new applications.
Industry
History of 3D
First used commercially in a public theater in 1922, 3D technology has been used by content producers in an effort to enhance the viewing experience. 3D imagery is created using stereoscopic photography, which is a process that creates the illusion of 3D by using a pair of 2D images. Each image represents a different perspective of the same object, emulating the different perspectives that binocular vision captures. When the two images are viewed by each eye, the brain fuses the two images to form a single picture, creating the illusion of 3D. 3D technology has a wide range of applications including entertainment, research and development, scientific exploration and manufacturing.
Innovation in 3D technology has centered on optimizing the projection of stereoscopic images as well as the filtering of the image intended for each eye. Early 3D exhibition required the use of two projectors, one to project the reel for each eye to create the stereoscopic image, which required synchronization that was difficult to achieve due to the manual operation of projectors. To view a stereoscopic image, audiences utilized 3D eyewear that employed different filters that did not maintain the quality of a standard motion picture image and caused discomfort including eye strain and headaches.
Benefiting from the continuing adoption of digital projection, the newest wave of 3D projection uses digital technologies that address many of the limitations of previous methods of 3D projection. The use of high definition digital projectors, advances in the construction of silver screens and the use of polarization filters and polarized lenses have broadened the color spectrum, and reduced eyestrain and synchronization issues that caused headaches, thus greatly improving the 3D viewing experience.
The launch of modern 3D digital projection for motion pictures was marked by the presentation of Chicken Little by Disney in November 2005, which debuted on approximately 100 RealD-enabled screens. Since the debut of Chicken Little in 2005 through March 31, 2015, more than 200 major 3D motion pictures have been released on RealD-enabled screens including eight of the top 10 grossing films of all time. In addition, eight of the 10 highest grossing motion pictures released in 2014 were exhibited in RealD 3D.
Cutting-edge 3D technology has also been deployed in other applications including scientific research. For example, NASA has utilized 3D technology to analyze damage to the Space Shuttle and to navigate the Mars Rover. Industrial applications for 3D technology include the use of 3D visualization by biotech firms for the development of pharmaceuticals, by aircraft and motor vehicle manufacturers like McDonnell Douglas Corp., Caterpillar Inc. and Harley Davidson, Inc. for the design of new prototypes and by major energy companies such as Chevron that utilize 3D technology to reduce the cost and environmental impact of exploration by analyzing oil and gas fields in virtual 3D environments.
Market opportunity
Our visual technologies can be used in many different applications and businesses, including entertainment, consumer electronics, education, aerospace, defense and healthcare. Our 3D technologies are primarily used in the motion picture industry.
The shift in the motion picture industry from analog to digital over the past decade has created an opportunity for new and transformative 3D and other visual technologies. As of December 31, 2014, approximately 127,700 digital theater screens were deployed worldwide, representing over 90% of the worldwide installed base. Certain major film studios have stated that they will stop making available analog versions of their motion pictures within the next few years, which should contribute to further migration of cinema screens to digital projection, thereby expanding our growth opportunity. Our RealD Cinema Systems function as an enhancement to digital projectors and, therefore, require cinemas to be equipped with a digital projector prior to installation.
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The following chart illustrates, as of December 31, 2014, the approximate total number of theater screens worldwide, the approximate number of theater screens that have been converted to digital and the approximate number of digital theater screens that are 3D-enabled.
__________________________________________________________________________________________
(1) | Of the estimated 64,900 worldwide digital theater 3D-enabled screens as of December 31, 2014 (per Screen Digest), 26,500 were RealD-enabled screens, representing a nearly 41% share. As of March 31, 2015, RealD had deployed approximately 26,700 screens worldwide. |
The growth in 3D screens and 3D motion picture attendance worldwide has contributed to an increase in the worldwide box office generated by 3D screens in recent years. In 2014, 3D-enabled screens generated an estimated $7.1 billion in worldwide 3D box office (according to provisional figures from IHS), representing 20% of the $35.9 billion in total worldwide box office in 2014. In both 2014 and 2013, eight of the top 10 grossing films worldwide were exhibited in RealD 3D. We continue to experience growth in box office revenue in China in recent years, which was 45% of total 3D box office in 2014 as compared to 43% in 2013. We anticipate that approximately 30 3D motion pictures produced by domestic studios will be released worldwide in our fiscal year 2016, including sequels to successful major motion picture franchises, such as The Avengers, Jurassic Park, Terminator, Hotel Transylvania, Paranormal Activity, Star Wars, The Nut Job, Kung Fu Panda and The Hunger Games. However, we believe the 3D cinema business is maturing in many markets like the United States where our equipment installations have slowed.
In addition to major 3D releases produced by domestic film studios, an increasing number of 3D motion pictures are being produced overseas for release in various international markets. For example, The Monkey King and Taking of Tiger Mountain generated approximately $170 million and $130 million, respectively, in total box office during 2014 and Journey to the West 3D and Young Detective Dee: Rise of the Sea Dragon 3D generated nearly $200 million and $100 million, respectively, in total box office during 2013. All four films were produced in China, the second-largest cinema market in the world. Similarly, two movies were produced in Russia, Viy 3D in 2014 and Stalingrad 3D in 2013, which generated nearly $32 million and $39 million in total box office, respectively.
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The following table shows the major domestically produced 3D motion pictures released or scheduled for release on domestic and/or international 3D-enabled screens for the fiscal year 2016 ending on March 31, 2016. Information provided includes the motion picture studios and the release dates for those motion pictures (announced as of June 11, 2015):
Film | Motion Picture Studio | Domestic Release Date | ||
Avengers: Age of Ultron | Disney / Marvel | 5/1/2015 | ||
Mad Max: Fury Road | Warner Bros. | 5/15/2015 | ||
Poltergeist | Fox | 5/22/2015 | ||
San Andreas | Warner Bros. | 5/29/2015 | ||
Jurassic World | Universal | 6/12/2015 | ||
Inside Out | Disney | 6/19/2015 | ||
Terminator Genisys | Paramount | 7/1/2015 | ||
Minions | Universal | 7/10/2015 | ||
Ant-Man | Disney | 7/17/2015 | ||
Pixels | Sony | 7/24/2015 | ||
Underdogs | Weinstein | 8/14/2015 | ||
Everest | Universal | 9/18/2015 | ||
Hotel Transylvania 2 | Sony | 9/25/2015 | ||
The Walk | Sony | 10/2/2015 | ||
Pan | Warner Bros. | 10/9/2015 | ||
Goosebumps | Sony | 10/16/2015 | ||
Paranormal Activity: The Ghost Dimension | Paramount | 10/23/2015 | ||
Peanuts | Fox | 11/6/2015 | ||
Hunger Games: Mockingjay, Part 2 | Lionsgate | 11/20/2015 | ||
The Martian | Fox | 11/25/2015 | ||
The Good Dinosaur | Disney | 11/25/2015 | ||
In the Heart of the Sea | Warner Bros. | 12/11/2015 | ||
Star Wars: The Force Awakens | Disney | 12/18/2015 | ||
Point Break | Warner Bros. | 12/25/2015 | ||
The Nut Job 2 | Open Road Films | 1/15/2016 | ||
Kung Fu Panda 3 | Fox | 1/29/2016 | ||
The Finest Hours | Disney | 1/29/2016 | ||
Zootopia | Disney | 3/4/2016 | ||
Monster Trucks | Paramount | 3/18/2016 | ||
Batman v Superman: Dawn of Justice | Warner Bros. | 3/25/2016 | ||
We believe that more 3D-enabled theater screens will be needed in the future in fast-growing international markets such as China to provide the necessary capacity to fully capitalize on commercially successful 3D motion pictures. In mature markets like the United States where installations of our RealD Cinema Systems are slowing, we are working with our studio and exhibitor partners to maximize the revenues generated by our existing platform.
Key applications
We believe that we possess innovative technology, a significant market presence, a premium brand and a scalable licensing model in our key applications.
We design, manufacture, license and market our RealD Cinema Systems that enable digital cinema projectors to show 3D motion pictures and alternative 3D content to consumers wearing our RealD eyewear.
Technology. We believe our RealD Cinema Systems' patented 3D digital projection technology delivers the brightest light output of any RealD competitor in the the market. Because light output is one of the most significant factors in producing a
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high quality 3D image, we believe we are able to reach larger screens with our RealD digital projection technology than the majority of other 3D digital projection technology providers. For example, our RealD XL Cinema System using our polarizing technology can deliver crisp and clear 3D content to screens with a single digital DLP projector (digital light processing, based on Texas Instruments chip technology) and the same lamp and lamp power as a 2D presentation. Our RealD Cinema Systems:
• | are relatively inexpensive to deploy and include field upgradeable enhancements and maintenance at no additional charge to the exhibitor; |
• | produce full color (as compared to others' stereoscopic/spectral 3D that relies on eyewear with red and green color filters that cause a substantial loss of available colors); |
• | reduce most "ghost images" caused by the left eye seeing a small portion of the right-eye frames and vice versa; and |
• | can be viewed with our circular polarized passive RealD eyewear, which allow consumers to move around with reduced image distortion. |
Market presence. Our RealD Cinema Systems are the world's most widely deployed digital 3D cinema technology based on the number of theater screens installed worldwide. As of March 31, 2015, our RealD Cinema Systems were deployed on approximately 26,700 theater screens in 70 countries worldwide. As of December 31, 2014, our RealD Cinema Systems accounted for more than 85% of the estimated domestic 3D-enabled theater screens and nearly 41% of the 3D-enabled theater screens deployed worldwide. During our fiscal year ended March 31, 2015, domestic box office on RealD-enabled screens represented approximately 77% of total domestic 3D box office and we estimate that worldwide box office on RealD-enabled screens represented approximately 57% of the total worldwide 3D box office. We expect to continue to grow our cinema business based on an increasing number of theater screens becoming RealD-enabled internationally, an increasing number of RealD-compatible 3D motion pictures being released and the 3D platform being optimized in mature markets.
The following chart illustrates the number of theater locations with RealD-enabled screens and the total number of RealD-enabled screens:
Years ended March 31 | ||||||||
(approximate numbers) | 2015 | 2014 | 2013 | |||||
Number of RealD-enabled screens (at period end) | ||||||||
Total domestic RealD-enabled screens | 13,600 | 13,400 | 12,800 | |||||
Total China RealD-enabled screens | 2,050 | 1,550 | 1,100 | |||||
Total rest of world RealD-enabled screens | 11,050 | 10,250 | 8,800 | |||||
Total RealD-enabled screens | 26,700 | 25,200 | 22,700 | |||||
Number of locations with RealD-enabled screens (at period end) | ||||||||
Total domestic locations with RealD-enabled screens | 3,000 | 3,000 | 2,800 | |||||
Total China locations with RealD-enabled screens | 300 | 250 | 200 | |||||
Total rest of world locations with RealD-enabled screens | 2,850 | 2,650 | 2,500 | |||||
Total locations with RealD-enabled screens | 6,150 | 5,900 | 5,500 | |||||
Number of 3D motion pictures (released domestically during period) | 29 | 35 | 35 | |||||
At most RealD theater locations, there are multiple RealD-enabled screens. We believe that having more RealD-enabled screens per location will allow us to accommodate simultaneous 3D motion picture releases and provide the necessary capacity to fully capitalize on commercially successful 3D motion pictures. We believe the commercial success of 3D motion pictures will facilitate and further encourage the conversion of theater screens to digital and 3D. After motion picture exhibitors convert their projectors to digital cinema, they must install a polarization preserving screen and our RealD Cinema Systems in order to display motion pictures in RealD 3D.
Content. There were 29 3D films exhibited on our RealD domestic cinema systems in fiscal year 2015 as compared to 35 in fiscal year 2014. As of June 11, 2015, we expect approximately 30 3D motion pictures to be released on our domestic screens during our fiscal year 2016, which ends on March 31, 2016, all of which we expect will be exhibited using our RealD Cinema Systems. In addition, we expect a growing number of foreign 3D films produced overseas to be released on our international RealD-enabled screens during our fiscal year 2016.
We believe that the success of major 3D motion pictures, and the growth of an industry consortium called Digital Cinema Distribution Coalition (DCDC), which enables the digital distribution of content through a net work of satellite and terrestrial
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distribution technologies, will drive the creation and theatrical distribution of more alternative content and live broadcast events in 3D. Alternative content can also be viewed on our RealD-enabled screens.
Brand. Motion picture studios often co-brand RealD in motion picture marketing and advertising. Motion picture exhibitors display our brand at theaters, on-screen and online. Moviegoers have worn our branded RealD eyewear more than 1.5 billion times. Our in-theater branding includes signage at the box office where tickets are purchased, signage in the lobby and in poster cases in and around the theater, branded recycling bins located at each auditorium entrance and exit, an on-screen animated 3D preview informing consumers when to put on their eyewear and reminding them to recycle their eyewear after the motion picture. Our brand also appears on major online ticketing websites aligned with show times at theaters equipped with our RealD technology. We believe our branded 3D experience will lead to increased admissions as consumers recognize our brand as the leading choice for 3D viewing, prompting motion picture exhibitors to select us as their 3D technology licensor.
Licensing model. We license our RealD Cinema Systems to motion picture exhibitors under multi-year (typically five years or longer) agreements that are generally exclusive and from which we generally receive license fees on a per-admission basis. Our agreements with motion picture exhibitors provide us with recurring revenue as 3D motion pictures are exhibited using our 3D technologies. We continue to focus on optimizing our revenues from our existing platforms in more mature markets like the United States and believe our cinema business will continue to grow in international developing markets based on several factors including the number of additional RealD Cinema Systems our existing motion picture exhibitor licensees are expected to deploy, our market presence and the number of 3D motion pictures slated for future release domestically and internationally.
We license and market systems to motion picture exhibitors based on the type of digital projector installed and theater configuration: the RealD ZScreen, the RealD XL Cinema System, the RealD XLS Cinema System and the RealD XLW Cinema System, which is designed specifically for premium large screen auditoriums with stadium seating configurations, as well as LUXE: A RealD Experience, our premium large format brand, which launched in Russia in fiscal year 2014 and recently expanded to China in fiscal year 2015. Our RealD XL Cinema System can be displayed on screens up to 82 feet wide, and our RealD Cinema Systems will be scalable to larger formats as projector technology evolves. The RealD XLW Cinema System, introduced in January 2011, can accommodate a throw ratio as wide as 1.0 (projection distance divided by screen width), and is designed for use in premium large screen motion picture auditoriums, theme parks and specialty theaters with stadium seating. LUXE: A RealD Experience auditoriums use our brightest 3D projection technology, wall-to-wall/floor-to-ceiling screens of at least 16 meters in width, immersive sound systems and auditorium rakes to optimize the moviegoer's views. We also recently introduced a RealD Cinema System for dual projector installations that is capable of delivering more light than other dual-projector 3D systems. Based on our actual experience, we believe we can upgrade almost any theater that has an existing digital cinema projector with our RealD Cinema Systems within a few hours. Under our agreements with motion picture exhibitors, we provide field upgradeable enhancements and maintenance on our RealD Cinema Systems at no additional charge to the exhibitor.
We believe our RealD Cinema Systems are a compelling and scalable technology for the motion picture industry. Motion picture producers can tell their stories in more creative and compelling ways through the use of 3D technology. As evidenced by the record-setting performances of Iron Man 3 and Gravity, releasing content on RealD-enabled screens can result in increased ticket sales at premium prices, enhanced monetization of a motion picture's initial release as well as enhanced monetization of a film's downstream revenue sources (such as pay television rights), which are often negotiated based on a film's theatrical success at the box office. As a result, 3D filmmaking can provide a more attractive return on investment to motion picture producers and distributors with only limited incremental costs compared to producing a film in 2D. Motion picture exhibitors share in the benefit of increased motion picture ticket sales at premium prices despite requiring very limited up-front costs to deploy RealD's Cinema Systems. We also believe consumers benefit from a superior 3D entertainment experience.
Other technologies and applications
We actively seek to have our 3D and other technologies incorporated into new devices by making them available to licensees, including consumer electronics manufacturers, content producers and content distributors.
Technology. We continue our development efforts of next-generation 3D and other visual technologies. We have developed intelligent backlight technology for LCDs that directs the LCD's light field, allowing for power savings, outdoor readability, privacy and potentially glass-free viewing of 3D content. Our patented high brightness, passive eyewear-based 3D display could be used with high definition displays without significantly degrading image resolution as experienced with competing passive eyewear 3D display technologies.
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In 2013, we introduced RealD TrueImage, a content enhancement technology, which was originally developed to increase our technological advantage in cinema through improved 3D image quality, but which has 2D cinema and consumer applications as well.
Competitive presence. Our 3D and other technologies can be deployed across the entire range of consumer electronics. We have made available certain of our technologies to consumer electronics manufacturers and content distributors to enable the delivery and viewing of 3D content.
Content. Building on the success of major 3D motion pictures released in theaters, we believe consumers' desire for 3D consumer electronics will be stimulated with the creation and distribution of new motion pictures and other forms of 3D content. There may be opportunities to provide live broadcast events in 3D, including sporting events, concerts, cultural and other live events, for 3D interactive games, as well as other new and alternative 3D content for the home and elsewhere, which will further stimulate the demand for RealD-enabled visual display technologies.
Brand. We believe the strength of our brand in the motion picture industry will assist us in the consumer electronics space.
Licensing model. Although we have not yet generated material revenue outside of the motion picture industry, we believe there will be future revenue opportunities for licensing our 3D and other technologies in other industries.
Professional and Non-Theatrical Applications. Our 3D technologies are utilized by Fortune 500 companies, government, academic institutions and research and development organizations for a variety of applications. Our 3D technologies have also been used for theme park installations, including LEGOLAND®.
Our history
RealD was founded in 2003 with the goal of bringing a premium 3D viewing experience to audiences everywhere. In 2005, we acquired Stereographics Corporation, or Stereographics, a company founded in 1980 and one of the largest providers of 3D technologies at the time of the acquisition. In 2007, we acquired ColorLink Inc., or ColorLink, a polarization control, photonics and optics company with an extensive patent portfolio. ColorLink, which was founded in 1995, had played an instrumental role collaborating with RealD to develop our first cinema system. In March 2005, we demonstrated our initial RealD Cinema System to motion picture exhibitors and studios. In November 2005, Disney released Chicken Little in 3D on approximately 100 RealD-enabled screens. In 2008, we established a RealD sales and operating presence in Europe and also entered 3D consumer electronics with a number of 3D technologies for the home and elsewhere. In December 2009, Fox released Avatar worldwide, including on approximately 4,200 RealD-enabled screens. In 2010, we established a RealD sales and operating presence in China and Hong Kong. In 2012, we established a RealD sales and operating presence in Russia. In 2013, RealD surpassed 20,000 3D-equipped cinema screens worldwide and also established a RealD sales and operating presence in Latin America. In 2015, RealD surpassed 26,700 RealD-enabled cinema screens worldwide.
Licensees
In our cinema business, our primary licensees are motion picture exhibitors that use our RealD Cinema Systems, including 18 of the top 25 motion picture exhibition groups in the world. As of March 31, 2015, we had multi-year (typically five years or longer) agreements that are generally exclusive with our motion picture exhibitor licensees in both the domestic and international markets. However, our license agreements typically do not obligate motion picture exhibitors to deploy a specific number of our RealD Cinema Systems according to a specific timeline. License revenue from Wanda (including AMC), Cinemark and Regal collectively comprised approximately 31% of our total license revenue in the year ended March 31, 2015, 33% in the year ended March 31, 2014 and 22% in the year ended March 31, 2013. As of March 31, 2015, we had two licensees that each accounted for more than 10% of our total license revenue, one of which accounted for 15% and the other for 11%. As of March 31, 2014, we had two licensees that each accounted for more than 10% of our total license revenue, one of which accounted for 14% and the other for 13%. No licensee accounted for more than 10% of our total license revenue in fiscal year 2013.
Sales and marketing
We market and license our 3D and other visual technologies throughout the motion picture, consumer electronics and professional industries through an internal sales team. We maintain sales offices in the United States, the United Kingdom, Russia, Japan, Hong Kong, China and Brazil. We focus our marketing efforts on motion picture studios and exhibitors, consumer electronics manufacturers, interactive game companies, content producers and content distributors. We reach these customers primarily through industry trade shows, public relations and our website and studio events.
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Research and development
We believe we must continue to develop or acquire innovative technologies on a regular basis to maintain our competitive edge. We monitor trends in the motion picture, consumer electronics and professional industries to stay abreast of new developments. We further monitor relevant intellectual property and other public domain information. Our research and development is focused on developing innovative visual technologies and building and testing products that could potentially incorporate our 3D and other technologies. Once the proof of concepts are developed, built and tested, our technologies may be licensed to motion picture exhibitors and consumer electronics manufacturers.
Our research and development expenses were $19.5 million for the year ended March 31, 2015, $19.7 million for the year ended March 31, 2014 and $19.5 million for the year ended March 31, 2013. In addition, we have made significant investments in intellectual property through acquisitions, including our acquisitions of Stereographics and ColorLink and a portfolio of patents from Digital Domain Media Holdings.
Manufacturing and supply
RealD Cinema Systems. We purchase optical and mechanical components for our RealD Cinema Systems from multiple suppliers and manufacture our RealD Cinema Systems in Boulder, Colorado. We have also entered into a large number of license and deployment agreements with digital cinema projector and server companies that grant them a limited, royalty-free license related to the use of RealD technology into digital cinema projection systems.
RealD eyewear. Our RealD eyewear is an integral part of our RealD Cinema Systems. Our circular polarized passive RealD eyewear allows consumers to move around with reduced image distortion and is comfortable and sanitary, which we believe provides convenience to consumers. We have entered into non-exclusive agreements with several manufacturers to produce RealD eyewear. We manage worldwide manufacturing and distribution of RealD eyewear and we operate a domestic recycling program for our RealD eyewear. Domestically, we provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by movie goers. Most international motion picture exhibitors purchase RealD eyewear directly from us and sell them to consumers as part of the admission fee or as a concession item. As a result, we are one of the world's largest distributors of passive 3D eyewear. Our recyclable eyewear is designed to fit comfortably on most viewers and easily over prescription eyewear. We also make available kids size RealD 3D eyewear.
RealD installation, repair and maintenance services. We hire independent contractors to perform installation, repair and maintenance services related to our RealD Cinema Systems.
Competition
The market for visual display technologies is highly competitive.
Our primary competitors for our RealD Cinema Systems include Dolby Laboratories, Inc. (Dolby), X6D Limited (Xpand), MasterImage 3D, LLC (MasterImage), Sony Electronics (Sony), and IMAX Corporation (IMAX). As of December 31, 2014, these and other competitors had enabled approximately 38,400 worldwide theater screens, collectively, as compared to our approximately 26,500 RealD-enabled worldwide theater screens (which subsequently increased to approximately 26,700 screens as of March 31, 2015). Consumers may be more familiar with some of our competitors' brands in the motion picture industry. However, we believe we differentiate ourselves from our competitors in the motion picture industry for reasons that include the following:
• | we provide premium technologies that are highly regarded by licensees and others in the motion picture industry; |
• | our RealD Cinema Systems deliver superior light output providing for a high quality image and enabling display on single projector larger theater screens than most competing technologies; |
• | we offer motion picture exhibitors a licensing model that includes field upgradeable enhancements and maintenance at no additional charge, which reduces their capital expenditures and the risk that they may purchase equipment that will become obsolete; |
• | compared to most of our competitors' eyewear in the motion picture industry, our circular polarized passive RealD eyewear allows consumers to move around with reduced image distortion; and |
• | our RealD eyewear model requires fewer personnel (no active collecting or washing by motion picture exhibitors) and reduces motion picture exhibitors' loss from theft and breakage. |
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Intellectual property
Our success depends in large part upon our ability to obtain and maintain protection for our proprietary technologies. We have a substantial base of intellectual property assets, including patents, trademarks, copyrights, trade secrets and know-how.
We have numerous patents covering unique aspects and improvements for many of our technologies. As of March 31, 2015, we had over 266 patent families comprising approximately 281 individual issued patents and approximately 359 pending patent applications in approximately 18 jurisdictions worldwide. Our issued patents are scheduled to expire at various times through January 2035. Of these, 12 patents are scheduled to expire in calendar year 2015 and 11 patents are scheduled to expire in calendar year 2016 and six patents are scheduled to expire in calendar year 2017. We believe the expiration of these patents will not adversely affect our business. Our patents are used in the areas of algorithms, autostereo, eyewear, projection, format, direct view, retarder stack filters, polarization switches, eyewear protection, color switching and other areas. We currently derive our license revenue principally from our RealD Cinema Systems. Patents relating to our RealD Cinema Systems will expire over time through 2035. We pursue a general practice of filing patent applications for our technology in the United States and outside of the United States where our licensees manufacture, distribute or sell licensed products and where our competitors manufacture, distribute or sell competing products. We actively pursue new applications to expand our patent portfolio to address new technology innovations. We also from time to time acquire intellectual property through acquisitions, such as our purchase of a portfolio of 2D-3D conversion patents from Digital Domain Media Holdings, and our acquisitions of Stereographics and ColorLink. We are actively engaged in the enforcement and protection of our intellectual property rights worldwide.
We have approximately 67 trademark and service mark registrations and pending applications worldwide for a variety of word marks, logos and slogans. Our registered and common law trademarks are an integral part of our licensing program and licensees typically elect to place our trademarks on their products to inform consumers that their products incorporate our technology and meet our quality specifications.
Employees
As of March 31, 2015, we had 162 employees located in the United States, the United Kingdom, Japan, Hong Kong, Taiwan, China, Russia and Brazil. Approximately 30 employees are engaged in research and development, approximately 39 employees are in operations, and approximately 93 employees are in sales and general and administrative functions. None of our employees are represented by a labor union, and we consider our employee relations to be good.
Available Information
We file annual, quarterly and special reports and other information with the SEC. Our filings with the SEC are available to the public on the SEC's website at www.sec.gov. Those filings are also available to the public on, or accessible through, our website for free via the "Investor Relations" section at www.reald.com. The information we file with the SEC or contained on or accessible through our corporate website is not incorporated by reference herein and is not part of this Annual Report on Form 10-K. You may also read and copy, at SEC prescribed rates, any document we file with the SEC at the SEC's Public Reference Room located at 100 F Street, N.E., Washington D.C. 20549. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.
Item 1A. Risk factors
The following risk factors and other information included in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business, results of operations, financial condition and/or liquidity. If any of these events or the following risks actually occur, our business, operating results and financial condition could be materially adversely affected, and you could lose all or part of your investment.
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Risks relating to our business and our industry
If motion pictures that can be viewed with RealD Cinema Systems are not made or are not commercially successful, our revenue will decline.
Almost all of our revenue is currently dependent upon both the number of 3D motion pictures released and the commercial success of those 3D motion pictures. Although we have produced alternative content in 3D, such as the production of Carmen in 3D with London's Royal Opera House, we are not actively developing 3D motion pictures or our own 3D content, and therefore, we rely on motion picture studios to produce and release 3D motion pictures compatible with our RealD Cinema Systems. There is no guarantee that the number of 3D motion pictures being released will remain at current levels or increase, or that motion picture studios will continue to produce 3D motion pictures at all. Motion picture studios may refrain from producing and releasing 3D motion pictures for any number of reasons, including their lack of commercial success, changes in consumer preferences, the lower-cost to produce 2D motion pictures or the availability of other entertainment options. The commercial success of a 3D motion picture depends on a number of factors that are outside of our control, including whether it achieves critical acclaim, timing of the release, cost, marketing efforts and promotional support for the release. In the past, consumer interest in 3D motion pictures was episodic and motion picture studios tended to use 3D motion pictures as a gimmick rather than as an artistic tool to enhance the viewing experience. Consumer preferences have recently trended toward viewing motion pictures in 2D rather than 3D resulting in weaker box office performance. Weaker box office performance of 3D motion pictures may result in motion picture studios producing fewer 3D motion pictures or motion picture exhibitors may reduce the frequency in which they show motion pictures in 3D or may decide not to show 3D motion pictures at peak movie-going hours. Poor box office performance of 3D motion pictures, disruption or reduction in 3D motion picture production or conversion of 2D motion pictures into 3D motion pictures, changes in release schedules, the inability to see 3D motion pictures at peak hours, cancellations of motion picture releases in 3D versions, a reduction in marketing efforts for 3D motion pictures by motion picture studios or a lack of consumer demand for 3D motion pictures could result in lower 3D motion picture attendance, which would substantially reduce our revenue, which declined in fiscal year 2015 compared to fiscal year 2014. Moreover, films can be subject to delays in production or changes in release schedule, and the slippage of a film's release date from one accounting period to another could adversely affect our financial condition, results of operations and business.
If motion picture exhibitors do not continue to use our RealD Cinema Systems, negotiate renewals of their licensing agreements for substantially lesser fees or renew with substantial concessions, or if they experience financial difficulties, our growth and results of operations could be adversely affected.
Our primary licensees in the motion picture industry are motion picture exhibitors. Our license agreements with motion picture exhibitors do not obligate these licensees to deploy a specific number of our RealD Cinema Systems. We cannot predict whether any of our existing motion picture exhibitor licensees will continue to perform under their license agreements with us, whether we or any of our existing motion picture exhibitor licensees may now or in the future be in breach of those agreements or whether our existing motion picture exhibitor licensees will renew their license agreements with us at the end of their term. If our existing motion picture exhibitor licensees do not renew their license agreements with us, negotiate renewals of their license agreements for substantially lesser license fees or with substantial concessions, or seek to take advantage of incentive offers related to securing renewals of existing contracts, our revenue would decline, which would adversely affect our business and results of operations. In addition, if motion picture exhibitors reduce or eliminate the number of 3D motion pictures that are exhibited in theaters, then our revenue could be materially and adversely affected, and motion picture studios may not produce and release 3D motion pictures, which could also adversely affect our financial condition, results of operations and business.
In addition, license revenue from Wanda (including AMC), Cinemark and Regal collectively comprised approximately 31% of our gross license revenue in the year ended March 31, 2015, 33% in the year ended March 31, 2014 and 22% in the year ended March 31, 2013. If any of these motion picture exhibitors were to experience financial difficulties, they may be unable to pay us amounts due in a timely fashion or at all, which could substantially reduce our cash flow and materially and adversely impact our financial condition and results of operations. For example, in order to attract more movie-goers, these motion picture exhibitors recently renovated certain of their theaters and installed larger chairs, which not only led to reduced seating capacity, but also resulted in higher ticket prices. If the motion picture exhibitors are unable to attract more movie-goers who are willing to pay higher ticket prices, they could experience financial difficulties, which in turn could adversely affect our financial condition, results of operations and business.
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A deterioration in our relationships with the major motion picture studios could adversely affect our business and results of operations.
The six major motion picture studios accounted for approximately 78% of domestic box office revenue and eight of the top 10 grossing 3D motion pictures in calendar year 2014. Such 3D motion pictures are also released internationally. In addition, for our domestic operations, these major motion picture studios pay us a per use fee for our RealD eyewear. To the extent that our relationship with any of these major motion picture studios deteriorates or any of these studios stop making motion pictures that can be viewed at RealD-enabled theater screens, refuse to co-brand with us, stop using or paying for the use of or reduce the amounts paid for our RealD eyewear in domestic and certain international markets, our costs could increase and our revenue could decline, which would adversely affect our business and results of operations.
Additionally, if consumers' demand for 3D motion pictures declines, then motion picture studios may reduce marketing the 3D aspect of 3D motion pictures which could reduce box office performance of 3D motion pictures and our revenue could be adversely affected.
If the deployment of our RealD Cinema Systems is delayed or not realized, our future prospects could be limited and our business could be adversely affected.
We have license agreements with motion picture exhibitors that give us the right, subject to certain exceptions, to deploy our RealD Cinema Systems if a location under contract is already equipped with our systems. Under the terms of these agreements, the motion picture exhibitor licensees may choose to install additional 3D digital projector systems. However, our license agreements do not obligate our licensees to deploy a specific number of our RealD Cinema Systems. Numerous factors beyond our control could influence when and whether our RealD Cinema Systems will be deployed, including motion picture exhibitors' ability to fund capital expenditures, or their decision to delay or abandon the conversion of their theaters to digital projection or reduce the number of 3D motion pictures exhibited in their theaters, and our ability to secure adequate supplies of components comprising our RealD Cinema System in any given period. If motion picture exhibitors delay, postpone or decide not to deploy RealD Cinema Systems at the number of screens they have announced, or we are unable to deploy our RealD Cinema Systems in a timely manner, our future prospects could be limited and our business could be adversely affected.
We have a history of net losses and may suffer losses in the future.
While we were profitable in the fiscal year ended March 23, 2012, we incurred net losses in our fiscal years ended 2015, 2014, 2013, 2011, and 2010. Our revenues declined in our fiscal year 2015 as compared to the prior year. If we cannot return to sustainable revenue growth and profitability, our financial condition will deteriorate, and we may be unable to achieve our business objectives.
We may not achieve anticipated cost savings from the implementation of our cost reduction plans and may experience difficulties, delays and unexpected costs in continuing our cost reduction efforts.
We implemented our cost reduction plans to reduce the overall costs of our global operations, and we are seeking further efficiencies in our cost structure, including actively evaluating alternatives for certain of our research and development efforts. Moreover, we announced in December 2014 additional operating expense savings and capital expenditure reductions projected for fiscal year 2016. We may encounter difficulties, delays and unexpected costs in connection with such efforts. Our ability to achieve anticipated savings is dependent upon various business developments, such as the state of development of, and prospects for, our new technologies, some of which are beyond our control. If we are unable to achieve the anticipated savings or benefits to our business in the expected time frame or other unforeseen events occur, our business and results of operations may be adversely affected.
In addition, part of our cost reduction efforts may involve an involuntary reduction in force. For our cost reduction efforts to be successful while at the same time building a framework for future growth, we must continue to execute and deliver on our core business initiatives around the world with fewer human resources and intellectual capital. This will include managing complexities associated with a geographically diverse organization. We must also attract, retain and motivate key employees, including highly qualified management, scientific, manufacturing and sales and marketing personnel who are critical to our business. We may not be able to attract, retain or motivate qualified employees in the future and our inability to do so may adversely affect our business.
We have not yet finalized our cost reduction plan for fiscal year 2016 and there is no guarantee that any net cost reduction will actually be achieved. There may also be other risks associated with our cost reduction efforts and we cannot guarantee that we will be able to successfully manage these or other risks. If we fail to execute on our initiatives, such failure could result in a material adverse effect on our business and results of operations.
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There can be no assurance that the strategic alternative process will result in pursuing or completing a particular transaction.
In the fourth quarter of our fiscal year ended March 31, 2015, we announced that we had engaged Moelis & Company LLC as our financial advisor to assist in our evaluation of potential strategic alternatives. There can be no assurance that the evaluation of potential strategic alternatives will result in either pursuing or completing a particular transaction. We also may not accurately assess the risks and uncertainties associated with engaging in a strategic alternative, and the anticipated benefits from pursuing any such alternative may not materialize. In addition, undertaking a strategic process could divert management’s time and focus from operating our business, potentially have adverse effects on our existing business relationships and our key employees.
We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.
In connection with the preparation of our interim financial statements for the quarter ended December 31, 2014, our management team and independent registered public accounting firm identified certain deficiencies in our internal controls that, when aggregated, were determined to be a material weakness in our internal control over financial reporting. We have initiated a remediation plan to enhance our control procedures for the identified deficiencies, but will not consider the material weakness remediated until our controls are operational for a sufficient period of time, tested and management concludes that these controls are operating effectively. Prior to such time, there remains risk that the transitional controls on which we currently rely will fail to be sufficiently effective, which could result in a material misstatement of our financial position or results of operations and require a restatement of our financial statements.
If we are unable to establish appropriate internal controls, we may not have adequate, accurate or timely financial information, we may be subject to litigation and we may be unable to meet our reporting obligations or comply with the requirements of the SEC or the Sarbanes-Oxley Act of 2002, which could result in the imposition of sanctions, including the inability of registered broker dealers to make a market in our common shares, or investigation by regulatory authorities. Any such action or other negative results caused by our inability to meet our reporting requirements or comply with legal and regulatory requirements or by disclosure of an accounting, reporting or control issue could adversely affect the trading price of our securities. Further and continued determinations that there are significant deficiencies or material weaknesses in the effectiveness of our internal controls could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures to comply with applicable requirements.
Any inability to protect our intellectual property rights could reduce the value of our 3D and other visual technologies and our brands, which could adversely affect our financial condition, results of operations and business.
Our business is dependent upon our patents, trademarks, trade secrets, copyrights and other intellectual property rights. Effective intellectual property rights protection, however, may not be available or timely under the laws of every country in which we and our licensees operate, such as China. For example, we believe competitors may be introducing cinema systems similar to our RealD Cinema Systems that potentially infringe on our intellectual property rights in China, Russia and other territories to unfairly compete against us. While we are actively engaged in the enforcement and protection of our intellectual property rights, the efforts we have taken may not be sufficient or we may not prevail. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. In addition, protecting our intellectual property rights is costly and time consuming. It may not be practicable or cost effective for us to fully protect our intellectual property rights in some countries or jurisdictions. If we are unable to successfully identify and stop unauthorized use of our intellectual property, we could lose potential revenue and experience increased operational and enforcement costs, which could adversely affect our financial condition, results of operations and business.
It is possible that some of our 3D and other visual technologies may not be protectable by patents. In addition, given the costs of obtaining patent protection, we may choose not to protect particular innovations that later turn out to be important. Even where we do have patent protection, the scope of such protection may be insufficient to prevent third parties from designing around our particular patent claims or otherwise avoiding infringement. Furthermore, there is always the possibility that an issued patent may later be found to be invalid or unenforceable, or a competitor may attempt to engineer around our issued patent. Additionally, patents only offer a limited term of protection. Moreover, the intellectual property we maintain as trade secrets could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from those trade secrets.
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Any failure to maintain the security of information relating to our customers, employees, licensees and suppliers, whether as a result of cybersecurity attacks or otherwise, could expose us to litigation, government enforcement actions and costly response measures, and could disrupt our operations and harm our reputation.
In connection with the sales and marketing of our products and our entering into licensing arrangements with motion picture exhibitors, we may from time to time transmit confidential information. We also have access to, collect or maintain private or confidential information regarding our customers, employees, licensees and suppliers, as well as our business. We have procedures in place to safeguard such data and information and as a result of those procedures, to our knowledge, computer hackers have been unable to gain access to the information stored in our information systems. However, cyber-attacks are rapidly evolving and becoming increasingly sophisticated. It is possible that computer hackers and others might compromise our security measures or those that we do business with in the future and obtain the personal information of our customers, employees, licensees and suppliers or our business information. A security breach of any kind could expose us to risks of data loss, litigation, government enforcement actions and costly response measures, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation which could cause us to lose market share and have an adverse effect on our results of operations.
We may in the future be subject to intellectual property rights disputes that are costly to defend, could require us to pay damages and could limit our ability to use particular 3D and other visual technologies in the future.
We may be exposed to, or threatened with, future litigation or any other disputes by other parties alleging that our 3D and other visual technologies infringe their intellectual property rights. Any intellectual property disputes, regardless of their merit, could be time consuming, expensive to litigate or settle and could divert management resources and attention. An adverse determination in any intellectual property dispute could require us to pay damages and/or stop using our 3D and other visual technologies, trademarks, copyrighted works and other material found to be in violation of another party's rights and could prevent us from licensing our 3D and other visual technologies to others. In order to avoid these restrictions and resolve the dispute, we may have to pay for a license. This license may not be available on reasonable terms, could require us to pay significant license fees and may significantly increase our operating expenses. A license also may not be available to us at all. As a result, we may be required to use and/or develop non-infringing alternatives, which could require significant effort and expense, or which may not be possible. If we cannot obtain a license or develop alternatives for any infringing aspects of our business, we may be forced to limit our 3D and other visual technologies and may be unable to compete effectively. In certain instances, we have contractually agreed to provide indemnification to licensees relating to our intellectual property. This may require us to defend or hold harmless motion picture exhibitors, manufacturers or other licensees. We have from time to time corresponded with one or more third parties regarding patent enforcement issues and in-bound and out-bound patent licensing opportunities. In addition, from time to time we may be engaged in disputes regarding the licensing of our intellectual property rights, including matters related to our license fee rates and other terms of our licensing arrangements. These types of disputes can be asserted by our licensees or prospective licensees or by other third parties as part of negotiations with us or in private actions seeking monetary damages or injunctive relief or in regulatory actions. Requests for monetary and injunctive remedies asserted in claims like these could be material and could have a significant impact on our business. Any disputes with our licensees, potential licensees or other third parties could materially and adversely affect our business, results of operations and prospects.
Our reliance on certain significant suppliers for the raw materials used in our RealD Cinema Systems subjects us to risks which could adversely affect our business.
We rely on certain significant suppliers for the raw materials used in our RealD Cinema Systems, which are critical to our operations. Our business could be negatively impacted by any quality or reliability issues with our suppliers’ products, including any undetected, latent defects. In addition, our dependence on these suppliers subjects us to the possible risks of shortages, interruptions and price fluctuations. If any of our suppliers are unable to fulfill their obligations to us, or if we are unable to find replacement suppliers in the event of a supply shortage or disruption, we could incur higher costs to secure adequate supplies and risk using lesser quality products, either of which could materially harm our business. Possible shortages or interruptions in the supply of raw materials caused by the inability of our suppliers to obtain credit in a tightened credit market or other conditions beyond our control could adversely affect the availability, quality and cost of the supply used in our RealD Cinema Systems. Any inability on our part to effectively manage supply chain risk could increase our costs and limit the availability of raw materials that are critical to our operations.
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Our RealD Cinema Systems and other visual technologies are generally designed for use with third-party technologies and hardware, and if we are unable to maintain the ability of our RealD Cinema Systems and other visual technologies to work with these third-party technologies and hardware, our business and operating results could be adversely affected.
Our RealD Cinema Systems and other visual technologies are generally designed for use with third-party technologies and hardware, such as Christie and Barco projectors, Doremi servers, Harkness Hall screens and Sony Electronics 4K SXRD® digital cinema projectors. Third-party technologies and hardware may be modified, re-engineered or removed altogether from the marketplace. In addition, third-party technologies used to interact with our 3D and other visual technologies can change without prior notice to us, which could result in increased costs or our inability to provide our 3D and other visual technologies to our licensees. If we are unable to maintain the ability of our 3D and other visual technologies to work with these third-party technologies and hardware, our business and operating results could be adversely affected.
If we are unable to maintain our brand and reputation for providing high quality 3D and other visual technologies, our business, results of operations and prospects could be materially harmed.
Our business, results of operations and prospects depend, in part, on maintaining and strengthening our brand and reputation for providing high quality 3D and other visual technologies. If problems with our 3D and other visual technologies cause motion picture exhibitors or other licensees to experience operational disruption or failure or delays in the delivery of their products and services to their customers, our brand and reputation could be diminished. Maintaining and strengthening our brand and reputation may be particularly challenging if we enter business segments in which we have limited experience. If we fail to promote and maintain our brand and reputation successfully, our business, results of operations and prospects could be materially harmed.
Competition from other providers of 3D technologies to the motion picture industry could adversely affect our business.
The motion picture industry is highly competitive, particularly among providers of 3D technologies. Our primary competitors include Dolby, Sony, IMAX, MasterImage and Xpand. In addition, other companies, including motion picture exhibitors and studios and smaller competitors in international markets, may develop their own 3D technologies in the future. Consumers may also perceive the quality of 3D technologies delivered by some of our competitors to be equivalent or superior to our 3D technologies. In addition, some of our current or future competitors may enjoy competitive advantages, such as greater financial, technical, marketing and other resources, greater market share and name recognition, ability to develop and be the first to introduce new 3D technologies successfully to the market or more experience or advantages in the business segments in which we compete that will allow them to offer lower prices or higher quality technologies, products or services. If we do not successfully compete with these providers of 3D technologies, we could continue to lose market share and our business could be adversely affected. In addition, competition could force us to decrease prices and cause our margins to decline, which could adversely affect our business. Pricing pressures in both domestic and international motion picture exhibitor markets continue, and no assurance can be given that our margins in future periods will increase.
The introduction of new 3D and other visual technologies and changes in the way that our competitors operate could harm our business. If we fail to keep up with rapidly changing 3D and other visual technologies or the growth of new and existing opportunities, our 3D and other visual technologies could become less competitive or obsolete.
Due to technological advances and changing consumer tastes, numerous companies have developed, and are expected to continue to develop, new 3D and other visual technologies that may compete directly with or render our 3D and other visual technologies less competitive or obsolete. We believe that original equipment manufacturers may be working to develop laser-based projection technologies, which may compete with, be incompatible with or render our RealD Cinema Systems obsolete. Competitors may develop alternative 3D and other visual technologies that are more attractive to consumers, content producers and distributors, motion picture exhibitors and others, or more cost effective than our technologies, and compete with or render our 3D and other visual technologies less competitive or obsolete. As a result of this competition, we could continue to lose market share, which could harm our business and operating results. If we are unable to develop and effectively market new 3D and other visual technologies that adequately or competitively address the needs of these changing industries, our business, results of operations and prospects could be materially and adversely affected.
In addition, we face competition from companies that enjoy competitive advantages in the industries in which we operate for our research and development projects. Our competitors have greater financial resources than we do, more developed and distribution channels and relationships with manufacturers, and technologies that may be better suited to bring these products to market. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, products, technologies or standards in 3D and other visual technologies and may offer consumers superior technology or lower prices which may reduce the demand for visual display devices using our 3D and other visual technologies. As a result, we may not be able to compete successfully in the industries in which we operate for our research and development projects.
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If our 3D and other visual technologies fail to be widely adopted by or are not compatible with the needs of our licensees, our business prospects could be limited and our operating results could be adversely affected.
Our licensees depend upon our 3D and other visual technologies being compatible with a wide variety of motion picture and other systems, products and infrastructure. We make significant efforts to design our 3D and other visual technologies to address capability, quality and cost considerations so that they either meet or, where possible, exceed the needs of our licensees. To have our 3D and other visual technologies widely adopted, we must convince a broad spectrum of professional organizations worldwide, as well as motion picture studios and exhibitors and other industry participants, to adopt them, and to ensure that our 3D and other visual technologies are compatible with their systems, products and infrastructure.
If our 3D and other visual technologies are not widely adopted or retained or if we fail to conform our 3D and other visual technologies to the expectations of, or standards set by, industry participants, they may not be compatible with other products and our business, operating results and prospects could be adversely affected. We expect that meeting and maintaining the needs of our licensees for compatibility with them will be significant to our business in the future. In addition, the market for broadcast technologies has traditionally been heavily regulated by governments or other regulatory bodies, and we expect this to continue to be the case in the future. If our 3D and other visual technologies are not compatible with the broadcasting infrastructure or governmental or regulatory requirements in particular geographic areas, our ability to compete in these markets could be adversely affected.
Other forms of entertainment may be more attractive to consumers than those using our 3D and other visual technologies, which could harm our growth and operating results.
We face competition for consumer attention from other forms of entertainment that may drive down motion picture box office and license revenue from motion picture exhibitors. We compete with a number of alternative motion picture distribution channels, such as cable, satellite, broadcast, packaged media and the Internet and business models in these areas continue to evolve rapidly. There are also other forms of entertainment competing for consumers' leisure time and disposable income such as concerts, amusement parks, sporting events and, from time to time, other major events like the Olympic Games or the World Cup. A significant increase in the popularity of these motion picture channels and competing forms of entertainment could reduce the demand for theatrical exhibition of 3D motion pictures, including those viewed with our RealD Cinema Systems, or the use of 3D-enabled consumer electronics devices, any of which would have an adverse effect on our business and operating results.
We have a limited operating history in several of the industries in which we are conducting our research and development projects, which makes it difficult to predict our future prospects and financial performance.
We have a limited operating history in several of the industries in which we are conducting our research and development projects. As such, the potential for future success for our research and development projects will depend on the challenges, uncertainties, expenses and difficulties encountered by us and we cannot predict whether and when any of such projects will be commercially available in the near future or at all. In addition, our research and development projects must be considered in light of our strategic plan to focus on our core business: the innovation and licensing of 3D and other visual technologies for the theater. In connection with this strategic plan, we are actively evaluating alternatives for refocusing and restructuring our research and development efforts through partnering or other means by which we can commercialize these technologies while keeping low or further reducing our cost structure. However, we cannot assure you that any strategic alternative, if identified, evaluated and consummated, will be beneficial to our business or provide greater value to our stockholders.
Our level of indebtedness reduces our financial flexibility and could impede our ability to operate.
As of March 31, 2015, our total indebtedness was approximately $29.8 million. Our indebtedness could have important consequences, including the following: (i) we may not generate sufficient cash flow from operations to service and repay our debt and related obligations and have sufficient funds left over to achieve or sustain profitability in our operations; (ii) we may be unable to meet our working capital and capital expenditure needs in order to compete successfully in our industry, particularly if we increase our debt obligations under our secured credit facility; (iii) we may be limited in our ability to obtain additional financing in the future, including obtaining additional commitments from our revolving credit facility; (iv) we are at a competitive disadvantage to lesser leveraged competitors; (v) we may be limited in our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and (vi) we may be vulnerable to general adverse economic and industry conditions, including changes in interest rates.
We may borrow additional amounts under our credit facilities to fund various growth initiatives, including accelerated research and product development, acquisitions, capital expenditures and stock repurchases. As of March 31, 2015, $50 million was available under our revolving credit facility, which matures on June 26, 2017, and $12.7 million was available under our term loan facility, which matures on June 26, 2018.
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Our credit facilities require us to pay a variable rate of interest, which will increase or decrease based on variations in certain financial indexes, and fluctuations in interest rates can significantly decrease our profits. We do not have any hedge or similar contracts in place that would protect us against changes in interest rates. There is no assurance that we will be able to refinance our outstanding indebtedness, or if refinancing is available, that it can be obtained on terms we can afford. For more information regarding our credit facilities, see "Management's discussion and analysis of financial condition and results of operations—Liquidity and capital resources".
Our credit facilities impose, and the terms of any future indebtedness may impose, significant operating, financial and other restrictions on us and our subsidiaries.
Restrictions imposed by our credit facilities will limit or prohibit, among other things, our ability to:
• | incur additional debt; |
• | make certain investments or acquisitions; |
• | enter into certain merger and consolidation transactions; and |
• | sell our assets other than in the ordinary course of business. |
We are also required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. If we fail to comply with any of the covenants or if any other event of default, as defined in our credit facilities, should occur, the lenders could elect to prevent us from borrowing and declare the indebtedness to be immediately due and payable.
These restrictions could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities. A breach of any of these restrictions, including breach of financial covenants, could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and fees, to be immediately due and payable and proceed against any collateral securing that indebtedness, which will constitute substantially all of our assets.
Our operating results may fluctuate from quarter to quarter, which may be different from analysts' expectations and adversely affect our stock price.
Our operating results may fluctuate from quarter to quarter. Factors that have affected our operating results in the past, and are likely to affect our operating results in the future, include, among other things:
• | the timing of when a 3D motion picture is released which tends to be based on specific consumer entertainment dynamics, which results in seasonal patterns, with the largest number of motion pictures being released in summer and early winter; |
• | the attendance at 3D versions of motion picture releases; |
• | the rate of installations of new RealD Cinema Systems, which we expect to decrease with the passage of time; |
• | the timing of capital expenditures and expenses, including depreciation expense of our RealD Cinema Systems deployed at a motion picture exhibitor's premises (we expect capital expenditures to decrease, and depreciation expense to increase, as our RealD Cinema Systems business matures), digital projector depreciation expenses, RealD eyewear costs (including shipping, handling and recycling costs), field service and support costs, and occupancy costs, which may increase significantly, even in quarters when we do not experience a similar growth in revenue; |
• | the timing and accuracy of license fee reports which often include positive or negative corrective or retroactive license fees that cover extended periods of time; |
• | rates of growth in installation of our RealD Cinema Systems overseas, especially in China, Russia and other emerging economies; |
• | management of our expenses as we continue to focus on our core strategy, conduct a strategic process and implement our cost reduction plans; and |
• | competitive and pricing pressures that vary from market-to-market and place-to-place. |
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In addition, variances in our operating results from analysts' expectations could adversely affect our stock price. See also "Management's discussion and analysis of financial condition and results of operations—Seasonality and quarterly performance".
We face a number of challenges with respect to the maturity of the domestic digital cinema market, and if motion picture exhibitors do not continue converting analog theaters to digital outside of the United States or the pace of conversion slows, our future prospects could be limited and our business could be adversely affected.
Our RealD Cinema Systems only work in theaters equipped with digital cinema projection systems, which enable 3D motion pictures to be delivered, stored and projected electronically, and our systems are not compatible with analog motion picture projectors. Motion picture exhibitors have been converting projectors from analog to digital cinema over the last several years, giving us the opportunity to deploy our RealD Cinema Systems. After motion picture exhibitors convert their projectors to digital cinema, they must install a polarization preserving screen and our RealD Cinema System to display motion pictures in RealD 3D. The conversion by motion picture exhibitors of their projectors and screens from analog to digital cinema requires significant expense. As of December 31, 2013, approximately 93% of domestic theater screens had converted to digital and approximately 78% of the international theater screens had been converted. We face a number of challenges with respect to the maturity of the domestic digital cinema market, including that the demand for new digital cinema screens has decreased significantly. Future growth in the domestic digital cinema market will depend on a number of factors, including the construction of new theaters, exhibitors choosing to deploy our RealD Cinema Systems versus competing or alternative technologies and our ability to maintain competitive pricing. In addition, if the market for digital cinema overseas develops more slowly than expected, or if the motion picture exhibitors we have agreements with delay or abandon the conversion of their theaters from analog theaters to digital, our ability to grow our revenue and our business could be adversely affected. While DCIP and Cinedigm financing provided funding for the digital conversion of domestic theater screens operated by many of our licensees, there has not yet been a similar effort to organize digital conversion in certain geographies outside North America. If the pace of digital conversion outside of the United States does not follow that which occurred inside the United States, our revenue may not grow or may decline, and our business could be adversely affected.
We have incurred and may in the future incur asset impairment charges.
An asset impairment charge may result from the occurrence of unexpected adverse events or management decisions that impact our estimates of expected cash flows generated from our long-lived assets. We review our long-lived assets for impairment, when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We may be required to recognize asset impairment charges in the future as a result of system upgrades and replacements, reductions in demand for specific technologies, a weak economic environment, challenging market conditions, events related to particular customers or asset type, or as a result of asset or portfolio sale decisions by management.
Additionally, in connection with our cost reduction plans, we intend to relocate our headquarters in Los Angeles, California, and therefore expect to incur material impairments on leasehold improvements in the future.
We face risks from doing business internationally that could harm our business, financial condition and results of operations.
We are dependent on international business for a significant portion of our total revenue. International gross revenue accounted for approximately 57% in fiscal 2015, 52% in fiscal 2014 and 50% in fiscal 2013. We expect that our international business will continue to represent a significant portion of our total revenue for the foreseeable future. This future revenue will depend to a large extent on the continued use and expansion of our 3D and other visual technologies in the motion picture industry outside of North America. As a result, our business is subject to certain risks inherent in international business operations, many of which are beyond our control. These risks include:
• | competitive and pricing pressures that vary from market-to-market and place-to-place; |
• | fluctuating foreign exchange rates and systems;laws and policies affecting trade, investment and taxes, including laws and policies relating to customs, duties, the repatriation of funds and withholding taxes and changes in these laws and our compliance with the foregoing; |
• | changes in local regulatory requirements, including restrictions on content; |
• | differing cultural tastes and attitudes; |
• | differing degrees of protection for intellectual property; |
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• | the need to adapt our business model to local requirements; |
• | difficulties in staffing and managing foreign and geographically dispersed operations; |
• | imposition of differing labor laws and standards; |
• | the instability of foreign economies and governments; and |
• | political instability, natural disaster, war or acts of terrorism. |
Events or developments related to these and other risks associated with our international business operations could adversely affect our revenue from such operations, which could have a material and adverse effect on our business, financial condition and results of operations.
Our RealD eyewear may, in the future, be regulated by the Food and Drug Administration, or FDA, or by other state or foreign governmental or regulatory agencies, which could increase our costs and materially and adversely impact our profitability.
Currently, polarized 3D eyewear, including our RealD eyewear, is not regulated by the FDA, or by state or foreign governmental and regulatory agencies. However, certain eyewear, such as non-prescription reading glasses and sunglasses, are considered to be medical devices by the FDA and are subject to regulations imposed by the FDA and various state and foreign governmental and regulatory agencies. With the rising popularity of polarized 3D eyewear, there has been an increasing level of public scrutiny examining its potential health risks. Polarized 3D eyewear, including our RealD eyewear, may at some point be subject to federal, state or foreign regulations that could potentially restrict how our RealD eyewear is produced, used or marketed, and the cost of complying with those regulations may adversely affect our profitability.
If 3D viewing with active or passive eyewear is found to cause health risks or consumers believe that it does, demand for the 3D viewing experience may decrease or we may become subject to liability, any of which could adversely affect our results of operations, financial condition, business and prospects.
Research conducted by institutions unrelated to us has suggested that 3D viewing with active or passive eyewear may cause vision fatigue, eye strain, discomfort, headaches, motion sickness, dizziness, nausea, epileptic seizures, strokes, disorientation, perceptual after-effects, decreased postural stability or other health risks in some consumers. If these potential health risks are substantiated or consumers believe in their validity, demand for the 3D viewing experience in the theater, the home and elsewhere may decline. As a result, major motion picture studios and other content producers and distributors may refrain from developing 3D content, motion picture exhibitors may reduce the number of 3D-enabled screens (including RealD-enabled screens) they currently deploy or plan to deploy, or they may reduce the number of 3D motion pictures exhibited in their theaters, which would adversely affect our results of operations, financial condition and prospects. A decline in consumer demand may also lead to the reduction or abandonment of 3D products, which could adversely affect our prospects and financial condition.
In addition, if health risks associated with our RealD eyewear materialize, we may become subject to governmental regulation or product liability claims, including claims for personal injury. Successful assertion against us of one or a series of large claims could materially harm our business. Also, if our RealD eyewear is found to be defective, we may be required to recall it, which may result in substantial expense and adverse publicity that could adversely impact our sales, operating results and reputation. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded under the terms of the policy, which could adversely affect our financial condition. In addition, we may also be required to pay higher premiums and accept higher deductibles in order to secure adequate insurance coverage in the future, which could materially and adversely affect our results of operations, financial condition and business. Even meritless product liability claims could be expensive to resolve and may divert our management's attention.
Our agreements with motion picture studios domestically and motion picture exhibitors internationally require us to manage the supply chain of our RealD eyewear, and any interruption to the supply chain for our RealD eyewear components could adversely affect our results of operations, financial condition, business and prospects.
Our RealD eyewear is an integral part of our RealD Cinema Systems. We have entered into non-exclusive agreements with several manufacturers to produce RealD eyewear. We manage manufacturing, distribution and recycling of RealD eyewear for motion picture studios and exhibitors worldwide. Domestically, we generally provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors' customers. Most international motion picture exhibitors and some domestic motion picture exhibitors purchase RealD eyewear directly from us and sell them to consumers as part of their admission or as a concession item. Any
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interruption in the supply of RealD eyewear from manufacturers, increase in shipping costs, logistics or recycling interruption, other disruption to our global supply chain or competitive pricing pressures could adversely affect our results of operations, financial condition, business and prospects. For example, in connection with major 3D motion picture releases and increased consumer demand, we have in the past exhausted our inventory of RealD eyewear and incurred increased shipping costs to accelerate delivery of new inventory.
Our RealD 3D eyewear business model in North America and a limited number of countries internationally rely on financial support from motion picture studios for the RealD eyewear that are provided to theater customers, and the uncertainty and any potential dispute between motion picture studios and exhibitors could adversely affect our results of operations, financial condition, business and prospects.
Our RealD eyewear is an integral part of our RealD Cinema Systems. In North America, we provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors’ customers. In certain territories, motion picture studios provide financial support directly to theater operators for the RealD eyewear that are used by their customers. Elsewhere, motion picture exhibitors purchase RealD eyewear directly from us and sell them to customers as part of their admission or as a concession. While we support multiple business models for our RealD eyewear around the world, the uncertainty and any potential dispute between motion picture studios and exhibitors over the eyewear business model, whether domestically or internationally, could adversely affect our results of operations, financial condition, business and prospects. In addition, we expect that profitability in our RealD eyewear business may not be sustainable, as motion picture studios with whom we do business seek to recover our cost savings and efficiencies in the form of reduced prices for eyewear.
Economic conditions beyond our control could reduce consumer demand for motion pictures and consumer electronics using our 3D and other visual technologies and, as a result, could materially and adversely affect our business, revenue and growth prospects.
Difficult economic conditions and recessionary periods may lead to a decrease in discretionary consumer spending or consumer preference for lower-cost 2D motion pictures, resulting in lower motion picture box office revenue. In the event of declining box office revenue, motion picture studios may be less willing to release 3D motion pictures and motion picture exhibitors may be less willing to license our RealD Cinema Systems or exhibit 3D motion pictures. Further, a decrease in discretionary consumer spending may adversely affect future demand for consumer electronics products that may use our 3D and other visual technologies and consumer electronics manufacturers may decide to not adopt, limit, delay or cease their use of our 3D and other visual technologies, any of which could cause our business, revenue and growth prospects to suffer.
The loss of members of our management could substantially disrupt our business operations.
Our success depends to a significant degree upon the continued contribution by members of our management. A limited number of individuals have primary responsibility for managing our business, including our relationships with motion picture studios and exhibitors. The loss of members of our management, including Michael V. Lewis, our Chairman and Chief Executive Officer, or the loss of key employees in our accounting or R&D departments or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could impair our ability to sustain and grow our business and could substantially disrupt our business operations. In addition, because we operate in a highly competitive industry, our hiring of qualified executives, scientists, engineers or other personnel may cause us or those persons to be subject to lawsuits alleging misappropriation of trade secrets, improper solicitation of employees, breach of contract or other claims.
Our ability to use our net operating loss carryforwards to offset future taxable income could be subject to certain limitations if our ownership has changed or will change by more than 50%, which could potentially result in increased future tax liability.
While currently subject to a full valuation allowance for purposes of preparing our consolidated financial statements (see the discussion under the heading "Management's discussion and analysis of financial condition and results of operations—Critical accounting policies and estimates—Deferred tax asset valuation and tax exposures"), we intend to use our U.S. net operating loss carryforwards to reduce any future U.S. corporate income tax liability associated with our operations. Section 382 of the U.S. Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. In that event, our ability to use our net operating loss carryforwards could be adversely affected. To the extent our use of net operating loss carryforwards is significantly limited under the rules of Section 382, our income could be subject to U.S. corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.
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Furthermore, we operate both in the United States and in certain jurisdictions outside the United States. Our non-U.S. operations may in the future generate taxable income that is subject to income or other taxes in the jurisdictions in which those operations are conducted. As of March 31, 2015, we had foreign tax credit carryforwards of approximately $18.8 million for federal income tax purposes that begin to expire in the year 2019. Each jurisdiction in which we operate may have its own limitations on our ability to utilize such foreign tax credit carryforwards generated in that jurisdiction. Also, we generally cannot utilize net operating loss carryforwards or tax credits generated in one jurisdiction to reduce our liability for taxes in any other jurisdiction. Accordingly, we may be subject to tax liabilities in certain jurisdictions in which we operate notwithstanding the existence of net operating loss carryforwards or tax credits in other jurisdictions.
Our future growth largely depends on gaining increased market share in China and other emerging economies, and we face risks in conducting business in these emerging economies.
Our future growth largely depends on gaining increased market share in China and other emerging economies. China is the Company's largest and fastest growing market opportunity. As of March 31, 2015, our RealD Cinema Systems were deployed and operated in approximately 2,050 cinema screens in China, with an additional approximately 1,031 screens under contract within this market. We believe that our sales of products and services in China and other emerging economies will expand in the future to the extent that the use of digital technologies increases in these countries, including in movies and theaters, and as consumers there continue to become more affluent. Our inability to penetrate the Chinese market, in particular, may adversely impact our global market share and growth opportunities. We face many risks associated with operating in China and these other emerging economies, in large part due to limited recognition and enforcement of contractual and intellectual property rights. As a result, we may experience difficulties in enforcing our intellectual property rights in these emerging economies, where intellectual property rights are more difficult to enforce as compared to the United States, Hong Kong, Japan and Europe. We believe that it is critical that we strengthen existing relationships and develop new relationships with entertainment industry participants worldwide to increase our ability to enforce our intellectual property and contractual rights without relying solely on the legal systems in the countries in which we operate. If we are unable to develop, maintain, and strengthen these relationships, our revenue from these countries could be adversely affected.
We face risks associated with international trade and currency exchange.
We maintain sales, marketing and business operations in foreign countries. Consequently, we are exposed to exchange rate fluctuations associated with the local currencies of our foreign business operations, including the Chinese yuan, Russian ruble and Brazilian real. Revenue from our foreign business operations in transactions denominated in local currencies are significant. While we may also derive revenue from our foreign business operations in transactions denominated in U.S. dollars, a substantial portion of our costs from our foreign operations are denominated in the currency of that foreign location. Consequently, exchange rate fluctuations between the U.S. dollar and other currencies could have a material impact on our profitability. In addition, foreign governments may restrict transfers of cash out of the country and control exchange rates. There can be no assurance that we will be able to repatriate our earnings, and at exchange rates that are beneficial to us, which could have a material adverse effect on our business and results of operations.
We have incurred, and may continue to incur, increased costs and demands on our management as a result of complying with the laws and regulations affecting public companies.
We have incurred, and may continue to incur, increased costs and demands on our management as a result of complying with the laws and regulations affecting public companies. Upon becoming a public company in July 2010, we began incurring additional general and administrative expenses to comply with the SEC reporting requirements, the listing standards of the New York Stock Exchange, or NYSE, the provisions of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The increased costs associated with operating a public company may negatively affect our operating results and divert our management’s attention from other business concerns.
Changes in accounting may affect our reported earnings and operating income.
U.S. GAAP and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of our business, such as revenue recognition, film accounting, accounting for pensions and other post-retirement benefits, accounting for income taxes, and treatment of goodwill or long lived assets, are highly complex and involve many subjective judgments. Changes in these rules, their interpretation, management’s estimates, or changes in our products or business could significantly change our reported future earnings and operating income and could add significant volatility to those measures, without a comparable underlying change in cash flow from operations.
Beginning in the first quarter of fiscal year 2014, we modified our definition of Adjusted EBITDA to align with the Adjusted EBITDA definition under our expanded credit facility. As a result, we no longer add back sales and use tax and
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property tax to calculate Adjusted EBITDA for financial reporting purposes. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the most comparable U.S. GAAP item, see "Non-U.S. GAAP discussion" under Item 7 in Part II.
Risks related to owning our common stock
The price of our common stock may fluctuate significantly and you could lose all or part of your investment as a result.
An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares or at all. The market price of our common stock could fluctuate significantly for various reasons, including those factors listed in "—Risks related to our business and our industry" and the following:
• | our quarterly or annual earnings or those of our competitors; |
• | the public's reaction to press releases or other public announcements by us or third parties, including our filings with the SEC; |
• | changes in earnings estimates or recommendations by research analysts who track our common stock or the stock of our competitors; |
• | investor perceptions or the investment opportunity associated with our common stock relative to other investment alternatives; |
• | new laws or regulations or new interpretations of laws or regulations applicable to our business; |
• | changes in accounting standards, policies, guidance, interpretations or principles; |
• | changes in general conditions in the domestic and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events; |
• | litigation involving our Company or investigations or audits by regulators into the operations of our Company or our competitors; |
• | strategic action by our competitors; and |
• | sales of common stock by our directors, executive officers and significant stockholders. |
In addition, the stock market in general, and the market for technology and media companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action litigation has often been instituted against these companies. If litigation is instituted against us, it could result in substantial costs and a diversion of our management's attention and resources even if such litigation is without merit and regardless of the outcome of such litigation.
Sales of outstanding shares of our common stock (or shares of our common stock issued upon exercise of stock options) into the market in the future could cause the market price of our stock to drop significantly, even if our business is doing well.
As of March 31, 2015, we had 50,433,777 shares of common stock outstanding which are freely tradable, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with the volume, manner of sale, notice and availability of public information provisions of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. Our co-founders and certain other pre-IPO stockholders also have registration rights which enable them to cause us to register for sale shares held by them in the public markets. If our existing security holders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline.
In addition, as of March 31, 2015, there were 15,557,642 shares underlying options and restricted stock that were issued and outstanding and we have an aggregate of 5,965,443 shares of common stock reserved for future issuance under our equity
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incentive plan and employee stock purchase plan. These shares will become eligible for sale in the public market to the extent permitted by the provisions of various option and warrant agreements, maintenance of applicable registration statements and Rules 144 and 701 under the Securities Act. If additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our stock could decline and it might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.
Our co-founders, directors, executive officers and principal stockholders have substantial control over us and could delay or prevent a change in corporate control.
As of March 31, 2015, our directors and executive officers, together with their affiliates, beneficially owned approximately 14% of our outstanding common stock, including approximately 13% beneficially owned by Michael V. Lewis, our Chairman and Chief Executive Officer.
These stockholders, acting together, have the ability to control, or have significant influence over, the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have the ability to control, or have significant influence over, the management and affairs of our Company. Accordingly, this concentration of ownership might harm the market price of our common stock by:
• | delaying, deferring or preventing a change in corporate control; |
• | impeding a merger, consolidation, takeover or other business combination involving us; or |
• | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. |
Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.
Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares that may be issued to satisfy our obligations under our equity incentive plans, shares that may be issued in connection with our acquisition of other companies, assets or technology, or shares of our authorized but unissued preferred stock. Issuances of common stock or preferred voting stock could reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, likely could result in your interest in us being subject to the prior rights of holders of that preferred stock. In addition, any future issuance of capital stock by us will dilute your economic interest in our Company.
We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We currently do not expect to pay dividends on shares of our common stock, and we intend to use cash generated from operations to continue to grow our business. Consequently, your only opportunity currently to achieve a positive return on your investment in us will be if the market price of our common stock appreciates. Our board of directors may, in the future and at their discretion, authorize the payment of dividends on our common stock depending on various factors, including our financial condition, results of operations, capital requirements, any restrictions that may be imposed by applicable law, our contracts and such other factors as are deemed relevant by them.
If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about our business or if they downgrade our stock, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. We do not control these analysts. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
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Provisions in our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a change of control of our Company or changes in our management and, therefore, may depress the trading price of our stock.
Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our stock by acting to discourage, delay or prevent a change of control of our Company or changes in our management that some of the stockholders of our Company may deem advantageous. Some of these provisions:
• | authorize the issuance of "blank check" preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt; |
• | provide for a classified board of directors (three classes) where only one-third of our board of directors is up for re-election at the annual stockholders meeting each year; |
• | provide that stockholders may only remove directors for cause; |
• | provide that stockholders may only remove directors prior to the expiration of their term upon a supermajority vote of at least 80% of our outstanding common stock; |
• | provide that any vacancy on our board of directors, including a vacancy resulting from an increase in the size of the board, may only be filled by the affirmative vote of a majority of our directors then in office, even if less than a quorum; |
• | provide that a special meeting of stockholders may only be called by our board of directors or by our chief executive officer; |
• | provide that action by written consent of the stockholders may be taken only if the board of directors first approves such action; provided that, notwithstanding the foregoing, we will hold an annual meeting of stockholders in accordance with NYSE rules, for so long as our shares are listed on NYSE, and as otherwise required by the bylaws; |
• | provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and |
• | establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
We may also adopt a "poison pill" stockholder rights plan at any time in response to a potentially hostile bid or for any or no reason due to our available "blank check" preferred stock. Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any "interested" stockholder for a period of three years following the date on which the stockholder became an "interested" stockholder.
Item 1B. Unresolved staff comments
None.
Item 2. Properties
Our principal properties as of March 31, 2015 are set forth below:
Our corporate headquarters and principal operations are located in Beverly Hills, California, where we lease and occupy approximately 43,500 square feet. The term of our lease for our Beverly Hills corporate headquarters expires in August 2021, with an option to extend the term of the lease for one additional five-year period. We also have two facilities in Boulder, Colorado where we lease and occupy a total of approximately 93,700 square feet. The terms of these leases expire in August 2015 and June 2024. One of the leases has an option to extend for four additional five-year periods.
We also have offices outside London in Hemel Hempstead and Oxford, United Kingdom where we lease and occupy a total of approximately 7,400 square feet. The term of one lease expires in January 2025 and the other is month-to-month.
We also have offices in Tokyo, Japan where we lease and occupy approximately 1,400 square feet. The term of this lease expires in December 2015.
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We also have offices in Shanghai, China where we lease and occupy approximately 3,000 square feet. The term of this lease expires in January 2016.
We also have offices in Beijing, China where we lease and occupy approximately 1,600 square feet. The term of this lease expires in December 2017.
We also have offices in Wan Chai, Hong Kong where we lease and occupy approximately 200 square feet. The term of this lease expires in July 2015.
We also have offices in Taipei, Taiwan where we lease and occupy approximately 200 square feet. The term of this lease expires in January 2016.
We also have offices in Moscow, Russia where we lease and occupy approximately 1,500 square feet. The term of this lease expires in January 2016.
We also have offices in Rio de Janeiro, Brazil where we lease and occupy approximately 500 square feet. The term of this lease expires in January 2017.
We believe that our facilities are in good condition and generally suitable and adequate for our needs for the foreseeable future. However, we will continue to seek additional space as needed to satisfy our growth.
Item 3. Legal proceedings
We are involved in various legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights, commercial, employment and other matters. Our management believes that losses in excess of the amounts accrued arising from such lawsuits are remote, but that litigation is necessarily uncertain and there is the potential for a material adverse effect on our financial statements if one or more matters are resolved in a particular period in an amount in excess of that anticipated by management.
In March 2014, we filed separate patent lawsuits in the United States District Court for the Central District of California against MasterImage 3D, Inc., et al. ("MasterImage"), for its MI-Horizon 3D products, and against Volfoni Inc., et al. ("Volfoni"), for its SmartCrystal Diamond product. These lawsuits contend that MasterImage and Volfoni are infringing on RealD XL Cinema System intellectual property rights with their respective products. In June 2014, we dismissed the lawsuit against Volfoni without prejudice after Volfoni made specific representations and warranties that it had not sold or distributed and is not selling or distributing its SmartCrystal product in the United States.
In November 2014, we filed a complaint with the United States International Trade Commission ("ITC") and the ITC instituted an investigation under Section 337 of the Tariff Act of 1930 into MasterImage’s allegedly infringing imports into the United States. RealD has requested that the ITC issue an Exclusion Order to bar importation of those MasterImage products and the key components inside those products. We have also sought a Cease and Desist Order to bar further sales and other domestic commercial activities of infringing MasterImage products and key components that have already been imported. The investigation is ongoing before the ITC, and RealD expects the evidentiary hearing to commence in September 2015. Pending the ITC action, RealD and MasterImage have mutually agreed to stay the concurrent proceedings in the US District Court without prejudice.
In May 2015, the Company filed a lawsuit with the Paris First Instance Court against MasterImage 3D PLC, Kinepolis Group and Kinepolis Le Chateau Du Cinema, for infringement of RealD's European patent related to the RealD XL Cinema System 3D cinema projection technology. The action is pending.
Our competitors have filed petitions seeking re-examinations and other challenges to our patents and patent applications in the United States, Europe, Australia, China, Japan and Russia. The Company is vigorously defending against these challenges.
Item 4. Mining safety disclosures
Not applicable.
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PART II
Item 5. Market for registrant's common equity, related stockholder matters and issuer purchases of equity securities.
Market information and holders
Our common stock is traded on the New York Stock Exchange under the symbol "RLD". The following table shows, for the periods indicated, the high and low per share sale prices of our common stock, as reported by the New York Stock Exchange.
Prices | |||||||
High | Low | ||||||
Fiscal year ended March 31, 2015 | |||||||
First quarter | $ | 13.18 | $ | 9.83 | |||
Second quarter | $ | 12.32 | $ | 8.97 | |||
Third quarter | $ | 11.97 | $ | 9.07 | |||
Fourth quarter | $ | 13.53 | $ | 10.13 | |||
Fiscal year ended March 31, 2014 | |||||||
First quarter | $ | 15.58 | $ | 12.91 | |||
Second quarter | $ | 13.98 | $ | 6.68 | |||
Third quarter | $ | 9.34 | $ | 6.41 | |||
Fourth quarter | $ | 11.88 | $ | 7.78 | |||
On June 4, 2015, the last reported sales price of our common stock on the New York Stock Exchange was $12.87 per share. According to the records of our transfer agent, we had 131 stockholders of record of our common stock on June 4, 2015. This number does not include persons who hold our common stock through brokers or other institutions.
Dividends
We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Instead, we expect that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon various factors, including our financial condition, results of operations, capital requirements, any restrictions that may be imposed by applicable law and our contracts and such other factors as are deemed relevant by our board of directors.
Stock repurchase program
On April 20, 2012, we announced that our board of directors had approved an authorization to repurchase up to $50 million of RealD common stock. On December 17, 2012, our board of directors approved a $25 million increase in our stock repurchase plan, increasing the $50 million repurchase plan announced on April 20, 2012 to $75 million. The number of shares to be repurchased and the timing of any potential repurchases will depend on factors such as our stock price, economic and market conditions, alternative uses of capital, and corporate and regulatory requirements. Repurchases of common stock may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when we might otherwise be precluded from doing so under insider trading laws, and a variety of other methods, including open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or by any combination of such methods. The repurchase program may be suspended or discontinued at any time. Pursuant to our stock repurchase plan authorized by our board of directors, we have repurchased a total of 6,599,726 shares of common stock at an average price per share of $10.30, including sales commissions, for an aggregate cost of $67.9 million inception to date. For the fiscal year ended March 31, 2014, we repurchased a total of 671,997 shares of common stock at an average price per share of $11.18, including sales commissions, for an aggregate cost of $7.5 million. For the fiscal year ended March 31, 2015, we did not make any stock repurchases.
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Equity compensation plan information
The following table summarizes our equity compensation plans as of March 31, 2015:
Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights | Weighted-average Exercise Price of Outstanding Options and Rights | Number of Securities Remaining Available for Future Issuance | |||||||
(a) | (b) | (c) | |||||||
Equity compensation plans approved by security holders (1) | 9,592,199 | $ | 13.74 | 5,965,443 | |||||
Total | 9,592,199 | $ | 13.74 | 5,965,443 | |||||
_______________________________________________________________________________
(1) | The weighted average exercise price under column (b) with respect to equity compensation plans does not include shares issuable upon the vesting of outstanding restricted stock units and performance stock units which have no exercise price. |
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Comparison of stockholder return
The performance graph presented below shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of RealD under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph compares the cumulative total return for the period from July 16, 2010 (the date our common stock commenced trading on the New York Stock Exchange) to March 31, 2015 provided to stockholders on RealD Inc.'s common stock relative to the cumulative total returns of the NYSE Composite Index, the Russell 2000 Index and the Bloomberg Hollywood Reporter Index.
Comparison of Cumulative Total Return*
Among the NYSE Composite Index, the Russell 2000 Index
and the Bloomberg Hollywood Reporter Index
7/16/2010 | 3/11 | 3/12 | 3/13 | 3/14 | 3/15 | ||||||||||||
RealD Inc. | 100.00 | 140.24 | 69.20 | 66.63 | 57.25 | 65.56 | |||||||||||
NYSE Composite Index | 100.00 | 127.16 | 127.30 | 145.12 | 171.93 | 182.28 | |||||||||||
Russell 2000 Index | 100.00 | 139.38 | 139.00 | 161.81 | 202.10 | 218.69 | |||||||||||
Bloomberg Hollywood Reporter Index | 100.00 | 134.73 | 137.98 | 176.21 | 221.33 | 261.27 | |||||||||||
_______________________________________________________________________________
* | Assumes that $100.00 was invested in RealD common stock and in each index at market closing prices on July 16, 2010, and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. |
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Item 6. Selected financial data
The selected financial data set forth below should be read in conjunction with our consolidated financial statements and related notes and "Management's discussion and analysis of financial condition and results of operations" in Part II, Item 7 appearing elsewhere in this Annual Report on Form 10-K.
The selected consolidated statement of operations data for the years ended March 31, 2015, March 31, 2014, March 31, 2013, March 23, 2012 and March 25, 2011 and the selected consolidated balance sheet data as of March 31, 2015, March 31, 2014, March 31, 2013, March 23, 2012 and March 25, 2011 have been derived from our audited consolidated financial statements included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected for future periods.
Year ended | |||||||||||||||||||
(in thousands, except per share data) | March 31, 2015 | March 31, 2014 | March 31, 2013 | March 23, 2012 | March 25, 2011 | ||||||||||||||
Consolidated Statement of Operations Data: | |||||||||||||||||||
Net revenue | $ | 163,463 | $ | 199,234 | $ | 215,552 | $ | 246,628 | $ | 246,136 | |||||||||
Cost of revenue | 82,685 | 103,975 | 125,360 | 117,938 | 178,396 | ||||||||||||||
Gross profit | 80,778 | 95,259 | 90,192 | 128,690 | 67,740 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Research and development | 19,474 | 19,685 | 19,454 | 16,500 | 15,582 | ||||||||||||||
Selling and marketing | 21,719 | 27,137 | 25,266 | 27,682 | 24,139 | ||||||||||||||
General and administrative | 49,370 | 50,596 | 47,830 | 42,189 | 35,835 | ||||||||||||||
Total operating expenses | 90,563 | 97,418 | 92,550 | 86,371 | 75,556 | ||||||||||||||
Operating income (loss) | (9,785 | ) | (2,159 | ) | (2,358 | ) | 42,319 | (7,816 | ) | ||||||||||
Interest expense, net | (1,634 | ) | (2,255 | ) | (1,483 | ) | (971 | ) | (919 | ) | |||||||||
Other income (loss) | (4,419 | ) | (679 | ) | (982 | ) | 782 | 6,182 | |||||||||||
Income tax expense | 7,909 | 6,117 | 5,064 | 5,105 | 4,272 | ||||||||||||||
Net income (loss) | (23,747 | ) | (11,210 | ) | (9,887 | ) | 37,025 | (6,825 | ) | ||||||||||
Accretion of preferred stock | — | — | — | — | (4,934 | ) | |||||||||||||
Net income (loss) attributable to RealD Inc. common stockholders | $ | (23,822 | ) | $ | (11,406 | ) | $ | (9,690 | ) | $ | 36,869 | $ | (12,289 | ) | |||||
Basic earnings (loss) per share of common stock (1) | $ | (0.48 | ) | $ | (0.23 | ) | $ | (0.19 | ) | $ | 0.68 | $ | (0.29 | ) | |||||
Diluted earnings (loss) per share of common stock (1) | $ | (0.48 | ) | $ | (0.23 | ) | $ | (0.19 | ) | $ | 0.65 | $ | (0.29 | ) | |||||
Shares used in computing basic earnings (loss) per share of common stock (1) | 50,042 | 49,504 | 52,345 | 54,352 | 41,933 | ||||||||||||||
Shares used in computing diluted earnings (loss) per share of common stock (1) | 50,042 | 49,504 | 52,345 | 56,852 | 41,933 | ||||||||||||||
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Year ended | |||||||||||||||||||
(in thousands) | March 31, 2015 | March 31, 2014 | March 31, 2013 | March 23, 2012 | March 25, 2011 | ||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 60,333 | $ | 28,800 | $ | 31,020 | $ | 24,894 | $ | 16,936 | |||||||||
Total assets | 229,644 | 247,182 | 273,648 | 302,175 | 280,147 | ||||||||||||||
Total indebtedness (including short-term indebtedness) | 29,840 | 36,250 | 47,500 | 25,000 | 2,310 | ||||||||||||||
Total equity | $ | 146,343 | $ | 150,834 | $ | 149,189 | $ | 197,606 | $ | 145,100 | |||||||||
Year ended | |||||||||||||||||||
(in thousands) | March 31, 2015 | March 31, 2014 | March 31, 2013 | March 23, 2012 | March 25, 2011 | ||||||||||||||
Consolidated Other Data: | |||||||||||||||||||
Capital expenditures | $ | 17,430 | $ | 22,335 | $ | 34,290 | $ | 61,468 | $ | 102,643 | |||||||||
Depreciation and amortization | 39,999 | 40,300 | 33,131 | 28,266 | 15,737 | ||||||||||||||
Adjusted EBITDA (2) | 52,034 | 65,122 | 57,926 | 96,598 | 54,621 | ||||||||||||||
Cash flows provided by (used in): | |||||||||||||||||||
Operating activities | 51,847 | 35,700 | 79,697 | 43,001 | 35,098 | ||||||||||||||
Investing activities | (17,367 | ) | (21,784 | ) | (37,900 | ) | (57,469 | ) | (87,031 | ) | |||||||||
Financing activities | (4,645 | ) | (16,283 | ) | (35,786 | ) | 22,426 | 55,735 | |||||||||||
Free cash flow (3) | $ | 34,417 | $ | 13,365 | $ | 45,407 | $ | (18,467 | ) | $ | (67,545 | ) | |||||||
Year ended | ||||||||||||||
(approximate numbers) | March 31, 2015 | March 31, 2014 | March 31, 2013 | March 23, 2012 | March 25, 2011 | |||||||||
Number of RealD-enabled screens (at period end): | ||||||||||||||
Total domestic RealD-enabled screens | 13,600 | 13,400 | 12,800 | 11,700 | 8,700 | |||||||||
Total China RealD-enabled screens | 2,050 | 1,550 | 1,100 | 500 | 100 | |||||||||
Total rest of world RealD-enabled screens | 11,050 | 10,250 | 8,800 | 8,000 | 6,200 | |||||||||
Total RealD-enabled screens | 26,700 | 25,200 | 22,700 | 20,200 | 15,000 | |||||||||
Number of locations with RealD-enabled screens (at period end): | ||||||||||||||
Total domestic locations with RealD-enabled screens | 3,000 | 3,000 | 2,800 | 2,600 | 2,300 | |||||||||
Total China locations with RealD-enabled screens | 300 | 250 | 200 | 130 | 40 | |||||||||
Total rest of world locations with RealD-enabled screens | 2,850 | 2,650 | 2,500 | 2,370 | 2,160 | |||||||||
Total locations with RealD-enabled screens | 6,150 | 5,900 | 5,500 | 5,100 | 4,500 | |||||||||
_______________________________________________________________________________
(1) | For more information regarding loss per share calculations, see Note 2, "Earnings (loss) per share of common stock," to our consolidated financial statements and our consolidated financial statements. |
33
(2) | Adjusted EBITDA is not a recognized measurement under U.S. GAAP. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the comparable U.S. GAAP item, see "Non-U.S. GAAP discussion" under Item 7 in Part II. Set forth below is a reconciliation of Adjusted EBITDA to net income (loss) for the following periods indicated: |
Year ended | |||||||||||||||||||
(in thousands) | March 31, 2015 | March 31, 2014 | March 31, 2013 | March 23, 2012 | March 25, 2011 | ||||||||||||||
Net loss | $ | (23,747 | ) | $ | (11,210 | ) | $ | (9,887 | ) | $ | 37,025 | $ | (6,825 | ) | |||||
Add (deduct): | |||||||||||||||||||
Interest expense, net | 1,634 | 2,255 | 1,483 | 971 | 919 | ||||||||||||||
Income tax expense | 7,909 | 6,117 | 5,064 | 5,105 | 4,272 | ||||||||||||||
Depreciation and amortization | 39,999 | 40,300 | 33,131 | 28,266 | 15,737 | ||||||||||||||
Other (income) loss (1) | 4,419 | 679 | 982 | (782 | ) | (6,182 | ) | ||||||||||||
Share-based compensation expense (2) | 14,898 | 17,741 | 18,474 | 15,744 | 8,950 | ||||||||||||||
Impairment of assets and intangibles (3) | 5,023 | 4,522 | 8,679 | 10,269 | 1,128 | ||||||||||||||
Cost reduction plan (4) | 1,373 | 4,718 | — | — | — | ||||||||||||||
Nonrecurring expenses (5) | 526 | — | — | — | — | ||||||||||||||
Adjusted EBITDA (6) | $ | 52,034 | $ | 65,122 | $ | 57,926 | $ | 96,598 | $ | 17,999 | |||||||||
_______________________________________________________________________________
(1) | Consists of gains and losses from foreign currency exchange and foreign currency forward contracts. |
(2) | Represents share-based compensation expense of nonstatutory and incentive stock options, restricted stock units and performance stock units, and employee stock purchase plan to employees, non-employees, officers and directors. |
(3) | Represents impairment of long-lived assets, such as fixed assets, theatrical equipment and related purchase commitments and identifiable intangibles. |
(4) | Expenses under our Credit Agreement for the non-U.S. GAAP categories "restructuring charges, severance costs and reserves" and "non-recurring expenses" (also see the "Cost reduction plans" caption above). |
(5) | Expenses under our Credit Agreement for the non-U.S. GAAP category "non-recurring costs and expenses". In fiscal year ended March 31, 2015, these expenses represent advisory fees related to our strategic alternatives process. |
(6) | Adjusted EBITDA is not a recognized measurement under U.S. GAAP. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the comparable U.S. GAAP item, see "Non-U.S. GAAP discussion" under Item 7 in Part II. |
We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA in developing our internal budgets, forecasts and strategic plans, in analyzing the effectiveness of our business strategies, in evaluating potential acquisitions, in making compensation decisions and in communications with our board of directors concerning our financial performance. Adjusted EBITDA also aligns with the similarly titled definition in the 2014 Credit Agreement and is used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments. Adjusted EBITDA has limitations as an analytical tool which includes, among others, the following:
• | Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
• | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
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• | Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; |
• | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
• | non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; |
• | Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and |
• | other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplement. Our consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with U.S. GAAP. See also "Part II, Item 7: Management's discussion and analysis of financial condition and results of operations—Non-U.S. GAAP discussion" and "—Seasonality and quarterly performance".
Beginning in the first quarter of fiscal year 2014, we modified our definition of Adjusted EBITDA to align with the Adjusted EBITDA definition under the 2014 Credit Agreement. As a result, we no longer add back sales and use tax and property tax to calculate Adjusted EBITDA for financial reporting purposes.
(3) | Free cash flow is not a recognized measurement under U.S. GAAP. For a definition of free cash flow and reconciliation to cash provided (used) by operating activities, the comparable U.S. GAAP item, see "Non-U.S. GAAP discussion" under Item 7 in Part II. Set forth below is a reconciliation of free cash flow to cash provided (used) by operating activites for the following periods indicated: |
Year ended | |||||||||||||||||||
(in thousands) | March 31, 2015 | March 31, 2014 | March 31, 2013 | March 23, 2012 | March 25, 2011 | ||||||||||||||
Net cash provided by operating activities | $ | 51,847 | $ | 35,700 | $ | 79,697 | $ | 43,001 | $ | 35,098 | |||||||||
Purchases of property and equipment | (4,359 | ) | (4,285 | ) | (16,169 | ) | (8,760 | ) | (6,416 | ) | |||||||||
Purchases of cinema systems and related components | (13,071 | ) | (18,050 | ) | (18,121 | ) | (52,708 | ) | (96,227 | ) | |||||||||
Total free cash flow | $ | 34,417 | $ | 13,365 | $ | 45,407 | $ | (18,467 | ) | $ | (67,545 | ) | |||||||
We present free cash flow because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by evaluating our liquidity and capital resources. In addition, we use free cash flow in developing our internal budgets, forecasts and strategic plans, in analyzing the effectiveness of our business strategies, in evaluating potential acquisitions, in making compensation decisions and in communications with our board of directors concerning our financial performance. However, free cash flow is not a recognized measurement under U.S. GAAP, should not be used in a manner that inappropriately implies that the measure represents the residual cash flow available for discretionary expenditures, and should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP.
Item 7. Management's discussion and analysis of financial condition and results of operations
The following discussion should be read together with "Selected Financial Data" and our historical consolidated financial statements and accompanying notes, which are included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions which could cause actual results to differ materially from management's expectations. See "Part I, Item 1A: Risk factors" and "Special note regarding forward-looking statements and other industry data" included elsewhere in this Annual Report on Form 10-K.
35
Overview
We are a leading global licensor of 3D and other visual technologies. We have an extensive intellectual property portfolio that is and can be used in applications that enable a premium viewing experience in the theater, the home and elsewhere.
Currently, we have one reportable segment for financial reporting purposes. We derive substantially all of our revenue from our core business: the licensing of RealD Cinema Systems and the product sale of RealD eyewear to motion picture exhibitors to enable a premium viewing experience for 3D motion pictures and alternative 3D content in the theater.
Key business metrics
Our management regularly reviews a number of business metrics, including the following key metrics to evaluate our business, monitor the performance of our business model, identify trends affecting our business, determine the allocation of resources, make decisions regarding corporate strategies and evaluate forward-looking projections. The measures that we believe are the primary indicators of our quarterly and annual performance are as follows:
• | RealD box office. Estimated domestic box office on RealD-enabled screens represents the estimated 3D box office generated on RealD-enabled domestic screens. Estimated international box office on RealD-enabled screens is the estimated 3D box office generated on RealD-enabled international screens. RealD's estimates of box office on RealD-enabled screens rely on box office tracking data. International box office reflects RealD's estimates of international box office generated on RealD-enabled screens in 19 foreign countries, excluding China, where box office tracking is available. RealD estimates these countries represent approximately 85% of RealD's international license revenues. |
• | Number of 3D motion pictures. Total 3D motion pictures are the number of 3D motion pictures released domestically in North America during the relevant period. |
• | Number of screens. We refer to motion picture theater screens in the United States or Canada enabled with our RealD Cinema Systems as "domestic screens", motion picture theater screens in China enabled with our RealD Cinema Systems as "China screens" and motion picture theater screens outside the United States, Canada and China enabled with our RealD Cinema Systems as "rest of world screens", or "ROW screens". |
• | Number of locations. We refer to motion picture exhibition complexes in the United States or Canada with one or more screens enabled with our RealD Cinema Systems as "domestic locations", motion picture exhibition complexes in China as "China locations" and motion picture exhibition complexes outside the United States, Canada and China with one or more screens enabled with our RealD Cinema Systems as "rest of world locations" or "ROW locations". |
• | Adjusted EBITDA. We use Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net income (loss) plus expenses for interest, income taxes, depreciation, amortization, impairment and stock-based compensation plus net foreign exchange loss (gain) plus expenses comprising the non-U.S. GAAP categories "restructuring charges, severance costs and reserves"and "non-recurring expenses" as defined in our 2014 Credit Agreement. We do not consider the preceding adjustments to be indicative of our core operating performance. We consider our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations for that period. However, Adjusted EBITDA is not a recognized measurement under U.S. GAAP and should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. For a reconciliation of Adjusted EBITDA to U.S. GAAP net income (loss) and for further discussion regarding Adjusted EBITDA, see "Non-U.S. GAAP discussion". Beginning in the first quarter of fiscal year 2014, we modified our definition of Adjusted EBITDA for financial reporting purposes to align with the Adjusted EBITDA definition under the Credit Agreement (see "Liquidity and capital resources" caption below). As a result, we no longer add back sales and use tax and property tax to calculate Adjusted EBITDA for financial reporting purposes. |
• | Free cash flow. We use free cash flow as a supplemental measure of our performance in liquidity. We define free cash flow as total cash provided (used) by operating activities less cash used in purchases of property and equipment and cash used in purchases of cinema systems and related components. However, free cash flow is not a recognized measurement under U.S. GAAP, should not be used in a manner that inappropriately implies that the measure represents the residual cash flow available for discretionary expenditures, and should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. For a reconciliation of and further discussion regarding free cash flow, see "Non-U.S. GAAP discussion". |
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The following table sets forth additional performance highlights of key business metrics for the periods presented (approximate numbers):
Years ended March 31 | |||||||||||
(approximate numbers, in millions) | 2015 | 2014 | 2013 | ||||||||
Estimated box office on RealD-enabled screens (generated during the period) | |||||||||||
Estimated box office on RealD-enabled domestic screens | $ | 947 | $ | 1,255 | $ | 1,297 | |||||
Estimated box office on RealD-enabled international screens | 1,079 | 1,421 | 1,602 | ||||||||
Total estimated box office on RealD-enabled screens | $ | 2,026 | $ | 2,676 | $ | 2,899 | |||||
Years ended March 31 | ||||||||
(approximate numbers) | 2015 | 2014 | 2013 | |||||
Number of RealD-enabled screens (at period end) | ||||||||
Total domestic RealD-enabled screens | 13,600 | 13,400 | 12,800 | |||||
Total China RealD-enabled screens | 2,050 | 1,550 | 1,100 | |||||
Total rest of world RealD-enabled screens | 11,050 | 10,250 | 8,800 | |||||
Total RealD-enabled screens | 26,700 | 25,200 | 22,700 | |||||
Number of locations with RealD-enabled screens (at period end) | ||||||||
Total domestic locations with RealD-enabled screens | 3,000 | 3,000 | 2,800 | |||||
Total China locations with RealD-enabled screens | 300 | 250 | 200 | |||||
Total rest of world locations with RealD-enabled screens | 2,850 | 2,650 | 2,500 | |||||
Total locations with RealD-enabled screens | 6,150 | 5,900 | 5,500 | |||||
Number of 3D motion pictures (released domestically during period) | 29 | 35 | 35 | |||||
Performance highlights for Adjusted EBITDA and free cash flow are presented below under the caption "Non-U.S. GAAP discussion".
Opportunities, trends and factors affecting our results of operations
Almost all of our revenue is currently dependent upon both the number of 3D motion pictures released and the commercial success of those 3D motion pictures. We expect to continue to expand our business in the foreseeable future primarily through our sales and marketing efforts in China by building on the sales and operating presence we established in this market over the past several years.
Cinema
As of March 31, 2015, there were approximately 26,700 RealD-enabled screens worldwide as compared to approximately 25,200 RealD-enabled screens worldwide as of March 31, 2014, an increase period over period of 1,500 RealD-enabled screens or 6%. The majority of our increase in installed screens occurred in China, Latin America, Europe. Based on the slate announced by motion picture studios, we anticipate that approximately 30 3D motion pictures produced by domestic studios will be released worldwide in our fiscal year 2016, including Mad Max: Fury Road, San Andreas and sequels to successful major motion picture franchises, such as The Avengers, Despicable Me, Jurassic Park, Terminator, Hotel Transylvania, Paranormal Activity, Star Wars, The Nut Job, Kung Fu Panda and The Hunger Games.
Other technologies
We have made available certain of our technologies to consumer electronics manufacturers and content distributors to enable the delivery and viewing of 3D content.
Cost reduction plans
Over the past few quarters, we implemented our Cost Reduction Plans to reduce the overall costs of our global operations, and we are seeking further efficiencies in our cost structure, including actively evaluating alternatives for certain of our research and development efforts. Moreover, we announced in December 2014 additional operating expense savings and capital expenditure reductions projected for fiscal year 2016. There is no guarantee that any cost reduction will actually be achieved.
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Strategic alternatives process
In the fourth quarter of our fiscal year ended March 31, 2015, we announced that we had engaged Moelis & Company LLC as our financial advisor to assist in our evaluation of potential strategic alternatives with the goal of enhancing value for all shareholders. There can be no assurance that the strategic alternatives process will result in pursuing a particular transaction or completing any such transaction.
Accounting period
On November 14, 2012, our Board of Directors approved a change in our accounting periods from the previous configuration of four 13-week periods for a total of 52 weeks to a calendar month end and calendar quarter end accounting period. This change in accounting period commenced in the third quarter ended December 31, 2012 of fiscal year 2013. As a result, the years ended March 31, 2015 and March 31, 2014 are eight days shorter (2.1%) than the year ended March 31, 2013.
Key components of our results of operations
Revenue
We derive substantially all of our revenue from the license of our RealD Cinema Systems and the use and sale of our RealD eyewear.
We license our RealD Cinema Systems under multi-year (typically five years or longer) agreements that are generally exclusive with our motion picture exhibitor licensees in both the domestic and international markets. Our license agreements for our RealD Cinema Systems are typically structured on a per-admission, periodic fixed-fee or per-motion picture basis. Currently, our license revenue is derived principally on a per-admission basis.
We generate product revenue from the distribution of RealD eyewear to motion picture studios and exhibitors worldwide. In the domestic market (the United States and Canada), we provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors' consumers. Most international motion picture exhibitors purchase RealD eyewear directly from us and sell them to consumers as part of the admission fee or as a concession item.Our cinema business is tied directly to the release of 3D motion pictures. These motion pictures tend to be released based on specific consumer entertainment dynamics, which results in seasonal patterns, with the largest number of motion pictures typically being released in the summer and early winter. We anticipate that approximately 30 3D motion pictures produced by domestic studios will be released worldwide in our fiscal year 2016, including Mad Max: Fury Road, San Andreas and sequels to successful major motion picture franchises, such as The Avengers, Despicable Me, Jurassic Park, Terminator, Hotel Transylvania, Paranormal Activity, Star Wars, The Nut Job, Kung Fu Panda and The Hunger Games.
Upfront payments for the purchase of RealD eyewear and license fees associated with certain motion picture exhibitor license agreements are recorded as deferred revenue until the applicable revenue recognition criteria are met.
Cost of revenue and operating expenses
Cost of revenue principally consists of depreciation expense of our RealD Cinema Systems deployed at a motion picture exhibitor's premises, digital projector depreciation expenses, RealD eyewear costs (including shipping, handling and recycling costs), field service and support costs and occupancy costs.
We classify our operating expenses into three categories: research and development, selling and marketing and general and administrative. Personnel costs include salaries, bonuses, benefits and share-based compensation. We allocate share-based compensation expense resulting from the amortization of the fair value of stock options granted based on how we categorize the department in which the stock option holder works.
Research and development. Research and development costs principally consist of personnel costs related to our research and development staff, depreciation and amortization of research and development assets, prototype and materials costs, the cost of third-party service providers supporting our research and development efforts and occupancy costs.
Selling and marketing. Selling and marketing costs principally consist of personnel costs related to our selling and marketing staff, advertising costs, including promotional events and other brand building initiatives and product marketing expenses, corporate communications, professional fees, occupancy costs and travel expenses.
General and administrative. General and administrative costs principally consist of personnel costs related to our executive, legal, finance and human resources staff, professional fees including legal and accounting costs, occupancy costs, bad debt expense, public company costs and gains and losses from disposition of assets. Additionally, general and
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administrative costs include sales, use, goods and services tax and value added tax (collectively, the "transaction taxes") as well as property taxes. For our U.S. and some of our international cinema license and product revenue, we absorb the majority of the transaction taxes.
Results of operations
The following table sets forth our audited consolidated statements of operations and other data for each of the periods indicated:
_______________________________________________________________________________
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Consolidated statements of operations data: | |||||||||||
Total revenue | $ | 163,463 | $ | 199,234 | $ | 215,552 | |||||
Cost of revenue | 82,685 | 103,975 | 125,360 | ||||||||
Gross margin | 80,778 | 95,259 | 90,192 | ||||||||
Operating expenses: | |||||||||||
Research and development | 19,474 | 19,685 | 19,454 | ||||||||
Selling and marketing | 21,719 | 27,137 | 25,266 | ||||||||
General and administrative | 49,370 | 50,596 | 47,830 | ||||||||
Total operating expenses | 90,563 | 97,418 | 92,550 | ||||||||
Operating loss | (9,785 | ) | (2,159 | ) | (2,358 | ) | |||||
Interest expense, net | (1,634 | ) | (2,255 | ) | (1,483 | ) | |||||
Other loss | (4,419 | ) | (679 | ) | (982 | ) | |||||
Loss before income taxes | (15,838 | ) | (5,093 | ) | (4,823 | ) | |||||
Income tax expense | 7,909 | 6,117 | 5,064 | ||||||||
Net loss | (23,747 | ) | (11,210 | ) | (9,887 | ) | |||||
Net (income) loss attributable to noncontrolling interest | (75 | ) | (196 | ) | 197 | ||||||
Net loss attributable to RealD Inc. common stockholders | $ | (23,822 | ) | $ | (11,406 | ) | $ | (9,690 | ) | ||
Other data: | |||||||||||
Adjusted EBITDA (1) | $ | 52,034 | $ | 65,122 | $ | 57,926 | |||||
Free cash flow (2) | $ | 34,417 | $ | 13,365 | $ | 45,407 | |||||
(1) | Adjusted EBITDA is not a recognized measurement under U.S. GAAP. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the comparable U.S. GAAP item, see "Non-U.S. GAAP discussion". |
(2) | Free cash flow is not a recognized measurement under U.S. GAAP. For a definition of free cash flow and reconciliation to cash provided (used) by operating activities, the comparable U.S. GAAP item, see "Non-U.S. GAAP discussion". |
The following table sets forth our consolidated statements of operations and other data as a percentage of net revenue for each of the periods indicated:
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Years ended March 31 | ||||||||
2015 | 2014 | 2013 | ||||||
Total revenue | 100 | % | 100 | % | 100 | % | ||
Cost of revenue | 50.6 | 52.2 | 58.2 | |||||
Gross margin | 49.4 | 47.8 | 41.8 | |||||
Operating expenses: | ||||||||
Research and development | 11.9 | 9.9 | 9.0 | |||||
Selling and marketing | 13.3 | 13.6 | 11.7 | |||||
General and administrative | 30.2 | 25.4 | 22.2 | |||||
Total operating expenses | 55.4 | 48.9 | 42.9 | |||||
Operating loss | (6.0 | ) | (1.1 | ) | (1.1 | ) | ||
Interest expense, net | (1.0 | ) | (1.1 | ) | (0.7 | ) | ||
Other loss | (2.7 | ) | (0.3 | ) | (0.5 | ) | ||
Loss before income taxes | (9.7 | ) | (2.5 | ) | (2.2 | ) | ||
Income tax expense | 4.8 | 3.1 | 2.3 | |||||
Net loss | (14.5 | ) | (5.6 | ) | (4.6 | ) | ||
Net (income) loss attributable to noncontrolling interest | 0.1 | (0.1 | ) | 0.1 | ||||
Net loss attributable to RealD Inc. common stockholders | (14.6 | )% | (5.7 | )% | (4.5 | )% | ||
Other data: | ||||||||
Adjusted EBITDA (1) | 31.8 | % | 32.7 | % | 26.9 | % | ||
_______________________________________________________________________________
(1) | For a definition of Adjusted EBITDA and reconciliation to net income (loss), the most comparable U.S. GAAP item, see "Non-U.S. GAAP discussion". |
The following table sets forth share-based compensation and depreciation and amortization included in the above line items:
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Share-based compensation | |||||||||||
Cost of revenue | $ | 1,212 | $ | 865 | $ | 807 | |||||
Research and development | 3,227 | 2,708 | 2,185 | ||||||||
Selling and marketing | 3,017 | 5,543 | 5,258 | ||||||||
General and administrative | 7,442 | 8,625 | 10,224 | ||||||||
Total | $ | 14,898 | $ | 17,741 | $ | 18,474 | |||||
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Depreciation and amortization | |||||||||||
Cost of revenue | $ | 34,497 | $ | 34,218 | $ | 29,300 | |||||
Research and development | 1,016 | 2,099 | 1,943 | ||||||||
Selling and marketing | 170 | 293 | 295 | ||||||||
General and administrative | 4,316 | 3,690 | 1,593 | ||||||||
Total | $ | 39,999 | $ | 40,300 | $ | 33,131 | |||||
In the period to period comparative discussion below, we describe our net revenue, license revenue (composed principally of revenue from our RealD Cinema Systems), and product and other revenue (principally composed of our RealD eyewear and, to a much lesser extent, professional product revenue and other revenue).
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Cost reduction plans
Over the past few quarters, we announced plans to reduce the overall costs of our global operations. The Cost Reduction Plans were primarily a response to the anticipated impact on our financial results and operations caused by changes in the 3D box office performance of certain motion pictures due to perceived changes in consumer preference and the fact that our 3D cinema business is maturing in many markets like the United States in which we expected equipment installations to continue to slow. As part of the Cost Reduction Plans, we reduced our staff, rescoped and made other changes to certain research and development projects, reduced certain non-personnel related general and administrative expenses and streamlined certain manufacturing operations. We further focused the expansion of our global cinema platform on emerging growth markets and higher performing motion picture exhibitors.
We account for the Cost Reduction Plans in accordance with the Accounting Standards Codification, including ASC 420, Exit or Disposal Cost Obligations, ASC 712, Compensation-Nonretirement Postemployment Benefits, ASC 840, Leases and ASC 360, Property, Plant and Equipment (Impairment or Disposal of Long-Lived Assets). As a result of the Cost Reduction Plans' workforce reduction and commencement of the relocation of manufacturing, we incurred termination and other charges totaling approximately $4.7 million for the fiscal year ended March 31, 2014. Charges of $1.4 million have been incurred for the fiscal year ended March 31, 2015, including $0.3 million for the accrual of losses on a lease for manufacturing facilities that will no longer be used in our operations. Therefore, the total charges were $6.1 million million through March 31, 2015. The following tables summarizes the charges resulting from implementation of the Cost Reduction Plans for the fiscal years ended March 31, 2015 and March 31, 2014:
Years ended March 31 | |||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||
(in thousands) | Personnel | Leasehold | Total | Personnel | Leasehold | Total | |||||||||||||||||
Cost of revenue | $ | 242 | $ | 601 | $ | 843 | $ | 835 | $ | 13 | $ | 848 | |||||||||||
Research and development | 240 | — | 240 | 757 | — | 757 | |||||||||||||||||
Selling and marketing | 97 | — | 97 | 1,830 | — | 1,830 | |||||||||||||||||
General and administrative | 192 | — | 192 | 1,206 | 77 | 1,283 | |||||||||||||||||
Total | $ | 771 | $ | 601 | $ | 1,372 | $ | 4,628 | $ | 90 | $ | 4,718 | |||||||||||
The following table summarizes the actual and estimated activity resulting from implementation of the cost reduction plan with accrued expenses and other liabilities:
Cost reduction plan liabilities | |||||||||||
(in thousands) | Personnel | Leasehold | Total | ||||||||
Cost reduction plan liabilities as of March 31, 2013 | $ | — | $ | — | $ | — | |||||
Charges | 4,628 | 90 | 4,718 | ||||||||
(Payments) | (3,212 | ) | (90 | ) | (3,302 | ) | |||||
Cost reduction plan liabilities as of March 31, 2014 | $ | 1,416 | $ | — | $ | 1,416 | |||||
Charges | 771 | 601 | 1,372 | ||||||||
(Payments) | (938 | ) | (336 | ) | (1,274 | ) | |||||
Cost reduction plan liabilities as of March 31, 2015 | $ | 1,249 | $ | 265 | $ | 1,514 | |||||
On December 4, 2014, we announced additional operating expense savings and capital expenditure reductions projected for fiscal year 2016. There is no guarantee that any cost reduction will actually be achieved.
Additionally, we lease office space for our headquarters that includes approximately $5.6 million in leasehold improvements and other items classified as fixed assets (see Note 3 "Cinema Systems and Property & Equipment"). If our headquarters were to be relocated, these fixed assets could become subject to an impairment assessment and contract termination costs or sublease loss could be incurred.
There is no guarantee that termination and implementation costs will not exceed the estimates, or that any net cost reduction will actually be achieved.
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Results of Operations
Fiscal year ended March 31, 2015 compared to fiscal year ended March 31, 2014
Revenue
For the fiscal year ended March 31, 2015, total revenue decreased $35.8 million to $163.5 million compared to $199.2 million for the fiscal year ended March 31, 2014.
Years ended March 31 | ||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||
(in thousands) | Amount | % of Total | Amount | % of Total | Amount change | Percentage change | ||||||||||||||
Revenue: | ||||||||||||||||||||
License revenue | ||||||||||||||||||||
Domestic | $ | 36,060 | 22 | % | $ | 49,289 | 25 | % | $ | (13,229 | ) | (27 | )% | |||||||
China | 18,362 | 11 | % | 16,138 | 8 | % | 2,224 | 14 | % | |||||||||||
Rest of World | 54,895 | 34 | % | 67,085 | 34 | % | (12,190 | ) | (18 | )% | ||||||||||
International | $ | 73,257 | 45 | % | $ | 83,223 | 42 | % | $ | (9,966 | ) | (12 | )% | |||||||
Total license revenue | $ | 109,317 | 67 | % | $ | 132,512 | 67 | % | $ | (23,195 | ) | (18 | )% | |||||||
Product and other | ||||||||||||||||||||
Domestic | $ | 35,021 | 21 | % | $ | 46,870 | 23 | % | $ | (11,849 | ) | (25 | )% | |||||||
China | 881 | 1 | % | 504 | — | % | 377 | 75 | % | |||||||||||
Rest of World | 18,244 | 11 | % | 19,348 | 10 | % | (1,104 | ) | (6 | )% | ||||||||||
International | $ | 19,125 | 12 | % | $ | 19,852 | 10 | % | $ | (727 | ) | (4 | )% | |||||||
Total product and other revenue | $ | 54,146 | 33 | % | $ | 66,722 | 33 | % | $ | (12,576 | ) | (19 | )% | |||||||
Total revenue | $ | 163,463 | 100 | % | $ | 199,234 | 100 | % | $ | (35,771 | ) | (18 | )% | |||||||
Other data: | ||||||||||||||||||||
Number of RealD-enabled screens (at period end) | ||||||||||||||||||||
Total domestic RealD-enabled screens | 13,600 | 51 | % | 13,400 | 53 | % | 200 | 1 | % | |||||||||||
Total China RealD-enabled screens | 2,050 | 8 | % | 1,550 | 6 | % | 500 | 32 | % | |||||||||||
Total rest of world RealD-enabled screens | 11,050 | 41 | % | 10,250 | 41 | % | 800 | 8 | % | |||||||||||
Total RealD-enabled screens | 26,700 | 100 | % | 25,200 | 100 | % | 1,500 | 6 | % | |||||||||||
Number of locations with RealD-enabled screens (at period end) | ||||||||||||||||||||
Total domestic locations with RealD-enabled screens | 3,000 | 49 | % | 3,000 | 51 | % | — | — | % | |||||||||||
Total China locations with RealD-enabled screens | 300 | 5 | % | 250 | 4 | % | 50 | 20 | % | |||||||||||
Total rest of world locations with RealD-enabled screens | 2,850 | 46 | % | 2,650 | 45 | % | 200 | 8 | % | |||||||||||
Total locations with RealD-enabled screens | 6,150 | 100 | % | 5,900 | 100 | % | 250 | 4 | % | |||||||||||
Number of 3D motion pictures (released domestically during period) | 29 | 35 | ||||||||||||||||||
The decrease in total revenue during the fiscal year ended March 31, 2015 compared to the fiscal year ended March 31, 2014 was primarily due to a decrease in both license revenue and product revenue resulting from a decrease in box office performance and lower corresponding eyewear usage, partially offset by increases in overall revenue in China resulting from continuous expansion in its cinema market. Our Chinese market comprised approximately 12% of total revenue for the fiscal year ended March 31, 2015 as compared to 8% for the fiscal year ended March 31, 2014. Our domestic market comprised approximately 43% of total revenue for the fiscal year ended March 31, 2015 as compared to 48% for the fiscal year ended
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March 31, 2014. Our ROW market comprised approximately 45% of total revenue for the fiscal year ended March 31, 2015 as compared to 44% for the fiscal year ended March 31, 2014.
For the fiscal year ended March 31, 2015, there were 20 motion pictures that contributed greater than $1.0 million of admission-based fees to license revenue. The top 10 pictures that contributed greater than $1.0 million admission-based fees to license revenue for the fiscal year ended March 31, 2015 included the following: Transformers 4: Age of Extinction ($7.3 million), X-Men 5: Days of Future Past ($5.6 million), Dawn of the Planet of the Apes ($5.5 million), The Hobbit: Battle of the Five Armies ($5.5 million), Guardians of the Galaxy ($5.1 million), Amazing Spiderman 2 ($5.0 million), Maleficent ($4.4 million), Captain America 2: The Winter Solider ($4.2 million), Godzilla ($3.8 million) and How to Train Your Dragon 2 ($3.7 million).
For the fiscal year ended March 31, 2014, there were 30 motion pictures that contributed greater than $1.0 million of admission-based fees to license revenue. The top 10 pictures that contributed greater than $1.0 million admission-based fees to license revenue for the fiscal year ended March 31, 2014 included the following: Iron Man 3 ($9.2 million), Gravity ($8.9 million), The Hobbit 2: The Desolation of Smaug ($7.4 million), Frozen ($5.6 million), Monsters University($4.8 million), Man of Steel ($4.4 million), Thor: The Dark World ($4.1 million), World War Z ($3.8 million), Star Trek 2: Into Darkness ($3.5 million) and Despicable Me 2 ($3.4 million).
License revenue comprised 67% of total revenue for the fiscal years ended March 31, 2015 and March 31, 2014. China license revenue comprised 17% and 12% of license revenue for the fiscal years ended March 31, 2015 and March 31, 2014, respectively. International license revenue comprised 67% and 63% of license revenue for the fiscal years ended March 31, 2015 and March 31, 2014, respectively. China license revenue comprised 25% and 19% of international license revenue for the fiscal years ended March 31, 2015 and March 31, 2014, respectively.
The decrease in our product and other revenue in the fiscal year ended March 31, 2015 compared to the fiscal year ended March 31, 2014 was primarily a result of a decrease in the volume of eyewear consumed or sold to our domestic market. The decrease in RealD eyewear volume domestically compared to the prior period resulted from the under performance of box offices and decreased domestic releases year-over-year, as described above. There was also a growing trend among ROW consumers to reuse our RealD eyewear for multiple viewings, as well as exhibitor buying patterns relative to the film slate and purchases by certain ROW exhibitors from alternative suppliers, including authorized resellers of our RealD eyewear. The decrease was slightly offset by an increase in China product and other revenue as a result of the continuous expansion of the market. Total international product and other revenue comprised of $19.1 million, or 35%, and $19.9 million, or 30%, of total product and other revenue for the fiscal years ended March 31, 2015 and March 31, 2014, respectively.
We expect our future revenue, particularly in our license business, will be driven by the number of RealD-enabled screens and motion pictures released in 3D. As the volume of RealD eyewear usage changes due to changing 3D motion picture slates and box office, we may experience additional pricing pressure from our customers. As a result, our net revenue may continue to decline, decline at a greater rate or may not increase at expected rates in future periods.
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Cost of revenue
Years ended March 31 | ||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||
(in thousands) | Amount | % of Revenue | Amount | % of Revenue | Amount change | Percentage change | ||||||||||||||
Revenue: | ||||||||||||||||||||
License revenue | $ | 109,317 | 67 | % | $ | 132,512 | 67 | % | $ | (23,195 | ) | (18 | )% | |||||||
Product and other | 54,146 | 33 | % | 66,722 | 33 | % | (12,576 | ) | (19 | )% | ||||||||||
Total revenue | $ | 163,463 | 100 | % | $ | 199,234 | 100 | % | $ | (35,771 | ) | (18 | )% | |||||||
Cost of revenue: | ||||||||||||||||||||
License | $ | 47,086 | 43 | % | $ | 45,364 | 34 | % | $ | 1,722 | 4 | % | ||||||||
Product and other | 35,599 | 66 | % | 58,611 | 88 | % | (23,012 | ) | (39 | )% | ||||||||||
Total cost of revenue | $ | 82,685 | 51 | % | $ | 103,975 | 52 | % | $ | (21,290 | ) | (20 | )% | |||||||
Gross profit: | ||||||||||||||||||||
License | $ | 62,231 | 57 | % | $ | 87,148 | 66 | % | $ | (24,917 | ) | (29 | )% | |||||||
Product and other | 18,547 | 34 | % | 8,111 | 12 | % | 10,436 | 129 | % | |||||||||||
Total gross profit | $ | 80,778 | 49 | % | $ | 95,259 | 48 | % | $ | (14,481 | ) | (15 | )% | |||||||
The fiscal years ended March 31, 2015 and March 31, 2014 include expenses discussed under the caption "Cost reduction plans".
For the fiscal year ended March 31, 2015, our cost of revenue decreased primarily due to the lower averaged per pair cost of RealD eyewear and decreased volume of shipments. Cost of revenue decreased, as a percentage of revenue, to 51% for the fiscal year ended March 31, 2015, as compared to 52% for the fiscal year ended March 31, 2014 due to decrease in cost of eyewear. The percentage of usage of recycled eyewear may decrease in future periods resulting in lower gross profit and gross margin.
License cost of revenue increased $1.7 million to $47.1 million for the fiscal year ended March 31, 2015 compared to $45.4 million for the fiscal year ended March 31, 2014 primarily as a result of a $0.6 million increase in impairment of returned or uncollectible customers cinema systems, $0.4 million increase in employee related costs, $0.4 million increase in manufacturing costs and $0.3 million increase in depreciation expense resulting from an increase in RealD-enabled screens. Included in license cost of sales is depreciation expense of $33.1 million and $32.9 million for the fiscal years ended March 31, 2015 and March 31, 2014, respectively. Depreciation expense as a percentage of net license revenue increased to 30% for the fiscal year ended March 31, 2015 from 25% for the fiscal year ended March 31, 2014.
Costs associated with our eyewear recycling program have been expensed in the period incurred. Recycling costs totaled $6.7 million for the fiscal year ended March 31, 2015 and $6.7 million for the fiscal year ended March 31, 2014, and included the cost to transport RealD eyewear between theaters and the recycling production facility and costs to process the RealD eyewear for reuse.
Product and other gross profit increased $10.4 million to a gross profit of $18.5 million for the fiscal year ended March 31, 2015 as compared to a gross profit of $8.1 million for the fiscal year ended March 31, 2014. The increase in our product and other gross profit was primarily a result of a reduction of average eyewear cost per unit expensed and partially offset by a reduction of total eyewear units sold. Product and other gross margin increased to 34% for the fiscal year ended March 31, 2015 as compared to 12% for the fiscal year ended March 31, 2014.
Our cost of revenue as a percentage of net revenue, as well as our gross profit and gross margin, will be affected in the future by the relative mix of license and product revenue, the mix of domestic and international product revenue, the relative mix of products and any new revenue sources, impairment charges and the percentage of usage of recycled eyewear. Impairment charges in future periods may increase as a result of system upgrades and replacements as well as changes in product offerings and new technology. As the number of RealD-enabled screens and 3D motion picture attendance increase, our total cost of revenue may increase.
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Operating expenses
Years ended March 31 | ||||||||||||||
(in thousands) | 2015 | 2014 | Amount change | Percentage change | ||||||||||
Research and development | $ | 19,474 | $ | 19,685 | $ | (211 | ) | (1 | )% | |||||
Selling and marketing | 21,719 | 27,137 | (5,418 | ) | (20 | )% | ||||||||
General and administrative | 49,370 | 50,596 | (1,226 | ) | (2 | )% | ||||||||
Total operating expenses | $ | 90,563 | $ | 97,418 | $ | (6,855 | ) | (7 | )% | |||||
Research and development. Our research and development expenses decreased primarily due to a $1.1 million decrease in depreciation expense and $0.3 million decrease in occupancy expenses, partially offset by a $0.7 million increase in personnel costs and a $0.6 million increase in engineering and prototype expenses in the fiscal year ended March 31, 2015 as compared to the fiscal year ended March 31, 2014. The change in personnel costs includes a $0.5 million increase in stock-based compensation expense and a $0.2 million increase in salaries and benefits expense. We expect to continue to support research and development of visual technologies for new products and continued investment in our cinema business.
Selling and marketing. Our selling and marketing expenses decreased primarily due to a $3.9 million decrease in personnel costs, a $0.9 million decrease in trade shows and associated traveling expenses and a $0.4 million decrease in advertising expenses. The change in personnel costs includes a $2.5 million decrease in stock-based compensation expense, $1.1 million decrease in salaries and benefits and a $0.3 million decrease in severance as part of the Cost Reduction Plans that took effect in fiscal year ended March 31, 2014. We expect to incur additional selling and marketing expenses, aside from personnel related costs, as we increase our international marketing efforts, particularly in Asia, Latin America and Russia, to build our business worldwide and market future 3D films.
General and administrative. Our general and administrative expenses decreased primarily due to a $3.0 million decrease in personnel costs, partially offset by a $2.2 million increase in outside services and professional service fees and a $0.6 million increase in depreciation expense. The decrease in personnel costs includes a decrease of $1.2 million in stock based compensation and a $1.8 million decrease in salaries and benefits as part of the Cost Reduction Plans that took effect in fiscal year ended March 31, 2014. The increase in outside services and professional service fees includes $2.1 million in legal fees associated with our global patent enforcement and $0.5 in million advisory fees related to our strategic alternatives process, partially offset by decreases in other professional fees. In addition, sales and use tax and value added tax expense decreased $1.5 million to $3.0 million for the fiscal year ended March 31, 2015 as compared to $4.5 million for the fiscal year ended March 31, 2014, primarily due to the decrease in total revenue. Property tax increased $0.4 million due to the release of accrued property tax for certain prior years that were not paid, but for which the statutes of limitations in various jurisdictions have expired in fiscal year ended March 31, 2014. We expect to incur increased legal expenses related to our global patent enforcement and our assessment of strategic alternatives.
Historical operating expenses are not necessarily indicative of future expenses for a changing business.
Other
Interest expense, net. Net interest expense for the fiscal years ended March 31, 2015 and March 31, 2014 was $1.6 million and $2.3 million, respectively. Our interest expense decreased primarily due to decreased borrowings under the 2014 Credit Agreement during fiscal year 2015.
Other loss. Other loss was $4.4 million for the year ended March 31, 2015 as compared to $0.7 million for the year ended March 31, 2014. Other loss increased primarily due to foreign exchange transaction losses related to our operations from international territories, especially in Russia.
Income tax. Our income tax expense was $7.9 million for the fiscal year ended March 31, 2015 as compared to $6.1 million for the fiscal year ended March 31, 2014; the increase is due to increased foreign income tax expense. We expect to incur an increasing amount of income tax expenses that relate to state income tax and foreign taxes as a result of continuous expansion in international markets. We file federal income tax returns and income tax returns in various state and foreign jurisdictions. Due to the net operating loss carryforwards, our United States federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.
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Fiscal year ended March 31, 2014 compared to fiscal year ended March 31, 2013
Revenue
For the fiscal year ended March 31, 2014, total revenue decreased $16.3 million to $199.2 million compared to $215.6 million for the fiscal year ended March 31, 2013.
Years ended March 31 | ||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||
(in thousands) | Amount | % of Total | Amount | % of Total | Amount change | Percentage change | ||||||||||||||
Revenue: | ||||||||||||||||||||
License revenue | ||||||||||||||||||||
Domestic | $ | 49,289 | 25 | % | $ | 56,210 | 26 | % | $ | (6,921 | ) | (12 | )% | |||||||
International | 83,223 | 42 | % | 81,542 | 38 | % | 1,681 | 2 | % | |||||||||||
Total license revenue | $ | 132,512 | 67 | % | $ | 137,752 | 64 | % | $ | (5,240 | ) | (4 | )% | |||||||
Product and other | ||||||||||||||||||||
Domestic | $ | 46,870 | 23 | % | $ | 50,769 | 23 | % | $ | (3,899 | ) | (8 | )% | |||||||
International | 19,852 | 10 | % | 27,031 | 13 | % | (7,179 | ) | (27 | )% | ||||||||||
Total product and other revenue | $ | 66,722 | 33 | % | $ | 77,800 | 36 | % | $ | (11,078 | ) | (14 | )% | |||||||
Total revenue | $ | 199,234 | 100 | % | $ | 215,552 | 100 | % | $ | (16,318 | ) | (8 | )% | |||||||
Other data: | ||||||||||||||||||||
Number of RealD-enabled screens (at period end) | ||||||||||||||||||||
Total domestic RealD-enabled screens | 13,400 | 53 | % | 12,800 | 56 | % | 600 | 5 | % | |||||||||||
Total international RealD-enabled screens | 11,800 | 47 | % | 9,900 | 44 | % | 1,900 | 19 | % | |||||||||||
Total RealD-enabled screens | 25,200 | 100 | % | 22,700 | 100 | % | 2,500 | 11 | % | |||||||||||
Number of locations with RealD-enabled screens (at period end) | ||||||||||||||||||||
Total domestic locations with RealD-enabled screens | 3,000 | 51 | % | 2,800 | 51 | % | 200 | 7 | % | |||||||||||
Total international locations with RealD-enabled screens | 2,900 | 49 | % | 2,700 | 49 | % | 200 | 7 | % | |||||||||||
Total locations with RealD-enabled screens | 5,900 | 100 | % | 5,500 | 100 | % | 400 | 7 | % | |||||||||||
Number of 3D motion pictures (released domestically during period) | 35 | 35 | ||||||||||||||||||
The decrease in total revenue during the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013 was primarily due to a decrease in license revenue resulting from a decrease in box office performance, lower domestic eyewear usage and lower international eyewear sales. Our international markets comprised approximately 52% of total revenue for the fiscal year ended March 31, 2014 as compared to 50% for the fiscal year ended March 31, 2013. The overall decrease in revenue attributable to international markets was driven primarily by a decrease in sales of RealD eyewear.
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For the fiscal year ended March 31, 2014, there were 30 motion pictures that contributed greater than $1.0 million of admission-based fees to license revenue. The top 10 pictures that contributed greater than $1.0 million admission-based fees to license revenue for the fiscal year ended March 31, 2014 included the following: Iron Man 3 ($9.2 million), Gravity ($8.9 million), The Hobbit 2: The Desolation of Smaug ($7.4 million), Frozen ($5.6 million), Monsters University($4.8 million), Man of Steel ($4.4 million), Thor: The Dark World ($4.1 million), World War Z ($3.8 million), Star Trek 2: Into Darkness ($3.5 million) and Despicable Me 2 ($3.4 million).
For the fiscal year ended March 31, 2013, there were 26 motion pictures that contributed greater than $1.0 million of admission-based fees to license revenue. The top 10 pictures that contributed greater than $1.0 million admission-based fees to license revenue for the fiscal year ended March 31, 2013 included the following: The Avengers ($14.0 million), The Hobbit: An Unexpected Journey ($8.7 million), Ice Age: Continental Drift ($7.6 million), The Amazing Spider-Man ($6.7 million), Life of Pi ($6.7 million), Madagascar 3: Europe's Most Wanted ($6.4 million), Men in Black III ($4.9 million), Brave ($4.4 million), Titanic (re-release) ($3.8 million) and Oz: the Great and Powerful ($3.8 million).
License revenue comprised 67% and 64% of total revenue for the fiscal years ended March 31, 2014 and March 31, 2013, respectively. International license revenue comprised 63% and 59% of our license revenue for the fiscal years ended March 31, 2014 and March 31, 2013, respectively.
The decrease in our product and other revenue in the fiscal year ended March 31, 2014, as compared to the fiscal year ended March 31, 2013, was primarily a result of a decrease in the volume of eyewear consumed or sold to our domestic and international markets and a decrease in the average revenue per unit. The decrease in RealD eyewear volume internationally compared to the prior period resulted from a growing trend among consumers to reuse RealD eyewear for multiple viewings, as well as exhibitor buying patterns relative to the film slate and purchases by certain international exhibitors from alternative suppliers, including authorized resellers of RealD eyewear. International product and other revenue comprised of $19.9 million, or 30% and $27.0 million, or 35% of total product and other revenue for the fiscal years ended March 31, 2014 and March 31, 2013, respectively. International product and other revenue were 24% of international license revenue for the fiscal year ended March 31, 2014 as compared to 33% for the fiscal year ended March 31, 2013.
Cost of revenue
Years ended March 31 | ||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||
(in thousands) | Amount | % of Revenue | Amount | % of Revenue | Amount change | Percentage change | ||||||||||||||
Revenue: | ||||||||||||||||||||
License revenue | $ | 132,512 | 67 | % | $ | 137,752 | 64 | % | $ | (5,240 | ) | (4 | )% | |||||||
Product and other | 66,722 | 33 | % | 77,800 | 36 | % | (11,078 | ) | (14 | )% | ||||||||||
Total revenue | $ | 199,234 | 100 | % | $ | 215,552 | 100 | % | $ | (16,318 | ) | (8 | )% | |||||||
Cost of revenue: | ||||||||||||||||||||
License | $ | 45,364 | 34 | % | $ | 47,243 | 34 | % | $ | (1,879 | ) | (4 | )% | |||||||
Product and other | 58,611 | 88 | % | 78,117 | 100 | % | (19,506 | ) | (25 | )% | ||||||||||
Total cost of revenue | $ | 103,975 | 52 | % | $ | 125,360 | 58 | % | $ | (21,385 | ) | (17 | )% | |||||||
Gross profit: | ||||||||||||||||||||
License | $ | 87,148 | 66 | % | $ | 90,509 | 66 | % | $ | (3,361 | ) | (4 | )% | |||||||
Product and other | 8,111 | 12 | % | (317 | ) | — | % | 8,428 | (2,659 | )% | ||||||||||
Total gross profit | $ | 95,259 | 48 | % | $ | 90,192 | 42 | % | $ | 5,067 | 6 | % | ||||||||
For the fiscal year ended March 31, 2014, our cost of revenue decreased primarily due to the costs associated with the growth and maintenance of our global installed base as well as a reduction in the product mix of lower cost recycled eyewear in our domestic markets, and freight charges related to international expansion. Cost of revenue decreased, as a percentage of revenue, to 52% for the fiscal year ended March 31, 2014, as compared to 58% for the fiscal year ended March 31, 2013 due to a reduction in license revenue, costs associated with the growth and maintenance of our global installed base, as well as a reduction in the product mix of lower cost recycled eyewear.
License cost of revenue decreased $1.9 million to $45.4 million for the fiscal year ended March 31, 2014 compared to $47.2 million for the fiscal year ended March 31, 2013 primarily as a result of a $3.8 million decrease in impairment expense, $1.8 million decrease in obsolete inventory expense, partially offset by $0.9 million increase in depreciation expense resulting
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from an increase in RealD-enabled screens. Included in license cost of sales is depreciation expense of $32.9 million and $29.0 million for the fiscal years ended March 31, 2014 and March 31, 2013, respectively. Depreciation expense as a percentage of net license revenue increased to 25% for the fiscal year ended March 31, 2014 from 21% for the fiscal year ended March 31, 2013.
During the fiscal year ended March 31, 2013, we determined that a non-cancelable purchase commitment for certain cinema systems configurations in the aggregate amount of $3.5 million was not fully recoverable, primarily due to the initial investment costs which are expected to exceed the anticipated future cash flows for the related cinema systems. For the fiscal year ended March 31, 2013, impairment charged to cost of revenue for all our Cinema Systems totaled $8.0 million, which included the impairment of the related outstanding purchase commitment of $3.5 million.
Product and other gross profit increased $8.4 million to a gross profit of $8.1 million for the fiscal year ended March 31, 2014 as compared to a gross loss of $0.3 million for the fiscal year ended March 31, 2013. The increase in our product and other gross profit was primarily a result of a reduction of average eyewear cost per unit expensed and partially offset by a reduction of average eyewear revenue per unit sold. Product and other gross margin increased to 12% for the fiscal year ended March 31, 2014 as compared to negative 0.4% for the fiscal year ended March 31, 2013.
Costs associated with our eyewear recycling program have been expensed in the period incurred. Recycling costs totaled $6.7 million for the fiscal year ended March 31, 2014 and $6.2 million for the fiscal year ended March 31, 2013, and included the cost to transport RealD eyewear between theaters and the recycling production facility and costs to process the RealD eyewear for reuse.
Operating expenses
Years ended March 31 | ||||||||||||||
(in thousands) | 2014 | 2013 | Amount change | Percentage change | ||||||||||
Research and development | $ | 19,685 | $ | 19,454 | $ | 231 | 1 | % | ||||||
Selling and marketing | 27,137 | 25,266 | 1,871 | 7 | % | |||||||||
General and administrative | 50,596 | 47,830 | 2,766 | 6 | % | |||||||||
Total operating expenses | $ | 97,418 | $ | 92,550 | $ | 4,868 | 5 | % | ||||||
Research and development. Our research and development expenses increased primarily due to a $1.0 million increase in personnel costs, a $0.4 million increase in depreciation and amortization expense, a $0.2 million increase in rent expense, partially offset by a $1.2 million decrease in engineering and prototype expenses and a $0.1 million decrease in outside services and professional services fees in the fiscal year ended March 31, 2014 as compared to the fiscal year ended March 31, 2013. The change in personnel costs includes a $0.5 million increase in stock-based compensation expense and a $0.5 million increase in salaries and benefits expense.
Selling and marketing. Our selling and marketing expenses increased primarily due to a $3.3 million increase in personnel costs and partially offset by a $1.5 million decrease in advertising expenses. The change in personnel costs includes a $1.2 million increase in salaries and benefits and a $1.8 million increase in severance as a result of the 2014 Cost Reduction Plan.
General and administrative. Our general and administrative expenses increased primarily due to a $2.1 million increase in depreciation and amortization expense, a $0.8 million increase in bad debt expense, a $0.6 million increase in rent expenses and a $0.5 million increase in outside services and professional services fees. The increases were partially offset by a $0.3 million decrease in personnel costs. The decrease in personnel costs includes a decrease of $1.6 million in stock based compensation as a result of the 2014 Cost Reduction Plan, partially offset by an increase in salaries and benefits of $1.3 million. Sales and use tax and value added tax expense increased $0.5 million to $4.5 million for the fiscal year ended March 31, 2014 as compared to $4.0 million for the fiscal year ended March 31, 2013, primarily due to the increase in international revenue. Property tax decreased $1.7 million due to the release of accrued property tax for certain prior years that were not paid, but for which the statutes of limitations in various jurisdictions have expired.
Historical operating expenses are not necessarily indicative of future expenses for a changing business.
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Other
Interest expense, net. Net interest expense for the fiscal years ended March 31, 2014 and March 31, 2013 was $2.3 million and $1.5 million, respectively. Our interest expense increased primarily due to increased amount of borrowings under our Credit Agreement.
Other income (loss). Other income (loss) was a loss of $0.7 million for the year ended March 31, 2014 as compared to a loss of $1.0 million for the year ended March 31, 2013. Other income (loss) decreased primarily due foreign exchange transaction losses related to our operations from international territories.
Income tax. Our income tax expense was $6.1 million for the fiscal year ended March 31, 2014 as compared to $5.1 million for the fiscal year ended March 31, 2013; the increase is due to increased foreign income tax expense. We expect to incur an increasing amount of income tax expenses that relate to state income tax and international operations.
Seasonality and quarterly performance
Our operations are generally subject to seasonal trends based on the number of 3D motion pictures released and the box office of those 3D motion pictures. As is the case with other participants in the motion picture exhibition industry, we expect that our fiscal quarters during the summer period generally will tend to show stronger box office performance and higher revenue due to the summer movie-going season, when many of the largest grossing films in any given year are typically released. By comparison the quarter ending in March traditionally does not benefit from the same box office performance due to the number and nature of the motion pictures released in this seasonal period. We expect to experience seasonal fluctuations in results of operations as a result of these trends. Our quarterly financial results have fluctuated in the past and may continue to fluctuate in the future based on a number of other factors in addition to these seasonal trends, many of which are beyond our control. Factors that may cause our operating results to vary or fluctuate include those discussed in Part I, Item 1A above under the caption "Risk factors".
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Liquidity and capital resources
Since our inception and through March 31, 2015, we have financed our operations through the proceeds we received in connection with our IPO, the sale of redeemable convertible preferred stock, borrowings under our credit facilities with City National and through the net cash provided by operating activities. Our cash flow from operating activities has historically been significantly impacted by the contractual payment terms and patterns related to the license of our RealD Cinema Systems and use and sale of our RealD eyewear, as well as significant investments in research, development, selling and marketing activities and corporate infrastructure.
Cash provided by operating activities is expected to be a primary recurring source of funds in future periods and will be driven by our expected revenue generated from the 3D motion pictures shown on our RealD Cinema Systems and an increase in the number of RealD-enabled screens, partially offset by an increase in working capital requirements associated with installing new RealD Cinema Systems, logistics and recycling costs for our RealD eyewear. Depending on our operating performance in any given period and the installation rate of additional RealD Cinema Systems, including system upgrades and replacements, changes in product offerings and new technology, we expect to supplement our liquidity needs primarily with borrowings under our credit facility as described below.
2014 Credit Agreement
On June 26, 2014, we entered into the Amended and Restated Credit Agreement (the "2014 Credit Agreement") with City National Bank, as administrative agent and letter of credit issuer ("City National"), the other agents and lenders (the "Lenders") from time to time party thereto. The 2014 Credit Agreement amends and restates in its entirety that certain Credit Agreement, dated as of April 19, 2012, with City National and the agents and lenders from time to time party thereto, as amended on October 16, 2013 (as amended, the "2012 Credit Agreement").
Pursuant to the 2014 Credit Agreement, the Lenders thereunder made available to us:
• | a revolving credit facility (including a letter of credit sub-facility) in a maximum amount not to exceed $50 million (the "Revolving Facility"), which matures on June 26, 2017. In addition, we may request up to an additional $25 million of commitments under the Revolving Facility (such that the maximum amount of all commitments under the Revolving Facility may not exceed $75 million), subject to the satisfaction of certain financial and other conditions and subject to obtaining such commitments; and |
• | a delayed draw term loan facility in a maximum amount not to exceed $50 million (the "Term Loan Facility"), which matures on June 26, 2018. |
Debt issuance costs related to the completion of the 2014 Credit Agreement totaled $0.9 million and were added to the $0.3 million deferred charge remaining on the 2012 Credit Agreement. All these issuance costs are being amortized over the contractual life of the 2014 Credit Agreement and recorded as interest expense.
Loans outstanding under the 2014 Credit Agreement bear interest at our option at either the Euro currency rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Euro currency rate for a one month Interest Period on such day plus 1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on our leverage ratio. Under the 2014 Credit Agreement, we are charged a commitment fee on the unused portions of the Revolving Facility and Term Loan Facility. The fee for the unused Revolving Facility varies between 0.250% and 0.375% per year depending on the percentage of the Revolving Facility in use. The fee for the unused Term Loan Facility is 0.375% of the unused commitment. Additionally, we are charged a letter of credit fee of between 2.25% to 2.75%, depending on our leverage ratio, per year with respect to the amount of each performance letter of credit issued under the 2014 Credit Agreement. We also pay customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the 2014 Credit Agreement. There were no letters of credit outstanding at March 31, 2015 and March 31, 2014.
Our obligations under the 2014 Credit Agreement are fully and unconditionally guaranteed by our subsidiaries, ColorLink Inc., a Delaware corporation, Stereographics Corporation, a California corporation, and RealD DDMG Acquisition, LLC, a Delaware limited liability company (collectively, the "Loan Parties"). Our obligations under the 2014 Credit Agreement are secured by a first priority security interest in substantially all of the Loan Parties’ tangible and intangible assets.
As of March 31, 2015, $50 million was available under the Revolving Facility and $12.7 million was available under the Term Loan Facility after taking into account our borrowings under the Term Loan Facility during the first quarter of fiscal year
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2015 in the amount of $37.3 million. As a result, as of March 31, 2015, we had $62.7 million available for future draws under the 2014 Credit Agreement.
Under the 2014 Credit Agreement, our business is subject to certain limitations, including limitations on our ability to incur additional debt, make certain investments or acquisitions, enter into certain merger and consolidation transactions and sell our assets other than in the ordinary course of business. We will also be required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. As of March 31, 2015, we were in compliance with all financial covenants in the Credit Agreement. If we fail to comply with any of the covenants or if any other event of default, as defined in the 2014 Credit Agreement, should occur, the bank lenders could elect to prevent us from borrowing and declare the indebtedness to be immediately due and payable.
As of March 31, 2015, we had no borrowings outstanding under the Revolving Facility and $29.8 million outstanding under the Term Loan Facility, which is to be repaid in 12 quarterly installments of $1.9 million through March 31, 2018 and the remaining $7.5 million of principal by June 26, 2018.
As of March 31, 2015, our primary sources of liquidity were our cash and cash equivalents of $60.3 million and funds available under our 2014 Credit Agreement of $62.7 million.
Our cash equivalents primarily consist of money market funds and other marketable securities that mature within three months from the date of purchase. The carrying amount of cash equivalents reasonably approximates fair value due to the short maturities of these instruments. The primary objective of our investment activities is preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. We do not enter into investments for trading or speculative purposes.
We believe that our cash, cash equivalents, potential cash flows from operations, and our availability under our Credit Agreement will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.
The following table sets forth our major sources and (uses) of cash for each period as set forth below:
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Operating activities | $ | 51,847 | $ | 35,700 | $ | 79,697 | |||||
Investing activities | (17,367 | ) | (21,784 | ) | (37,900 | ) | |||||
Financing activities | $ | (4,645 | ) | $ | (16,283 | ) | $ | (35,786 | ) | ||
Cash flow from operating activities
The fiscal years ended March 31, 2015 and March 31, 2014 include payments discussed under the caption "Cost reduction plans".
Net cash inflows from operating activities during the fiscal year ended March 31, 2015 primarily resulted from net loss adjusted for non-cash items, decrease in accounts receivable and an increase in accrued expenses, partially offset by a decrease in accounts payable, a decrease in deferred revenue and an increase in other assets. The decrease in accounts receivable was related to an overall decrease in total revenue and the timing of customer collections. The decrease in accounts payable was due to decreased business activities, resulting in reduced amounts due to vendors and compensation payable to employees. The decrease in deferred revenue was due to depletion of existing fixed fee revenue contracts as we focus more on admission based revenue structure. The increase in accrued expenses and other assets were primarily due to accrual and capitalization of lease incentives, partially offset by decreased business activities.
Net cash inflows from operating activities during the fiscal year ended March 31, 2014 primarily resulted from net loss adjusted for non-cash items and decrease in inventories, partially offset by an increase in accounts receivable, a decrease in deferred revenue, a decrease in accounts payable and accrued expenses. The decrease in inventory was primarily due to the decreased volume of inventory purchases and usage of existing inventories. The decrease in deferred revenue was due to depletion of existing fixed fee revenue contracts as we focus more on admission based revenue structure. The increase in accounts receivable was related to the timing of customer collections. The decrease in accounts payable and accrued expenses were due to decreased business activities, resulting in reduced amounts due to vendors and compensation payable to employees.
Net cash inflows from operating activities during the fiscal year ended March 31, 2013 primarily resulted from net loss adjusted for non-cash items, a decrease in inventories and a decrease in accounts receivable, partially offset by cash used from a
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decrease in accrued expenses. The decrease in inventories was primarily due to the decreased volume of inventory purchases and usage of existing inventories. The decrease in accounts receivable was related to timing of customer collections. The decrease in accrued expenses was due to decreased business activities, resulting in reduced amounts due to vendors and compensation payable to employees.
Cash flow from investing activities
For fiscal years 2015, 2014 and 2013, cash outflows for investing activities was primarily related to the establishment of our initial infrastructure and for the purchase of component parts for our RealD Cinema Systems, digital projectors, and other property, equipment and leasehold improvements. Capital expenditures were $17.4 million for the fiscal year ended March 31, 2015, $22.3 million for the fiscal year ended March 31, 2014 and $34.3 million for the fiscal year ended March 31, 2013. In the future, we will continue to invest in our business to grow sales and develop new products and support the related increasing employee headcount. We expect capital expenditures to represent a decreasing percentage of net revenue in the future.
In the fiscal year ended March 31, 2013, we purchased a portfolio of 2D-to-3D conversion patents in the amount of $6.1 million and may consider future purchases of intangible assets, acquisitions or other investing activities.
In the fiscal year ended March 31, 2015, we received proceeds of $0.1 million as a result of sale of fixed assets and digital projectors to certain of our motion picture exhibitors and business partners. In the fiscal year ended March 31, 2014, we received proceeds of $0.6 million as a result of the sale of fixed assets and digital projectors to certain of our motion picture exhibitors. In the fiscal year ended March 31, 2013, we received proceeds of $2.5 million as a result of the sale of digital projectors to certain of our motion picture exhibitors.
Cash flow from financing activities
Net cash outflows from financing activities for the year ended March 31, 2015 primarily resulted from $43.7 million of repayments to the 2012 Credit Agreement, $1.2 million repayments on tax withholdings of the restricted stock units distributed and $0.9 million payments on debt issuance cost related to 2014 Credit Agreement, partially offset by $37.3 million of proceeds from the 2014 Credit Agreement and $3.9 million proceeds from issuance of stock option exercises and employee stock.
Net cash outflows from financing activities for the year ended March 31, 2014 primarily resulted from $48.8 million of repayments to the 2012 Credit Agreement and $7.5 million of stock repurchases, partially offset by $37.5 million of proceeds from the 2012 Credit Agreement and $2.5 million proceeds from issuance of stock option exercises and employee stock purchases.
Net cash outflows from financing activities for the year ended March 31, 2013 primarily resulted from $25.0 million of repayments on our prior revolving and term loan facility, $12.5 million of repayments on the 2012 Credit Agreement, $60.4 million in stock repurchases, $1.2 million in payments of debt issuance costs and $1.0 million in distributions to a noncontrolling interest. These outflows were partially offset by $60.0 million in proceeds from the 2012 Credit Agreement, $4.3 million proceeds from issuance of common stock from the exercise of stock options and our employee stock purchase plan.
Proceeds from employee stock option exercises and employee stock purchase plan were $3.9 million, $2.5 million and $4.3 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively. From time to time, we expect to receive cash from the exercise of employee stock options and warrants and our employee stock purchase plan of our common stock. Proceeds from the exercise of employee stock options and warrants outstanding and from purchases of stock under our employee stock purchase plan will vary from period to period based upon, among other factors, fluctuations in the market value of our common stock relative to the exercise price of such stock options and warrants.
On April 20, 2012, we announced that our board of directors had approved an authorization to repurchase up to $50 million of RealD common stock. On December 14, 2012, our board of directors approved a $25 million increase in our stock repurchase plan, increasing the $50 million repurchase plan announced on April 20, 2012 to $75 million. The number of shares to be repurchased and the timing of any potential repurchases will depend on factors such as the Company's stock price, economic and market conditions, alternative uses of capital, and corporate and regulatory requirements. Repurchases of common stock may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when RealD might otherwise be precluded from doing so under insider trading laws, and a variety of other methods, including open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or by any combination of such methods. The repurchase program may be suspended or discontinued at any time.
Pursuant to the stock repurchase plan authorized by our board of directors, we have repurchased a total of 6,599,726 shares of common stock at an average price per share, including sales commissions, of $10.30 for an aggregate cost of $67.9 million inception to date. For the fiscal year ended March 31, 2015, we did not repurchase any common stocks. For the fiscal year
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ended March 31, 2014, we repurchased a total of 671,997 shares of common stock at an average price per share of $11.18, including sales commissions, for an aggregate cost of $7.5 million. For the fiscal year ended March 31, 2013, we repurchased a total of 5,927,729 shares of common stock at an average price per share of $10.20, including sales commissions, for an aggregate cost of $60.4 million.
See "Part I, Item 1A: "Risk factors—Risks related to owning our common stock—Sales of outstanding shares of our common stock (or shares of our common stock issued upon exercise of stock options) into the market in the future could cause the market price of our stock to drop significantly, even if our business is doing well".
Contractual obligations and commitments
The following table sets forth our contractual obligations and commitments as of March 31, 2015:
Payments due by period | |||||||||||||||||||
(in thousands) | Total | Less than 1 Year | 1 - 3 years | 3 - 5 years | More than 5 years | ||||||||||||||
Secured credit facilities (1) | $ | 29,840 | $ | 7,460 | $ | 14,920 | $ | 7,460 | $ | — | |||||||||
Operating lease obligations (2) | 31,403 | 4,313 | 8,095 | 8,285 | 10,710 | ||||||||||||||
Purchase obligations (3) | 13,685 | 13,685 | — | — | — | ||||||||||||||
Total | $ | 74,928 | $ | 25,458 | $ | 23,015 | $ | 15,745 | $ | 10,710 | |||||||||
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(1) | See Note 6, "Borrowings" to our consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. Includes estimated interest payments related to the Credit Facility. |
(2) | See Note 7, "Commitments and contingencies," to our consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. |
(3) | Consists of contractual purchase obligations with certain of our vendors, including some revolving 90-day supply commitments. |
Off-balance sheet arrangements
We had no off-balance sheet arrangements as of March 31, 2015. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries.
Non-U.S. GAAP discussion
In addition to our U.S. GAAP results, we present Adjusted EBITDA and free cash flow as a supplemental measure of our performance. However, both Adjusted EBITDA and free cash flow are not recognized measurements under U.S. GAAP. We define Adjusted EBITDA as net income (loss) plus expenses for interest, income taxes, depreciation, amortization, impairment and stock-based compensation plus net foreign exchange loss (gain) plus expenses under our Credit Agreement for the non-U.S. GAAP categories "restructuring charges, severance costs and reserves"and "non-recurring expenses". We do not consider the preceding adjustments to be indicative of our core operating performance. We define free cash flow as total cash provided (used) by operating activities less cash used in purchases of property and equipment and cash used in purchases of cinema systems and related components. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations and our liquidity in that period. Non-U.S. GAAP adjustments to our results prepared in accordance with U.S. GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA and free cash flow should not be construed as an inference that our future results will be unaffected by unusual, infrequent or non-recurring items.
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Adjusted EBITDA
Set forth below is a reconciliation of Adjusted EBITDA to net loss for the following periods indicated:
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Net loss | $ | (23,747 | ) | $ | (11,210 | ) | $ | (9,887 | ) | ||
Add (deduct): | |||||||||||
Interest expense, net | 1,634 | 2,255 | 1,483 | ||||||||
Income tax expense | 7,909 | 6,117 | 5,064 | ||||||||
Depreciation and amortization | 39,999 | 40,300 | 33,131 | ||||||||
Other loss (1) | 4,419 | 679 | 982 | ||||||||
Share-based compensation expense (2) | 14,898 | 17,741 | 18,474 | ||||||||
Impairment of assets and intangibles (3) | 5,023 | 4,522 | 8,679 | ||||||||
Cost reduction plan (4) | 1,373 | 4,718 | — | ||||||||
Non-recurring expenses (5) | 526 | — | — | ||||||||
Adjusted EBITDA (6) | $ | 52,034 | $ | 65,122 | $ | 57,926 | |||||
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(1) | Consists of gains and losses from foreign currency exchange and foreign currency forward contracts. |
(2) | Represents share-based compensation expense of nonstatutory and incentive stock options, restricted stock units and performance stock units, and employee stock purchase plan to employees, non-employees, officers and directors. |
(3) | Represents impairment of long-lived assets, such as fixed assets, theatrical equipment and related purchase commitments and identifiable intangibles. |
(4) | Expenses under our Credit Agreement for the non-U.S. GAAP categories "restructuring charges, severance costs and reserves" and "non-recurring expenses" (also see the "Cost reduction plans" caption above). |
(5) | Expenses under our Credit Agreement for the non-U.S. GAAP category "non-recurring costs and expenses". In fiscal year ended March 31, 2015, these expenses represent advisory fees related to our strategic alternatives process. |
(6) | Adjusted EBITDA is not a recognized measurement under U.S. GAAP. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the comparable U.S. GAAP item, see the entirety of this "Non-U.S. GAAP discussion". |
We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA in developing our internal budgets, forecasts and strategic plans, in analyzing the effectiveness of our business strategies, in evaluating potential acquisitions, in making compensation decisions and in communications with our board of directors concerning our financial performance. Adjusted EBITDA also aligns with the similarly titled definition in our Credit Agreement and is used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments. Adjusted EBITDA has limitations as an analytical tool which includes, among others, the following:
• | Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
• | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
• | Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; |
• | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
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• | non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; |
• | Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and |
• | other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplement. Our consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with U.S. GAAP.
Beginning in the first quarter of fiscal year 2014, we modified our definition of Adjusted EBITDA to align with the Adjusted EBITDA definition under our expanded credit facility. As a result, we no longer add back sales and use tax and property tax to calculate Adjusted EBITDA for financial reporting purposes.
Free cash flow
The following table sets forth our major sources and (uses) of cash per U.S. GAAP for each period as set forth below:
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Operating activities | $ | 51,847 | $ | 35,700 | $ | 79,697 | |||||
Investing activities | (17,367 | ) | (21,784 | ) | (37,900 | ) | |||||
Financing activities | $ | (4,645 | ) | $ | (16,283 | ) | $ | (35,786 | ) | ||
We define Non-U.S. GAAP free cash flow as total cash provided (used) by operating activities less cash used in purchases of property and equipment and cash used in purchases of cinema systems and related components. Set forth below is a reconciliation of free cash flow to cash provided (used) by operating activities, the comparable U.S. GAAP, for the following periods indicated:
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Net cash provided by operating activities | $ | 51,847 | $ | 35,700 | $ | 79,697 | |||||
Purchases of property and equipment | (4,359 | ) | (4,285 | ) | (16,169 | ) | |||||
Purchases of cinema systems and related components | (13,071 | ) | (18,050 | ) | (18,121 | ) | |||||
Total free cash flow | $ | 34,417 | $ | 13,365 | $ | 45,407 | |||||
We present free cash flow because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by evaluating our liquidity and capital resources. In addition, we use free cash flow in developing our internal budgets, forecasts and strategic plans, in analyzing the effectiveness of our business strategies, in evaluating potential acquisitions, in making compensation decisions and in communications with our board of directors concerning our financial performance. However, free cash flow is not a recognized measurement under U.S. GAAP, should not be used in a manner that inappropriately implies that the measure represents the residual cash flow available for discretionary expenditures, and should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP.
Critical accounting policies and estimates
The discussion in this Item 7 is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, estimates and judgments are evaluated, including those related to revenue recognition, revenue deductions, product returns, fair value of our common stock, share-based compensation, inventories, definite lived asset impairments, goodwill impairment and income taxes. These estimates and judgments are based on historical experience and on various other
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assumptions that we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from these estimates.
We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management in the preparation of the financial statements relate to the following:
• | licensing revenue terms applied to the timing and number of motion picture exhibitor consumer admissions; |
• | domestic eyewear product revenue terms applied to when the usage occurs and the amount of usage; |
• | effects of allowances that are capitalized on the balance sheet and amortized to the applicable line item on the statement of operations as expense or contra revenue and earned customer incentives when customers do not timely report the activity that results in earned allowances and incentives; |
• | impairment testing of goodwill, intangible assets and tangible assets, including determination of relevant reporting units and long-lived asset groups; |
• | useful lives of intangible assets and tangible assets; |
• | timing and amount recognized for performance-based compensation, including bonus and certain restricted share units, based on projections of our performance achievement; |
• | the impact of potential future tax consequences of events that have been recognized in our financial statements; |
• | valuation of accruals and allowances; |
• | contingency assessments; and |
• | assumptions used in the determination of the fair value of equity-based awards for stock-based compensation. |
Revenue recognition
We derive substantially all of our revenue from the license of RealD Cinema Systems and the product sale of RealD eyewear. We evaluate revenue recognition for transactions using the criteria set forth by the Financial Accounting Standard Board (FASB) Accounting Standards Codification (ASC) Topic 840, Leases, and ASC Topic 605, Revenue Recognition. The revenue recognition guidance states that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. We record revenue net of estimated lease incentives and other allowances.
License revenue
License revenue, net of lease incentives and other allowances, is accounted for as an operating lease. License revenue is primarily derived under per-admission, percentage of box office, periodic fixed fee, or per-motion picture basis with motion picture exhibitors. Amounts received up front, less estimated lease incentives, are deferred and recognized over the lease term using the straight-line method. Additional lease payments that are contingent upon future events outside our control, including those related to admission and usage, are recognized as revenues when the contingency is resolved and we have fulfilled our obligations specific to the contingent payment received. Certain of our license revenue from leasing RealD Cinema Systems is earned upon admission by the motion picture exhibitor’s consumers. Our licensees, however, do not report and pay for such license revenue until after the admission has occurred, which may be received subsequent to our fiscal period end. We estimate and record domestic licensing revenue related to motion picture exhibitor consumer admissions in the quarter in which the admission occurs, but only when reasonable estimates of such amounts can be made. We record our international licensing revenue based on actual amounts reported by motion picture exhibitors. We determine that there is persuasive evidence of an arrangement upon the execution of a license agreement or upon the receipt of a licensee’s admissions report. Revenue is deemed fixed or determinable upon receipt of a licensee’s admissions report or evidence of a RealD box office showing by licensee. We determine collectability based on an evaluation of the licensee’s recent payment history and evaluation of the respective customer’s credit-standing.
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Product revenue
We recognize product revenue, net of allowances, when title and risk of loss have passed and when there is persuasive evidence of an arrangement, the payment is fixed or determinable, and collectability of payment is reasonably assured. In the United States and Canada, certain of our product revenue from the sale of RealD eyewear is earned upon admission and usage by the motion picture exhibitor’s consumers. Our customers, however, do not report admission or usage information until after the admission and usage has occurred, and such information may be received subsequent to our fiscal period end. Accordingly, we estimate and record such product revenue in the quarter in which the admission and usage occurs, but only when reasonable estimates of such amounts can be made. Internationally, the motion picture exhibitors prepay for RealD eyewear, which is deferred upon receipt of cash and earned upon shipping and transfer of title of the products. There are not estimates made in relation to international sales.
Share-based compensation
We account for share-based awards granted to employees and directors by recording compensation expense based on estimated fair values. We estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. Share-based awards are attributed to expense using the straight-line method over the vesting period. We determine the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as permitted under ASC 718, Compensation—Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates. Our estimates of the fair values of share-based awards granted and the resulting amounts of share-based compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, modifications, estimates of forfeitures, and the related income tax impact.
Inventories and deferred costs eyewear
Domestically, we provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors' consumers. Internationally, the motion picture exhibitors prepay us for RealD eyewear ordered. Inventory shipped is recognized as cost of product revenue according to transfer of title. Globally, we may provide a limited amount of RealD eyewear to motion picture studios for marketing purposes. Inventory shipped is recognized as sales and marketing expense.
For RealD eyewear located at a motion picture exhibitor, we do not believe it is operationally practical to perform physical counts or request the motion picture exhibitor to perform physical counts and confirm quantities held to ensure that losses due to damage, destruction and shrinkage are specifically recognized in the period incurred due to the number of domestic RealD-enabled screens and related usage of RealD eyewear. We believe that the cost to monitor shrinkage or usage significantly outweighs the financial reporting benefits of using a specific identification methodology of expensing. We believe that utilizing a composite method of expensing RealD eyewear inventory costs provides a rational and reasonable approach to ensuring that shrinkage is provided for in the period incurred and that inventory costs are expensed in the periods that reasonably reflect the periods in which the related revenue is recognized. In doing so, we believe the following methodology reasonably and generally reflects periodic income or loss under these facts and circumstances:
• | For an estimated period of time following shipment to domestic motion picture exhibitors, no expense is recognized from the time of shipment until the delivery is made because the eyewear is in transit and unused. |
• | The inventory cost is expensed on a straight-line basis over an estimated usage period beginning with initial usage of the eyewear shipped. In estimating the expensing start date and related expense period, we consider various factors including, but not limited to, those relating to a 3D motion picture's opening release date, a 3D motion picture's expected release period, the number of currently playing 3D motion pictures, and the motion picture exhibitor's buying and stocking patterns and practices. |
We believe that the expensing methodology described above rationally and reasonably approximates the period the related usage occurs resulting in our RealD eyewear product revenue. The expensing start date following the date of shipment is meant to approximate the date at which usage begins. Additionally, as the expense recognition period has been and is expected to continue to be short, we believe it adequately recognizes inventory impairments due to loss and damage on a timely basis. We further believe that exposures due to loss or damage, if any, are considered normal shrinkage and a necessary and expected cost to generate the revenue per 3D motion picture earned through RealD eyewear usage. We continue to monitor the reasonableness of this methodology to ensure that it approximates the period over which the related RealD eyewear product revenue is earned and realizable. Costs of RealD eyewear that has shipped but has not yet been used and expensed per this methodology are reported as deferred costs-eyewear.
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Impairment of long-lived assets
We review long-lived assets, such as property and equipment, cinema systems, digital projectors and intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors or circumstances that could indicate the occurrence of such events include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing operating or cash flow losses, or incurring costs in excess of amounts originally expected to acquire or construct an asset. If the asset is not recoverable, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
Goodwill impairment
Goodwill is deemed to have an indefinite useful life and therefore is not amortized. We evaluate our goodwill for impairment using a two-step process that is performed at least annually during our fourth fiscal quarter, or whenever events or circumstances indicate that goodwill may be impaired. The first step is a comparison of the fair value of an internal reporting unit with its carrying amount, including goodwill. A reporting unit is an operating segment or one level below an operating segment. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment loss is recognized for the difference. We currently have one reporting unit in which goodwill resides and the reporting unit did not fail step one.
Deferred tax asset valuation and tax exposures
In preparing our consolidated financial statements, we are required to make estimates and judgments that affect our accounting for income taxes. This process includes estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences, including the timing of recognition of share-based compensation expense, result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We also assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we have established a valuation allowance. We assess realization of our deferred tax assets based on all available evidence in order to conclude whether it is more likely than not that the deferred tax assets will be realized. Available evidence considered by us includes, but is not limited to, our historic operating results, projected future operating results, reversing temporary differences, changing business circumstances, and the ability to realize certain deferred tax assets through loss and tax credit carry-back and carry-forward strategies. As of March 31, 2014, we have determined based on the weight of the available evidence, both positive and negative, to provide for a valuation allowance against substantially all of the net deferred tax assets. The current deferred tax assets not reserved for by the valuation allowance are those in foreign jurisdictions or amounts that may be carried back in future years. If there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, we will adjust all or a portion of the applicable valuation allowance in the period when such change occurs.
We are subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, we adjust tax expense to reflect our ongoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results.
Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, the valuation allowance against our deferred tax assets and uncertainty in income tax positions. Our financial position and results of operations may be materially impacted if actual results significantly differ from these estimates or the estimates are adjusted in future periods.
Contingencies and assessments
We are subject to various loss contingencies and assessments arising in the course of our business, some of which relate to litigation, claims, property taxes and sales and use or goods and services tax assessments. We consider the likelihood of the loss or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss, contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on our business, consolidated results of operations, financial condition or cash flows.
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Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic 606), effective for RealD starting April 1, 2017 (the first quarter of fiscal year 2018). Early application is not permitted. The new standard will be implemented retrospectively with us choosing to either restate prior periods or recognize the cumulative effect; we have not yet selected a transition method.
The new Topic 606 does not apply to lease contracts within the scope of Topic 840 Leases. The primary objective of ASU 2014-09 is to provide guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605 Revenue Recognition and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Revenue recognition is anticipated to entail more judgment and more estimating than under the current guidance. ASU 2014-09 also changes Topic 360 Property, Plant and Equipment, Topic 350 Intangibles-Goodwill and Other and certain other U.S. GAAP. We have not yet determined the effects of Topic 606 and other ASU 2014-09 revisions on our consolidated financial statements.
In June 2014, FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption is permitted. We adopted the provisions of ASU 2014-12 in the third quarter of fiscal year 2015. Our adoption is not expected to have any material impact on our consolidated financial statements. We already follow the accepted accounting within ASU 2014-12 for stock compensation terms within the scope of this clarifying guidance.
In February 2015, FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The objective of ASU 2015-02 is to modify the consolidation requirements of Topic 810 to ensure that reporting entities do not consolidate other legal entities in situations where deconsolidation actually more accurately represents operational and economic results. Among other changes, the amendments to ASC 810 include lessening the relevance on fees paid to a decision-maker or service provider and the related party tiebreaker test.The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years beginning after December 15, 2015. This ASU may be adopted using a full retrospective approach or a modified retrospective approach by recording a cumulative effect adjustment to equity as of the beginning of the fiscal year of adoption. ASU 2015-02 will be effective for us beginning in fiscal 2017, we have not yet determined the effects of ASU 2015-02 on our consolidated financial statements.
In April 2015, FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under the ASU 2015-03, such costs are presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption is allowed for all entities for financial statements that have not been previously issued. The guidance is to be applied retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). ASU 2015-03 will be effective for us beginning in fiscal 2017. We elected not to early adopt and are currently evaluating the impact that the adoption of ASU 2015-03 may have on our consolidated financial statements.
Item 7A. Quantitative and qualitative disclosures about market risk
We have operations both within the United States and internationally and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks as well as changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by collecting in advance and setting credit limits, as we deem appropriate. In addition, our investment strategy currently has been to invest in financial instruments that are highly liquid, readily convertible into cash and which mature within three months from the date of purchase. We also enter into foreign exchange derivative hedging transactions as part of our risk management program. For accounting purposes, we do not designate any of our derivative instruments as hedges and we do not use derivatives for speculating trading purposes and are not a party to leveraged derivatives.
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Interest rate risk
We are exposed to market risk related to changes in interest rates.
Our investments are considered cash equivalents and primarily consist of money market funds. At March 31, 2015, we had cash and cash equivalents of $60.3 million. The carrying amount of cash equivalents reasonably approximates fair value due to the short maturities of these instruments. The primary objective of our investment activities is preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, however, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.
We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe our cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on these deposits.
Loans outstanding under the 2014 Credit Agreement bear interest at our option at either the Euro currency rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Euro currency rate for a one month Interest Period on such day plus (1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on our leverage ratio. Under the 2014 Credit Agreement, we are charged a commitment fee on the unused portions of the Revolving Facility and Term Loan Facility. The fee for the unused Revolving Facility varies between 0.250% and 0.375% per year depending on the percentage of the Revolving Facility in use. The fee for the unused Term Loan Facility is 0.375% of the unused commitment. Changes in interest rates do not affect operating results or cash flows on our fixed rate borrowings but would impact our variable rate borrowings. As of March 31, 2015, we had $29.8 million in borrowings outstanding under the 2014 Credit Agreement which bear weighted average interest at approximately 2.44%.
Foreign currency risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. Our historical revenue has generally been denominated in U.S. dollars, and in recent years, a significant portion of our current revenue has been denominated in U.S. dollars, Euro and British pound sterling; however, we expect an increasing portion of our future revenue and operating expenses to be denominated in currencies other than the aforementioned currencies, primarily the Canadian dollar, Latin American currencies, Russian ruble, Japanese yen, Chinese yuan and Hong Kong dollar. Our operating expenses are generally denominated in the currencies of the countries where our operations are located, primarily the United States and United Kingdom. Increases and decreases in our international revenue from movements in foreign exchange rates are partially offset by the corresponding increases or decreases in our international operating expenses. To further reduce our net exposure to foreign exchange rate fluctuations on our results of operations, we have entered into foreign currency forward contracts.
As of March 31, 2015, we had outstanding forward contracts based on the Great Britain Pound and Euro with notional amounts totaling $2.9 million. We do not designate any of our forward contracts as hedges for accounting purposes. With regards to these contracts, a hypothetical 10.0% adverse movement in foreign exchange rates compared with the U.S. dollar relative to exchange rates on March 31, 2015 would result in a $0.3 million reduction in fair value of these forward contracts. This analysis does not consider the impact that hypothetical changes in foreign currency exchange rates would have on anticipated transactions and assets and liabilities that these foreign currency sensitive instruments were designed to offset.
As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we
will continue to reassess our approach to managing this risk. In addition, currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion. As our international operations grow, we expect to conduct more of our business in currencies other than the U.S. dollar, thereby increasing risks associated with fluctuation in currency rates. Currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion. As our exposure to currency risks grows, we will continue to reassess our risk management.
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Inflation risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Counterparty risk
Our financial statements, including derivatives, are subject to counterparty credit risk, which we consider as part of the overall fair value measurement. We attempt to mitigate this risk through credit monitoring procedures.
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Item 8. Financial statements and supplementary data
Index to consolidated financial statements
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of RealD Inc.
We have audited the accompanying consolidated balance sheets of RealD Inc. (the “Company”) as of March 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended March 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a) 2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of RealD Inc. at March 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), RealD Inc.'s internal control over financial reporting as of March 31, 2015, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated June 11, 2015 expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
June 11, 2015
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RealD Inc.
Consolidated balance sheets
(in thousands, except per share data)
March 31, 2015 | March 31, 2014 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 60,333 | $ | 28,800 | |||
Accounts receivable, net | 26,748 | 48,422 | |||||
Inventories | 8,305 | 9,109 | |||||
Deferred costs—eyewear | 80 | 149 | |||||
Prepaid expenses and other current assets | 4,770 | 5,197 | |||||
Total current assets | 100,236 | 91,677 | |||||
Property and equipment, net | 20,599 | 22,491 | |||||
Cinema systems, net | 82,243 | 106,735 | |||||
Digital projectors, net-held for sale | — | 57 | |||||
Goodwill | 10,657 | 10,657 | |||||
Other intangibles, net | 4,817 | 6,154 | |||||
Deferred income taxes | 2,461 | 4,571 | |||||
Other assets | 8,631 | 4,840 | |||||
Total assets | $ | 229,644 | $ | 247,182 | |||
Liabilities and equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 9,652 | $ | 12,470 | |||
Accrued expenses and other liabilities | 26,640 | 21,896 | |||||
Deferred revenue | 5,009 | 8,143 | |||||
Income taxes payable | 1,619 | 1,790 | |||||
Deferred income taxes | 2,583 | 4,288 | |||||
Current portion of Credit Agreement | 7,460 | 12,500 | |||||
Total current liabilities | 52,963 | 61,087 | |||||
Credit Agreement, net of current portion | 22,380 | 23,750 | |||||
Deferred revenue, net of current portion | 3,931 | 6,465 | |||||
Other long-term liabilities and customer deposits | 4,027 | 5,046 | |||||
Total liabilities | 83,301 | 96,348 | |||||
Commitments and contingencies | |||||||
Equity | |||||||
Common stock, $0.0001 par value, 200,000 shares authorized; 50,434 and 49,438 shares issued and outstanding at March 31, 2015 and March 31, 2014, respectively | 371,689 | 352,913 | |||||
Accumulated deficit | (226,803 | ) | (201,763 | ) | |||
Accumulated other comprehensive income | 1,960 | 262 | |||||
Total RealD Inc. stockholders' equity | 146,846 | 151,412 | |||||
Noncontrolling interest | (503 | ) | (578 | ) | |||
Total equity | 146,343 | 150,834 | |||||
Total liabilities and equity | $ | 229,644 | $ | 247,182 | |||
See accompanying notes to consolidated financial statements
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RealD Inc.
Consolidated statements of operations
(in thousands, except per share data)
Years ended March 31 | |||||||||||
2015 | 2014 | 2013 | |||||||||
Revenue: | |||||||||||
License | $ | 109,317 | $ | 132,512 | $ | 137,752 | |||||
Product and other | 54,146 | 66,722 | 77,800 | ||||||||
Total revenue | 163,463 | 199,234 | 215,552 | ||||||||
Cost of revenue: | |||||||||||
License | 47,086 | 45,364 | 47,243 | ||||||||
Product and other | 35,599 | 58,611 | 78,117 | ||||||||
Total cost of revenue | 82,685 | 103,975 | 125,360 | ||||||||
Gross profit | 80,778 | 95,259 | 90,192 | ||||||||
Operating expenses: | |||||||||||
Research and development | 19,474 | 19,685 | 19,454 | ||||||||
Selling and marketing | 21,719 | 27,137 | 25,266 | ||||||||
General and administrative | 49,370 | 50,596 | 47,830 | ||||||||
Total operating expenses | 90,563 | 97,418 | 92,550 | ||||||||
Operating loss | (9,785 | ) | (2,159 | ) | (2,358 | ) | |||||
Interest expense, net | (1,634 | ) | (2,255 | ) | (1,483 | ) | |||||
Other loss | (4,419 | ) | (679 | ) | (982 | ) | |||||
Loss before income taxes | (15,838 | ) | (5,093 | ) | (4,823 | ) | |||||
Income tax expense | 7,909 | 6,117 | 5,064 | ||||||||
Net loss | (23,747 | ) | (11,210 | ) | (9,887 | ) | |||||
Net (income) loss attributable to noncontrolling interest | (75 | ) | (196 | ) | 197 | ||||||
Net loss attributable to RealD Inc. common stockholders | $ | (23,822 | ) | $ | (11,406 | ) | $ | (9,690 | ) | ||
Loss per common share: | |||||||||||
Basic | $ | (0.48 | ) | $ | (0.23 | ) | $ | (0.19 | ) | ||
Diluted | $ | (0.48 | ) | $ | (0.23 | ) | $ | (0.19 | ) | ||
Shares used in computing earnings per common share: | |||||||||||
Basic | 50,042 | 49,504 | 52,345 | ||||||||
Diluted | 50,042 | 49,504 | 52,345 | ||||||||
See accompanying notes to consolidated financial statements
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RealD Inc.
Consolidated statements of comprehensive income (loss)
(in thousands, except per share data)
Years ended March 31 | |||||||||||
2015 | 2014 | 2013 | |||||||||
Net loss | $ | (23,747 | ) | $ | (11,210 | ) | $ | (9,887 | ) | ||
Other Comprehensive income, net of reclassification adjustments and taxes: | |||||||||||
Foreign currency translation gains | 1,698 | 147 | 115 | ||||||||
Other comprehensive income, net of tax | 1,698 | 147 | 115 | ||||||||
Comprehensive loss | $ | (22,049 | ) | $ | (11,063 | ) | $ | (9,772 | ) | ||
See accompanying notes to consolidated financial statements
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RealD Inc.
Consolidated statements of changes in equity
(in thousands, except share data)
Equity | ||||||||||||||||||||||
Common stock | Accumulated other comprehensive loss | Accumulated deficit | Noncontrolling interest | Total equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
Balance, March 23, 2012 | 54,561,178 | $ | 309,894 | $ | — | $ | (112,711 | ) | $ | 423 | $ | 197,606 | ||||||||||
Share-based compensation | — | 18,474 | — | — | — | 18,474 | ||||||||||||||||
Exercise of stock options | 543,797 | 3,516 | — | — | — | 3,516 | ||||||||||||||||
Issuance of common stock in connection with restricted stock units | 80,781 | — | — | — | — | — | ||||||||||||||||
Purchase and distribution of stock under employee stock purchase plan | 107,108 | 810 | — | — | — | 810 | ||||||||||||||||
Repurchases of common stock | (5,927,729 | ) | — | — | (60,445 | ) | — | (60,445 | ) | |||||||||||||
Other comprehensive loss, net of tax | — | — | 115 | — | — | 115 | ||||||||||||||||
Noncontrolling interest distribution | — | — | — | — | (1,000 | ) | (1,000 | ) | ||||||||||||||
Net income | — | — | — | (9,690 | ) | (197 | ) | (9,887 | ) | |||||||||||||
Balance, March 31, 2013 | 49,365,135 | $ | 332,694 | $ | 115 | $ | (182,846 | ) | $ | (774 | ) | $ | 149,189 | |||||||||
Share-based compensation | — | 17,741 | — | — | — | 17,741 | ||||||||||||||||
Exercise of stock options | 614,448 | 2,003 | — | — | — | 2,003 | ||||||||||||||||
Issuance of common stock in connection with restricted stock units | 50,058 | — | — | — | — | — | ||||||||||||||||
Purchase and distribution of stock under employee stock purchase plan | 79,856 | 475 | — | — | — | 475 | ||||||||||||||||
Repurchases of common stock | (671,997 | ) | — | — | (7,511 | ) | — | (7,511 | ) | |||||||||||||
Other comprehensive loss, net of tax | — | — | 147 | — | — | 147 | ||||||||||||||||
Net loss | — | — | — | (11,406 | ) | 196 | (11,210 | ) | ||||||||||||||
Balance, March 31, 2014 | 49,437,500 | $ | 352,913 | $ | 262 | $ | (201,763 | ) | $ | (578 | ) | $ | 150,834 | |||||||||
Share-based compensation | — | 14,898 | — | — | — | 14,898 | ||||||||||||||||
Exercise of stock options | 779,361 | 3,587 | — | — | — | 3,587 | ||||||||||||||||
Issuance of common stock in connection with restricted stock units | 279,148 | — | — | — | — | — | ||||||||||||||||
Repurchase of statutory withholdings of stock issued for restricted stock units | (98,710 | ) | — | — | (1,218 | ) | — | (1,218 | ) | |||||||||||||
Purchase and distribution of stock under employee stock purchase plan | 36,478 | 291 | — | — | — | 291 | ||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | 1,698 | — | — | 1,698 | ||||||||||||||||
Net loss | — | — | — | (23,822 | ) | 75 | (23,747 | ) | ||||||||||||||
Balance, March 31, 2015 | 50,433,777 | $ | 371,689 | $ | 1,960 | $ | (226,803 | ) | $ | (503 | ) | $ | 146,343 | |||||||||
See accompanying notes to consolidated financial statements
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RealD Inc.
Consolidated statements of cash flows
(in thousands)
Years ended March 31 | |||||||||||
2015 | 2014 | 2013 | |||||||||
Cash flows from operating activities | |||||||||||
Net loss | $ | (23,747 | ) | $ | (11,210 | ) | $ | (9,887 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 39,999 | 40,300 | 33,131 | ||||||||
Deferred income tax | 405 | (142 | ) | (241 | ) | ||||||
Non-cash interest expense | 119 | 529 | 483 | ||||||||
Non-cash stock compensation | 14,898 | 17,741 | 18,474 | ||||||||
Non-cash bad debt expense | 638 | 609 | (209 | ) | |||||||
(Gain) Loss on disposal of property and equipment | (8 | ) | 307 | 44 | |||||||
Impairment of long-lived assets | 5,023 | 4,522 | 8,679 | ||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | 21,036 | (3,559 | ) | 11,475 | |||||||
Inventories | 804 | 6,321 | 25,147 | ||||||||
Prepaid expenses and other current assets | 689 | (1,611 | ) | (954 | ) | ||||||
Deferred costs—eyewear | 69 | 389 | 394 | ||||||||
Other assets | (3,015 | ) | 191 | (590 | ) | ||||||
Accounts payable | (2,768 | ) | (10,308 | ) | 125 | ||||||
Accrued expenses and other liabilities | 4,744 | (3,646 | ) | (7,790 | ) | ||||||
Other long-term liabilities, customer deposits and virtual print fee liability | (1,019 | ) | (610 | ) | 2,747 | ||||||
Income taxes receivable/payable | (433 | ) | 1,574 | (518 | ) | ||||||
Deferred revenue | (5,587 | ) | (5,697 | ) | (813 | ) | |||||
Net cash provided by operating activities | 51,847 | 35,700 | 79,697 | ||||||||
Cash flows from investing activities | |||||||||||
Purchases of property and equipment | (4,359 | ) | (4,285 | ) | (16,169 | ) | |||||
Purchases of cinema systems and related components | (13,071 | ) | (18,050 | ) | (18,121 | ) | |||||
Purchases of intangible assets | — | — | (6,084 | ) | |||||||
Proceeds from sale of fixed assets | 63 | 551 | 2,474 | ||||||||
Net cash used in investing activities | (17,367 | ) | (21,784 | ) | (37,900 | ) | |||||
Cash flows from financing activities | |||||||||||
Noncontrolling interest distribution | — | — | (1,000 | ) | |||||||
Payments of debt issuance costs | (895 | ) | — | (1,167 | ) | ||||||
Proceeds from credit facility | 37,300 | 37,500 | 60,000 | ||||||||
Repayments on credit facility | (43,710 | ) | (48,750 | ) | (37,500 | ) | |||||
Proceeds from exercise of stock options | 3,587 | 2,003 | 3,516 | ||||||||
Proceeds from issuance of common stock pursuant to employee stock purchase plan | 291 | 475 | 810 | ||||||||
Repayments on tax withholding of restricted stock units | (1,218 | ) | — | — | |||||||
Purchases of treasury stock | — | (7,511 | ) | (60,445 | ) | ||||||
Net cash used in financing activities | (4,645 | ) | (16,283 | ) | (35,786 | ) | |||||
Effect of currency exchange rate changes on cash and cash equivalents | 1,698 | 147 | 115 | ||||||||
Net increase (decrease) in cash and cash equivalents | 31,533 | (2,220 | ) | 6,126 | |||||||
Cash and cash equivalents, beginning of year | 28,800 | 31,020 | 24,894 | ||||||||
Cash and cash equivalents, end of year | $ | 60,333 | $ | 28,800 | $ | 31,020 | |||||
Supplemental disclosures of cash flow information | |||||||||||
Cash payments for income taxes | 4,308 | 872 | 1,967 | ||||||||
Cash payments for interest expense | $ | 1,515 | $ | 1,726 | $ | 1,000 | |||||
See accompanying notes to consolidated financial statements
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RealD Inc.
Notes to consolidated financial statements
1. Business and basis of presentation
RealD Inc., including its subsidiaries ("RealD"), is a leading global licensor of 3D and other visual technologies.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The consolidated financial statements include the accounts of RealD, its wholly owned subsidiaries and its majority owned subsidiaries. The Company does not have any interests in variable interest entities. For consolidated subsidiaries that are not wholly owned but are majority owned, the subsidiaries' assets, liabilities, and operating results are included in their entirety in the accompanying consolidated financial statements. The noncontrolling interests in those assets, liabilities, and operations are reflected as non-controlling interests in the consolidated balance sheets under equity and consolidated statements of operations.
All significant intercompany balances and transactions have been eliminated in consolidation.
2. Summary of significant accounting policies
Accounting period
On November 14, 2012, RealD's Board of Directors approved a change in our accounting periods from the previous configuration of four 13-week periods for a total of 52 weeks to a calendar month end and calendar quarter end accounting period. This change in accounting period commenced in the third quarter ended December 31, 2012 of fiscal year 2013. As a result, the years ended March 31, 2015 and 2014 are eight days shorter (2.1%) than the year ended March 31, 2013.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and applicable disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management in the preparation of the financial statements relate to the following:
• | licensing revenue terms applied to the timing and number of motion picture exhibitor consumer admissions; |
• | domestic eyewear product revenue terms applied to when the usage occurs and the amount of usage; |
• | effects of allowances that are capitalized on the balance sheet and amortized to the applicable line item on the statement of operations as expense or contra revenue and earned customer incentives when customers do not timely report the activity that results in earned allowances and incentives; |
• | customer contract terms on revenue and balance sheet items; |
• | impairment testing of goodwill, intangible assets and tangible assets, including determination of relevant reporting units and long-lived asset groups; |
• | useful lives of intangible assets and tangible assets; |
• | timing and amount recognized for performance-based compensation, including bonus, executive salary and executive restricted share units, based on projections of Company performance achievement; |
• | the impact of potential future tax consequences of events that have been recognized in the Company’s financial statements; |
• | valuation of accruals and allowances; |
• | contingency assessments; and |
• | assumptions used in the determination of the fair value of equity-based awards for stock-based compensation. |
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Earnings (loss) per share of common stock
Basic income per share of common stock is computed by dividing the net income (loss) attributable to RealD common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing net income (loss) attributable to RealD Inc. common stockholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under our employee stock purchase plan and unvested restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method.
The calculation of the basic and diluted loss per share of common stock for the years ended March 31, 2015, March 31, 2014 and March 31, 2013 was as follows:
Years ended March 31 | |||||||||||
(in thousands, except per share data) | 2015 | 2014 | 2013 | ||||||||
Numerator: | |||||||||||
Net loss | $ | (23,747 | ) | $ | (11,210 | ) | $ | (9,887 | ) | ||
Net (income) loss attributable to noncontrolling interest | (75 | ) | (196 | ) | 197 | ||||||
Net loss attributable to RealD Inc. common stockholders | $ | (23,822 | ) | $ | (11,406 | ) | $ | (9,690 | ) | ||
Denominator: | |||||||||||
Weighted-average common shares outstanding (basic) | 50,042 | 49,504 | 52,345 | ||||||||
Effect of dilutive securities | — | — | — | ||||||||
Weighted-average common shares outstanding (diluted) | 50,042 | 49,504 | 52,345 | ||||||||
Loss per common share: | |||||||||||
Basic | $ | (0.48 | ) | $ | (0.23 | ) | $ | (0.19 | ) | ||
Diluted | $ | (0.48 | ) | $ | (0.23 | ) | $ | (0.19 | ) | ||
Due to the loss attributable to RealD Inc. common stockholders in the years ended March 31, 2015, March 31, 2014 and March 31, 2013, basic loss per common share and diluted loss per common share are the same as the effect of potentially dilutive securities would be anti-dilutive.
The weighted-average number of anti-dilutive shares excluded from the calculation of diluted earnings (loss) per common share for the years ended March 31, 2015, March 31, 2014 and March 31, 2013 was as follows:
Years ended March 31 | ||||||||
(in thousands) | 2015 | 2014 | 2013 | |||||
Options and warrants to purchase common stock | 9,632 | 9,299 | 8,441 | |||||
Total | 9,632 | 9,299 | 8,441 | |||||
Fair value measurements
Accounting Standards Codification Topic (ASC) 820-10, Fair Value Accounting (ASC 820), provides a common definition of fair value and establishes a framework to make the measurement of fair value in U.S. GAAP more consistent and comparable. This guidance also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and requires that assets and liabilities carried at fair value be classified and disclosed in the following three categories:
• | Level 1—Quoted prices for identical instruments in active markets. |
• | Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. |
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• | Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The Company's financial assets and liabilities, which include financial instruments as defined by ASC 820, include cash and cash equivalents, accounts receivable, accounts payable, long-term debt and derivatives. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are a reasonable approximation of fair value due to the short maturities of these instruments. The carrying amount of long-term debt approximates fair value based on borrowing rates currently available to the Company. The carrying amount of the Company's derivative instruments is recorded at fair value and is determined based on observable inputs that are corroborated by market data (Level 2).
As of March 31, 2015 and March 31, 2014, the fair values of our derivative instruments that were carried at fair value on a recurring basis were not significant.
Derivative instruments
The Company's derivative instruments are recorded at fair value in other current assets or other current liabilities, respectively, in the consolidated balance sheets. Changes in fair value are reported as a component of other income or loss on our consolidated statements of operations. For all periods presented, none of our derivative instruments were designated as hedging instruments. The Company does not use foreign currency option or foreign exchange forward contracts for speculative or trading purposes.
The Company purchases foreign currency forward contracts, generally with maturities of six months or less, to reduce the volatility of cash flows primarily related to forecasted payments and expenses denominated in certain foreign currencies. As of March 31, 2015, RealD had outstanding forward contracts based in British pound sterling and Euro with notional amounts totaling $2.9 million. As of March 31, 2014, the Company had outstanding forward contracts based in British pound sterling and Euro with notional amounts totaling $0.4 million. As of March 31, 2015, the carrying amount of the Company's foreign currency forward contracts was $0.4 million. As of March 31, 2014, the carrying amount of the Company's foreign currency forward contracts was insignificant. Foreign currency forward contracts were classified as Level 2 fair value instruments, which was determined based on observable inputs that were corroborated by market data both as of March 31, 2015 and March 31, 2014. The net realized and unrealized gains and losses related to forward contracts were $0.5 million, $0.6 million and $0.9 million for fiscal years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
Marketable securities
RealD classifies unrealized gains and losses on marketable securities reported as a component of accumulated other comprehensive income. As of March 31, 2015, March 31, 2014 and March 31, 2013, the Company had no marketable securities.
The objectives of RealD's investment policy are to preserve capital, provide sufficient liquidity to satisfy operating and investment purposes, and capture a market rate of return based on the Company's investment policy parameters and market conditions. The Company's investment policy limits investments to certain types of debt and money market instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.
Cash equivalents
The Company considers cash equivalents to be only those investments that are highly liquid, readily convertible into cash and which mature within three months from the date of purchase.
Accounts receivable, net
Accounts receivable, net, consists of trade receivables, value-added tax ("VAT") receivables, other receivables and allowance for doubtful accounts and customer credits. The Company provides credit to its customers, who are primarily in the movie production and exhibition businesses. The Company provides for the estimated accounts receivable that will not be collected. These estimates are based on an analysis of historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in the customers’ payment terms and their economic condition. Collection of accounts receivable may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company’s overall credit risk. The allowance for doubtful accounts and customer credits totaled $5.9 million and $4.1 million as of March 31, 2015 and March 31, 2014, respectively.
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Inventories and deferred costs-eyewear
Inventories and deferred costs-eyewear represent RealD eyewear and are substantially all finished goods. Inventories and deferred costs-eyewear are valued at the lower of cost (first-in, first-out method) or market value. At each balance sheet date, the Company evaluates ending inventories and deferred costs-eyewear for net realizable value. The Company also evaluates inventories for excess quantities and obsolescence. These evaluations include analyses of expected future average selling prices, projections of future demand and technology changes. In order to state inventories at the lower of cost or market, RealD maintains reserves against such inventories. If the Company’s analyses indicate that market is lower than cost, a write-down of inventories is recorded in cost of revenue in the period the loss is identified. As of March 31, 2015 and March 31, 2014, the inventory reserve as a result of our net realizable value analyses was $0.1 million and $0.6 million, respectively.
Domestically, the Company provides RealD eyewear free of charge to motion picture exhibitors and then receives a fee from the motion picture studios for the usage of RealD eyewear by the motion picture exhibitors’ consumers. Eyewear shipped from inventory is deferred on the shipment date and then amortized to cost of product revenue according to assumptions related to eyewear usage by consumers. Internationally, the motion picture exhibitors prepays the Company for RealD eyewear ordered. Inventory shipped is recognized to cost of product revenue according to transfer of title. Globally, the Company may provide limited amount of RealD eyewear to motion picture studios for marketing purposes. Inventory shipped is recognized to sales and marketing expense.
Property and equipment, RealD Cinema Systems and digital projectors
Property and equipment, RealD Cinema Systems and digital projectors are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. The major categories and related estimated useful lives are as follows:
RealD Cinema Systems | 5 - 8 years | |
Digital projectors—held for sale | 10 years | |
Leasehold improvements | Shorter of useful life or lease | |
Machinery and equipment | 2 - 7 years | |
Furniture and fixtures | 3 - 5 years | |
Computer equipment and software | 3 - 5 years | |
Digital projectors—held for sale (digital projectors) also include digital servers, lenses and accessories. Upon installation at the customer location, the Compnay retains title to the RealD Cinema Systems which are held and used by its customers. The digital projectors are held for sale at either a specified date or upon occurrence of certain contingent events. Depreciation for RealD Cinema Systems and digital projectors is included in cost of revenue.
Major enhancements and improvements are capitalized. Maintenance and repairs for cinema systems and digital projectors are charged to expense as incurred. Maintenance and repairs expense totaled $0.3 million, $0.5 million and $0.9 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
Other intangibles, net
Other intangibles, net, are deemed to have finite lives and consist of acquired developed technologies (which are primarily patents) and are amortized over their estimated useful lives of 5 to 19 years (with a weighted average remaining amortization period of 4.5 years) using the straight-line method.
Impairment of long-lived assets
The Company reviews long-lived assets, such as property and equipment, cinema systems, digital projectors and intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors or circumstances that could indicate the occurrence of such events include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing operating or cash flow losses, or incurring costs in excess of amounts originally expected to acquire or construct an asset. If the asset is not recoverable, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
During the year ended March 31, 2015, the impairment charged to cost of revenue for all impaired RealD Cinema Systems totaled $5.0 million.
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During the year ended March 31, 2014, the impairment charged to cost of revenue for all impaired RealD Cinema Systems totaled $4.5 million.
During the year ended March 31, 2013, the Company determined that a non-cancelable purchase commitment for certain cinema systems configurations in the aggregate amount of $3.5 million were not fully recoverable, primarily due to the initial investment costs which are expected to exceed the anticipated future cash flows for the related cinema systems. The impairment charged during the year ended March 31, 2013 for all impaired RealD Cinema Systems charged to cost of revenue was $8.0 million of the total $8.7 million impairment expense.
Goodwill
Goodwill is deemed to have an indefinite useful life and therefore is not amortized. The Company evaluates its goodwill for impairment using a two-step process that is performed at least annually during our fourth fiscal quarter, or whenever events or circumstances indicate that goodwill may be impaired. The first step is a comparison of the fair value of an internal reporting unit with its carrying amount, including goodwill. A reporting unit is an operating segment or one level below an operating segment. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment loss is recognized for the difference. The Company currently has one reporting unit in which goodwill resides and the reporting unit did not fail step one.
Revenue recognition
The Company derives substantially all of its revenue from the license of RealD Cinema Systems and the product sale of RealD eyewear. RealD evaluates revenue recognition for transactions using the criteria set forth by the Financial Accounting Standard Board (FASB) Accounting Standards Codification (ASC) Topic 840, Leases, and ASC Topic 605, Revenue Recognition. The revenue recognition guidance states that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. The Company records revenue net of estimated allowances.
License revenue
License revenue, net of lease incentives and other allowances, is accounted for as an operating lease. License revenue is primarily derived under per-admission, percentage of box office, periodic fixed fee, or per-motion picture basis with motion picture exhibitors. Amounts received up front, less estimated lease incentives, are deferred and recognized over the lease term using the straight-line method. Additional lease payments that are contingent upon future events outside the Company’s control, including those related to admission and usage, are recognized as revenues when the contingency is resolved and the Company has no more obligations to our customers specific to the contingent payment received. Certain of the Company’s license revenue from leasing RealD Cinema Systems is earned upon admission by the motion picture exhibitor’s consumers. The Company’s licensees, however, do not report and pay for such license revenue until after the admission has occurred, which may be received subsequent to the Company’s fiscal period end. The Company estimates and records domestic licensing revenue related to motion picture exhibitor consumer admissions in the quarter in which the admission occurs, but only when reasonable estimates of such amounts can be made. The Company records its international licensing revenue based on actual amounts reported by motion picture exhibitors. The Company determines that there is persuasive evidence of an arrangement upon the execution of a license agreement or upon the receipt of a licensee’s admissions report. Revenue is deemed fixed or determinable upon receipt of a licensee’s admissions report or evidence of a RealD box office showing by licensee. The Company determines collectability based on an evaluation of the licensee’s recent payment history and evaluation of the respective customer’s credit-standing.
Product revenue
The Company recognizes product revenue, net of allowances, when title and risk of loss have passed and when there is persuasive evidence of an arrangement, the payment is fixed or determinable, and collectability of payment is reasonably assured. In the United States and Canada, certain of the Company’s product revenue from the sale of RealD eyewear is earned upon admission and usage by the motion picture exhibitor’s consumers. The Company’s customers, however, do not report admission or usage information until after the admission and usage has occurred, and such information may be received
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subsequent to the Company’s fiscal period end. Accordingly, the Company estimates and records such product revenue in the quarter in which the admission and usage occurs, but only when reasonable estimates of such amounts can be made. Internationally, the motion picture exhibitors prepays for the RealD eyewear, which is deferred upon receipt of cash and earned upon shipping and transfer of title of the products. There are not estimates made in relation to international sales.
Cost of revenue
Cost of revenue principally consists of depreciation expense of RealD Cinema Systems deployed at a motion picture exhibitor's premises, digital projector depreciation expenses, impairment of goodwill and intangible assets, losses on assets of non-cancelable commitments, RealD eyewear costs (including shipping, handling and recycling costs), field service and support costs, occupancy costs and gain and loss from sale of production assets. Additionally, RealD provides certain cinema equipment to customers as lease incentives, which depreciated over life of the asset.
Shipping and handling costs
Amounts billed to customers for shipping and handling costs are included in revenue. Shipping and handling costs that we incur consist primarily of packaging and transportation charges and are recorded in cost of revenue. Shipping and handling costs recognized in cost of revenue were $4.0 million, $6.6 million and $7.9 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
Research and development costs
Research and development (R&D) costs are expensed as incurred. Major components of R&D expense include salaries and benefits, depreciation for R&D assets, materials and supplies inclusive of prototypes, non-recurring engineering, payments to third parties for R&D, facilities and equipment that can only be used for a particular project and overhead allocations of various administrative and facilities costs related to R&D.
Selling and marketing costs
Selling and marketing costs are primarily comprised of personnel costs related to our selling and marketing staff, advertising costs, including promotional events and other brand building and product marketing expenses, corporate communications, certain professional fees, occupancy costs and travel expenses.
Advertising costs are expensed as incurred. Advertising expenses were approximately $2.9 million, $2.7 million and $3.7 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
General and administrative costs
General and administrative costs principally consist of personnel costs related to our executive, legal, finance and human resources staff, professional fees including legal and accounting costs, occupancy costs, public company costs, bad debt expenses and gain and loss from disposition of assets. Additionally, general and administrative costs include sales, use, goods and services tax and value added tax (collectively, the "transaction taxes") as well as property taxes. For our U.S. and some of our international cinema license and product revenue, we absorb the majority of the transaction taxes.
Share-based compensation
RealD accounts for share-based awards granted to employees and directors by recording compensation expense based on estimated fair values. The Company estimates the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in its consolidated statements of operations. Share-based awards are attributed to expense using the straight-line method over the vesting period. The Company determines the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as permitted under ASC 718, Compensation—Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent the Company's best estimates. The Company's estimates of the fair values of share-based awards granted and the resulting amounts of share-based compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, modifications, estimates of forfeitures, and the related income tax impact. If any of the assumptions used in the Company's valuation models significantly change, share-based compensation for future awards may differ materially from the awards granted previously. See Note 9, Share-based compensation.
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Foreign currency
Local currency transactions of the Company's foreign operations that have the U.S. dollar as their functional currency are remeasured into U.S. dollars using current rates of exchange for monetary assets and liabilities and historical rates of exchange for nonmonetary assets and liabilities. Gains and losses from remeasurement of monetary assets and liabilities are included in other income (loss) in the Company's statements of operations.
The assets and liabilities of our foreign operations for which the functional currency is not the U.S. dollar are translated into U.S. dollars at exchange rates as of the balance sheet date, revenues and expenses are translated at average exchange rates for the period, and equity balances are translated at the historical rate. Resulting translation adjustments are included in other comprehensive loss, a component of equity (deficit).
Net income and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency and the net realized and unrealized gains and losses related to forward contracts totaled $0.5 million, $0.6 million and $0.9 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively, and are included in other income (loss).
Income taxes
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities at year-end and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized.
Accruals for uncertain tax positions are provided for in accordance with the authoritative guidance for accounting for uncertainty in income taxes (ASC 740). The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative guidance for accounting for uncertainty in income taxes also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. The Company's policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.
Employee benefit plans
RealD has a voluntary 401(k) saving plans in which most U.S. employees are eligible to participate. Eligible employees may make contributions not to exceed the maximum statutory contribution amounts. The Company may match a percentage of each employee's contributions consistent with the provisions of the plan for which they are eligible. All employee and employer contributions fully vest immediately. The Company's contributions to these plans totaled $0.4 million, $0.6 million and $0.6 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic 606), effective for RealD starting April 1, 2017 (the first quarter of fiscal year 2018). Early application is not permitted. The new standard will be implemented retrospectively with the Company choosing to either restate prior periods or recognize the cumulative effect; the Company has not yet selected a transition method.
The new Topic 606 does not apply to lease contracts within the scope of Topic 840 Leases. The primary objective of ASU 2014-09 is to provide guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605 Revenue Recognition and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Revenue recognition is anticipated to entail more judgment and more estimating than under the current guidance. ASU 2014-09 also changes Topic 360 Property, Plant and Equipment, Topic 350 Intangibles-Goodwill and Other and certain other U.S. GAAP. The Company has not yet determined the effects of Topic 606 and other ASU 2014-09 revisions on its consolidated financial statements.
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In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period". ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption is permitted. The Company adopted the provisions of ASU 2014-12 in the third quarter of fiscal year 2015. The Company’s adoption is not expected to have any material impact on its consolidated financial statements. The Company already follows the accepted accounting within ASU 2014-12 for stock compensation terms within the scope of this clarifying guidance.
In February 2015,the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. The objective of ASU 2015-02 is to modify the consolidation requirements of Topic 810 to ensure that reporting entities do not consolidate other legal entities in situations where deconsolidation actually more accurately represents operational and economic results. Among other changes, the amendments to ASC 810 include lessening the relevance on fees paid to a decision-maker or service provider and the related party tiebreaker test.The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years beginning after December 15, 2015. This ASU may be adopted using a full retrospective approach or a modified retrospective approach by recording a cumulative effect adjustment to equity as of the beginning of the fiscal year of adoption. ASU 2015-02 will be effective for the Company beginning in fiscal 2017, the Company has not yet determined the effects of ASU 2015-02 on its consolidated financial statements.
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs", which changes the presentation of debt issuance costs in financial statements. Under the ASU 2015-03, such costs are presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption is allowed for all entities for financial statements that have not been previously issued. The guidance is to be applied retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). ASU 2015-03 will be effective for the Company beginning in fiscal 2017. The Company elected not to early adopt and is currently evaluating the impact that the adoption of ASU 2015-03 may have on its consolidated financial statements.
3. Cinema Systems and Property & Equipment
Property and equipment, RealD Cinema Systems and digital projectors consist of the following:
(in thousands) | March 31, 2015 | March 31, 2014 | |||||
RealD Cinema Systems | $ | 208,056 | $ | 205,416 | |||
Digital projectors—held for sale | — | 216 | |||||
Leasehold improvements | 16,974 | 16,935 | |||||
Machinery and equipment | 5,791 | 4,753 | |||||
Furniture and fixtures | 1,238 | 1,272 | |||||
Computer equipment and software | 10,581 | 9,197 | |||||
Construction in process | 565 | 1,554 | |||||
Total | $ | 243,205 | $ | 239,343 | |||
Less accumulated depreciation | (140,363 | ) | (110,060 | ) | |||
Property and equipment, RealD Cinema Systems and digital projectors, net | $ | 102,842 | $ | 129,283 | |||
Depreciation expense amounted to $38.6 million, $39.0 million and $32.7 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
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During the year ended March 31, 2015, the Company received $0.1 million in cash from motion picture exhibitor customers for the sale of digital projectors.
During the year ended March 31, 2014, the Company received $0.3 million in cash from motion picture exhibitor customers for the sale of digital projectors.
During the year ended March 31, 2013, the Company received $2.5 million in cash from motion picture exhibitor customers for the sale of digital projectors.
During the year ended March 31, 2013, the Company determined that a non-cancelable purchase commitment for certain cinema systems configurations in the aggregate amount of $3.5 million was not fully recoverable, primarily due to the initial investment costs which are expected to exceed the anticipated future cash flows for the related cinema systems.
For the years ended March 31, 2015, March 31, 2014 and March 31, 2013, impairment expense charged to cost of revenue totaled $5.0 million, $4.5 million and $8.7 million, respectively.
4. Goodwill and other intangibles, net
Goodwill and other intangibles, net, consist of the following at:
March 31, 2015 | March 31, 2014 | ||||||||||||||
(in thousands) | Gross amount | Accumulated amortization | Gross amount | Accumulated amortization | |||||||||||
Acquired developed technologies | $ | 9,324 | $ | 4,507 | $ | 9,324 | $ | 3,170 | |||||||
Goodwill | 10,657 | — | 10,657 | — | |||||||||||
Total | $ | 19,981 | $ | 4,507 | $ | 19,981 | $ | 3,170 | |||||||
Amortization expense amounted to $1.4 million, $1.3 million and $0.4 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
In the fiscal year ended March 31, 2013, the Company purchased a portfolio of 2D-to-3D conversion patents in the amount of $6.1 million and may consider future purchases of intangible assets, acquisitions or other investing activities.
At March 31, 2015, the remaining amortization expense is estimated to be as follows (in thousands):
Fiscal year 2016 | $ | 1,303 | |
Fiscal year 2017 | 1,300 | ||
Fiscal year 2018 | 1,287 | ||
Fiscal year 2019 | 306 | ||
Fiscal year 2020 | 129 | ||
Thereafter | 492 | ||
Total | $ | 4,817 | |
Intangibles are deemed to have finite lives and consist of acquired developed technologies (which are primarily patents) and are amortized over their estimated useful lives of 5 to 19 years (with a weighted average remaining amortization period of 4.5 years) using the straight-line method.
5. Accrued expenses and other liabilities
Accrued expenses and other liabilities consist of the following at:
(in thousands) | March 31, 2015 | March 31, 2014 | |||||
Payroll and compensation | $ | 8,673 | $ | 5,070 | |||
Sales, use taxes and other taxes | 6,317 | 6,582 | |||||
Professional fees | 3,206 | 1,484 | |||||
RealD Cinema system contractual obligations | 5,154 | 4,134 | |||||
Other | 3,290 | 4,626 | |||||
Total | $ | 26,640 | $ | 21,896 | |||
For its U.S. and some of the international cinema license and product revenues, the Company absorbs the majority of the sales and use taxes and value added taxes and does not pass such costs on to its customers.
Cost reduction plans
Over the past few quarters, the Company announced plans to reduce the overall costs of its global operations (the "Cost Reduction Plans"). The Cost Reduction Plans were primarily a response to the anticipated impact on the Company’s financial results and operations caused by changes in the 3D box office performance of certain motion pictures due to perceived changes in consumer preference and the fact that the Company’s 3D cinema business is maturing in many markets like the United States in which the Company expected equipment installations to continue to slow. As part of the Cost Reduction Plans, the Company reduced its staff, rescoped and made other changes to certain research and development projects, reduced certain non-personnel related general and administrative expenses and streamlined certain manufacturing operations. The Company further focused the expansion of its global cinema platform on emerging growth markets and higher performing motion picture exhibitors.
The Company accounts for the Cost Reduction Plans in accordance with the Accounting Standards Codification, including ASC 420, Exit or Disposal Cost Obligations, ASC 712, Compensation-Nonretirement Postemployment Benefits, ASC 840, Leases and ASC 360, Property, Plant and Equipment (Impairment or Disposal of Long-Lived Assets). As a result of the Cost Reduction Plans' workforce reduction and commencement of the relocation of manufacturing, the Company incurred termination and other charges totaling approximately $4.7 million for the fiscal year ended March 31, 2014. Charges of $1.4 million have been incurred for the fiscal year ended March 31, 2015, including $0.3 million for the accrual of losses on a lease for manufacturing facilities that will no longer be used in the Company’s operations. Therefore, the total charges were $6.1 million through March 31, 2015. The following tables summarizes the charges resulting from implementation of the Cost Reduction Plans for the fiscal year ended March 31, 2015 and March 31, 2014:
Years ended March 31 | |||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||
(in thousands) | Personnel | Leasehold | Total | Personnel | Leasehold | Total | |||||||||||||||||
Cost of revenue | $ | 242 | $ | 601 | $ | 843 | $ | 835 | $ | 13 | $ | 848 | |||||||||||
Research and development | 240 | — | 240 | 757 | — | 757 | |||||||||||||||||
Selling and marketing | 97 | — | 97 | 1,830 | — | 1,830 | |||||||||||||||||
General and administrative | 192 | — | 192 | 1,206 | 77 | 1,283 | |||||||||||||||||
Total | $ | 771 | $ | 601 | $ | 1,372 | $ | 4,628 | $ | 90 | $ | 4,718 | |||||||||||
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The following table summarizes the actual and estimated activity resulting from implementation of the cost reduction plan with accrued expenses and other liabilities:
Cost reduction plan liabilities | |||||||||||
(in thousands) | Personnel | Leasehold | Total | ||||||||
Cost reduction plan liabilities as of March 31, 2013 | $ | — | $ | — | $ | — | |||||
Charges | 4,628 | 90 | 4,718 | ||||||||
(Payments) | (3,212 | ) | (90 | ) | (3,302 | ) | |||||
Cost reduction plan liabilities as of March 31, 2014 | $ | 1,416 | $ | — | $ | 1,416 | |||||
Charges | 771 | 601 | 1,372 | ||||||||
(Payments) | (938 | ) | (336 | ) | (1,274 | ) | |||||
Cost reduction plan liabilities as of March 31, 2015 | $ | 1,249 | $ | 265 | $ | 1,514 | |||||
Additionally, the Company leases office space for its headquarters that includes approximately $5.6 million in leasehold improvements and other items classified as fixed assets (see Note 3 "Cinema Systems and Property & Equipment"). If the Company relocated the office, these fixed assets could become subject to an impairment assessment and contract termination costs or sublease loss could be incurred.
There is no guarantee that termination and implementation costs will not exceed the estimates, or that any net cost reduction will actually be achieved.
6. Borrowings
2014 Credit Agreement
On June 26, 2014, RealD entered into the Amended and Restated Credit Agreement (the "2014 Credit Agreement"), by and among the Company, as borrower, City National Bank, as administrative agent and letter of credit issuer ("City National"), the other agents from time to time party thereto and the lenders from time to time party thereto (the "Lenders"). The 2014 Credit Agreement amends and restates in its entirety that certain Credit Agreement, dated as of April 19, 2012, by and among the Company, City National and the agents and lenders from time to time party thereto, which had been most recently amended on October 16, 2013 (the "2012 Credit Agreement").
Pursuant to the 2014 Credit Agreement, the Lenders thereunder made available to RealD:
• | a revolving credit facility (including a letter of credit sub-facility) in a maximum amount not to exceed $50 million (the "Revolving Facility"), which matures on June 26, 2017. In addition, we may request up to an additional $25 million of commitments under the Revolving Facility (such that the maximum amount of all commitments under the Revolving Facility may not exceed $75 million), subject to the satisfaction of certain financial and other conditions and subject to obtaining such commitments; and |
• | a delayed draw term loan facility in a maximum amount not to exceed $50 million (the "Term Loan Facility"), which matures on June 26, 2018. During the first quarter of fiscal year 2015, the Company borrowed $37.3 million under the Term Loan Facility, resulting in $12.7 million being available for future draws through June 26, 2015. |
Debt issuance costs related to the completion of the 2014 Credit Agreement totaled $0.9 million and were added to the $0.3 million deferred charge remaining on the 2012 Credit Agreement. As of March 31, 2015, unamortized debt issuance costs totaled $0.9 million. All these issuance costs are being amortized over the contractual life of the Revolving Facility and recorded as interest expense.
The obligations under the 2014 Credit Agreement are fully and unconditionally guaranteed by the Company’s subsidiaries, ColorLink Inc., a Delaware corporation ("ColorLink"), Stereographics Corporation, a California corporation ("Stereographics"), and RealD DDMG Acquisition, LLC, a Delaware limited liability company (together with the Company, ColorLink and Stereographics, the "Loan Parties"). The obligations under the 2014 Credit Agreement are secured by a first priority security interest in substantially all of the Loan Parties’ tangible and intangible assets.
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As of March 31, 2015, $50 million was available under the Revolving Facility and $12.7 million was available under the Term Loan Facility after taking into account our borrowings under the Term Loan Facility during the first quarter of fiscal year 2015 in the amount of $37.3 million. As a result, as of March 31, 2015, we had $62.7 million available for future draws under the 2014 Credit Agreement.
As of March 31, 2015, there was no balance outstanding under the Revolving Facility. The term loan outstanding balance of $29.8 million at March 31, 2015 is to be repaid in 12 quarterly installments of $1.9 million through March 31, 2018 and the remaining $7.5 million principal on June 26, 2018. The current and non-current portions of the Credit Agreement due as of March 31, 2015 and March 31, 2014, which include both the 2012 Credit Agreement and 2014 Credit Agreement in the table below,were as follows:
March 31, 2015 | March 31, 2014 | ||||||
(in thousands) | |||||||
Current portion of Credit Agreement | $ | 7,460 | $ | 12,500 | |||
Credit Agreement, net of current portion | 22,380 | 23,750 | |||||
Total Credit Agreement | $ | 29,840 | $ | 36,250 | |||
At March 31, 2015, our future minimum Credit Agreement obligations were as follows:
Fiscal year 2016 | $ | 7,460 | |
Fiscal year 2017 | 7,460 | ||
Fiscal year 2018 | 7,460 | ||
Fiscal year 2019 | 7,460 | ||
Total | $ | 29,840 | |
Under the Credit Agreement, our business is subject to certain limitations, including limitations on our ability to incur additional debt, make certain investments or acquisitions, enter into certain merger and consolidation transactions, and sell our assets other than in the ordinary course of business. We are also required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. As of March 31, 2015, we were in compliance with all financial covenants in our Credit Agreement. If we fail to comply with any of the covenants or if any other event of default, as defined in our Credit Agreement, should occur, the bank lenders could elect to prevent us from borrowing and declare the indebtedness to be immediately due and payable.
Loans outstanding under the 2014 Credit Agreement bear interest at the Company’s option at either the Eurodollar rate plus a margin ranging from 2.25% to 2.75% per year or the base rate (the highest of (i) the Federal Funds rate plus 0.50%, (ii) City National’s prime rate or (iii) the Eurocurrency rate for a one month Interest Period on such day plus 1.00%) plus a margin ranging from 1.25% to 1.75% per year. The applicable margin for loans varies depending on the Company’s leverage ratio. Under the 2014 Credit Agreement, the Company is charged a commitment fee on the unused portions of the Revolving Facility and Term Loan Facility. The fee for the unused Revolving Facility varies between 0.250% and 0.375% per year depending on the percentage of the Revolving Facility in use. The fee for the unused Term Loan Facility is 0.375% of the unused commitment. Additionally, the Company is charged a letter of credit fee between 2.25% to 2.75%, depending on the Company’s leverage ratio, per year with respect to the amount of each performance letter of credit issued under the 2014 Credit Agreement. The Company also pays customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the 2014 Credit Agreement.
As of March 31, 2015, there were $29.8 million in borrowings outstanding in the 2014 Credit Agreement, borrowings outstanding under the 2014 Credit Agreement bore weighted average interest at 2.44%. As of March 31, 2014, there were $36.3 million in borrowings outstanding under the 2012 Credit Agreement. As of March 31, 2014, borrowings outstanding under the 2012 Credit Agreement bore interest at 2.88%. As of March 31, 2013, there were $47.5 million borrowings outstanding under the 2012 Credit Agreement. As of March 31, 2013, borrowings outstanding under the 2012 Credit Agreement bore interest at 3.03%. Interest expense related to our borrowings under our credit and security agreement was $1.6 million, $1.8 million and $1.1 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
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7. Commitments and contingencies
Lease obligations
The Company leases certain office, production and research and development space under non-cancelable operating leases that expire at various dates. Certain operating leases provide the Company with the option to renew for additional periods. Where operating leases contain escalation clauses, rent abatements, and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company applies them in the determination of straight-line rent expense over the lease term. Certain operating leases require the payment of real estate taxes or other occupancy costs, which may be subject to escalation.
At March 31, 2015, the Company's future minimum lease obligations were as follows (in thousands):
Fiscal year 2016 | $ | 4,313 | |
Fiscal year 2017 | 4,019 | ||
Fiscal year 2018 | 4,076 | ||
Fiscal year 2019 | 4,082 | ||
Fiscal year 2020 | 4,203 | ||
Thereafter | 10,710 | ||
Total | $ | 31,403 | |
Rent expense was $6.8 million, $6.6 million and $5.2 million for the fiscal years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
Indemnities and commitments
During the ordinary course of business, the Company makes certain indemnities and commitments under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities of certain customers and licensees of our technologies, and indemnities to the Company’s directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. The majority of these indemnities and commitments do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities and commitments in the accompanying condensed consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is reasonably probable and estimable.
The Company has entered into contracts with certain of our vendors. Future obligations under such contracts totaled $13.7 million at March 31, 2015 and include revolving 90-day supply commitments and other professional service commitments. Many of the contracts contain cancellation penalty provisions requiring payment of up to 20.0% of the unused contract.
Contingencies and assessments
The Company is subject to various loss contingencies and assessments arising in the course of its business, some of which relate to litigation, claims, property taxes and sales and use tax or goods and services tax assessments. The Company considers the likelihood of the loss or the incurrence of a liability, as well as the Company’s ability to reasonably estimate the amount of loss in determining loss contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to us to determine whether such accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on the Company’s business, consolidated results of operations, financial condition or cash flows.
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8. Equity
Common stock
At March 31, 2015, the Company reserved the following shares of common stock for future issuances in connection with:
(in thousands) | ||
Restricted stock units | 1,524 | |
Performance stock options | 236 | |
Performance stock units | 1,029 | |
Stock option plan: | ||
Outstanding | 6,804 | |
Reserved for future issuance | 5,965 | |
Total | 15,558 | |
Stock repurchase program
On April 20, 2012, the Company announced that its board of directors had approved an authorization to repurchase up to $50.0 million of RealD common stock. On December 14, 2012, the Company's board of directors approved a $25 million increase in its stock repurchase plan, increasing the $50 million repurchase plan announced on April 20, 2012 to $75 million. The number of shares to be repurchased and the timing of any potential repurchases will depend on factors such as the Company's stock price, economic and market conditions, alternative uses of capital, and corporate and regulatory requirements. Repurchases of common stock may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when RealD might otherwise be precluded from doing so under insider trading laws, and a variety of other methods, including open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or by any combination of such methods. The repurchase program may be suspended or discontinued at any time.
Pursuant to RealD's stock repurchase plan authorized by its board of directors, the Company have repurchased a total of 6,599,726 shares of common stock at an average price per share of $10.30, including sales commissions, for an aggregate cost of $67.9 million inception to date. For the fiscal year ended March 31, 2015, the Company did not make any repurchases. For the fiscal year ended March 31, 2014, the Company repurchased a total of 671,997 shares of common stock at an average price per share of $11.18, including sales commissions, for an aggregate cost of $7.5 million. For the fiscal year ended March 31, 2013, the Company repurchased a total of 5,927,729 shares of common stock at an average price per share of $10.20, including sales commissions, for an aggregate cost of $60.4 million.
9. Share-based compensation
The Company accounts for share-based payment awards granted to employees and directors by recording compensation expense based on estimated fair values. The Company estimates the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. Share-based awards are attributed to expense using the straight-line method over the vesting period. The Company determines the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as permitted under ASC 718, Compensation — Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent the Company’s best estimates. The Company’s estimates of the fair values of stock options granted and the resulting amounts of share-based compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option modifications, estimates of forfeitures, and the related income tax impact.
In April 2010, the Company's board of directors unanimously adopted the RealD Inc. 2010 Stock Incentive Plan (the "2010 Stock Plan"), and in June 2010, the Company's stockholders approved the 2010 Stock Plan. The board of directors intends for the 2010 Stock Plan to replace our 2004 Amended and Restated Stock Incentive Plan, (the "2004 Plan"), such that, effective with our IPO, the Company will no longer make any new grants under the 2004 Plan. Instead, the board of directors or the Company's compensation committee will issue equity compensation awards under the 2010 Stock Plan. The stock plan provides for the granting of nonstatutory stock options, incentive stock options, stock appreciation rights, restricted stock awards and performance stock units to employees, officers, directors, non-employee directors and consultants. Additionally, in June 2011
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the Company's board of directors approved the RealD Inc. 2011 Employee Stock Purchase Plan (the "ESPP Plan") and in July 2011, the Company's stockholders approved the ESPP Plan. Stock-based compensation expense related to the ESPP Plan for the year ended March 31, 2015 was $0.1 million.
The following table reflects the components of share-based compensation expense recognized in the Company's consolidated statements of operations for the years ended March 31, 2015, March 31, 2014 and March 31, 2013:
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Cost of revenue | $ | 1,212 | $ | 865 | $ | 807 | |||||
Research and development | 3,227 | 2,708 | 2,185 | ||||||||
Selling and marketing | 3,017 | 5,543 | 5,258 | ||||||||
General and administrative | 7,442 | 8,625 | 10,224 | ||||||||
Total | $ | 14,898 | $ | 17,741 | $ | 18,474 | |||||
Stock options
Stock options granted generally vest over a four-year period, with 25% of the shares vesting after one year and monthly vesting thereafter. The options generally expire ten years from the date of grant. Share-based compensation expense related to stock options was $7.2 million, $13.8 million and $14.2 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
A summary of the Company's stock option activity is as follows:
(in thousands, except exercise price data and contractual term data) | Options | Weighted- average exercise price | Weighted- average remaining contractual term (years) | Aggregate intrinsic value | ||||||||
Outstanding at March 31, 2014 | 7,811 | $ | 13.11 | |||||||||
Granted | 602 | 11.25 | ||||||||||
Exercised | (779 | ) | 4.58 | |||||||||
Forfeited or expired | (830 | ) | 15.08 | |||||||||
Outstanding at March 31, 2015 | 6,804 | $ | 13.68 | 5.6 | $ | 14,309 | ||||||
Exercisable at March 31, 2015 | 5,689 | $ | 13.97 | 5.1 | $ | 11,486 | ||||||
Vested or expected to vest | 6,694 | $ | 13.76 | 5.6 | $ | 13,083 | ||||||
The total intrinsic value of options exercised was $6.4 million, $4.9 million and $2.6 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
Awards that are vested or expected to vest take into consideration estimated forfeitures for awards not yet vested.
The weighted-average grant date fair values were determined using the Black- Scholes option-pricing model with the following weighted-average assumptions:
Years ended March 31 | |||||||||||
2015 | 2014 | 2013 | |||||||||
Fair value of stock options granted | $ | 5.90 | $ | 7.20 | $ | 6.20 | |||||
Expected volatility | 55 | % | 60 | % | 60 | % | |||||
Expected term (years) | 6.0 | 6.0 | 6.0 | ||||||||
Risk-free rate | 1.2 | % | 1.4 | % | 1.0 | % | |||||
Expected dividends | — | — | — | ||||||||
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For purposes of determining the expected term and in the absence of historical data relating to stock option exercises, the Company applies a simplified approach: the expected term of awards granted is presumed to be the mid-point between the vesting date and the end of the contractual term. The Company uses the contractual term when valuing awards to consultants. For fiscal year ended March 31, 2015, the Company uses the annual volatility of its daily closing price for expected volatility. For fiscal years ended March 31, 2014 and March 31, 2013, the Company used the average volatility of similar, publicly traded companies as an estimate for expected volatility. The risk-free interest rate for periods within the expected or contractual life of the option, as applicable, is based on the United States Treasury yield curve in effect during the period the options were granted. The Company's expected dividend yield is zero.
As of March 31, 2015, there was $7.0 million of total unrecognized compensation costs related to stock option compensation arrangements granted which is expected to be recognized over the remaining weighted-average period of 2.14 years.
Performance stock options
Certain of the Company’s management-level employees receive performance stock options, which gives the recipient the right to receive common stock that is contingent upon achievement of specified pre-established performance goals over the performance period, which is generally three years subject to the recipient’s continued service with the Company. The performance goals for the performance stock options are based on the measurement of the Company’s total stockholder return, on a percentile basis, compared to a comparable group of companies. Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock options equal to or less than the number of performance stock options granted. In June 2013, the Company’s Chief Executive Officer’s fiscal year 2013 stock option grant was amended to retroactively change the vesting schedule of the stock option so that it now vests based upon the achievement of performance goals rather than based solely upon Mr. Lewis’ continued service with the Company. The performance goal is based on the measurement of the Company’s total stockholder return, on a percentile basis, compared to a comparable group of companies. The performance period for this performance stock option is between three and five years. For the years ended March 31, 2015, March 31, 2014 and March 31, 2013, share-based compensation expense related to performance stock options was $0.7 million, $0.5 million and $1.9 million, respectively.
The Monte Carlo Simulation valuation model uses terms based on the length of the performance period and compound annual growth rate goals for total stockholder return based on the provisions of the award. For purposes of determining the expected term and in the absence of historical data relating to stock option exercises, the Company applies a simplified approach: the expected term of awards granted is presumed to be the mid-point between the vesting date and the end of the contractual term. The Company uses the average volatility of a peer group of companies as an estimate for expected volatility. The risk-free interest rate for periods within the expected or contractual life of the option, as applicable, is based on the United States Treasury yield curve in effect during the period the options were granted.
A summary of the Company's performance stock option activity is as follows:
(in thousands, except exercise price data and contractual term data) | Options | Weighted- average exercise price | Weighted- average remaining contractual term (years) | |||||
Outstanding at March 31, 2014 | 686 | $ | 14.98 | 7.3 | ||||
Granted | — | — | 0 | |||||
Exercised | — | — | 0 | |||||
Forfeited or expired | — | — | 0 | |||||
Outstanding at March 31, 2015 | 686 | $ | 14.98 | 6.3 | ||||
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Performance stock units
Certain of the Company’s management-level employees also receive performance stock units, which gives the recipient the right to receive common stock that is contingent upon achievement of specific pre-established performance goals over the performance period, which is generally two years subject to the recipient’s continued service with us. The performance goals are based on achieving certain levels of total licensing revenue over the performance period. Depending on the outcome of the performance goals, the recipient may ultimately earn performance stock units between 0% and 200% of the number of performance stock units granted. For the year ended March 31, 2015, share-based compensation expense related to performance stock units was $1.5 million. For year ended March 31, 2014, share-based compensation expense related to performance stock units was $3.3 million. For the year ended March 31, 2013, there was no share-based compensation expense related to performance stock units.
(in thousands, except exercise price data and contractual term data) | Units | Weighted- average grant date fair value | ||||
Nonvested at March 31, 2014 | 668 | $ | 14.96 | |||
Granted | 652 | 11.46 | ||||
Vested | (129 | ) | 11.46 | |||
Forfeited or cancelled | (741 | ) | 14.15 | |||
Nonvested at March 31, 2015 | 450 | $ | 12.23 | |||
Restricted stock units
Certain of the Company’s employees, including certain management level employees, receive time-based restricted stock units. These restricted stock units vest over one to three years based upon a recipient's continued service with the Company. For the year ended March 31, 2015, the Company granted 1.3 million restricted stock units at a weighted average grant date fair value of $11.27 per restricted stock unit. For the year ended March 31, 2014, the Company granted 0.6 million restricted stock units at a weighted average grant date fair value of $12.29 per restricted stock unit. For the years ended March 31, 2015 and March 31, 2014, respectively, share- based compensation expense related to restricted stock units was $5.3 million and $3.3 million, respectively.
The following summarizes select information regarding the Company's restricted stock units during the year ended March 31, 2015:
(in thousands, except grant date fair value data) | Units | Weighted- average grant date fair value | ||||
Nonvested at March 31, 2014 | 479 | $ | 13.13 | |||
Granted | 1,303 | 11.27 | ||||
Vested | (327 | ) | 12.16 | |||
Forfeited or cancelled | (215 | ) | 11.61 | |||
Nonvested at March 31, 2015 | 1,240 | $ | 11.69 | |||
As of March 31, 2015, there was $14.5 million of total unrecognized compensation costs related to restricted stock units granted which is expected to be recognized over the remaining weighted-average period of 3.1 years.
The total fair values of restricted stock units that vested was $4.0 million, $2.5 million and $2.2 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
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10. Income taxes
The income tax provision from continuing operations for the fiscal years ended March 31, 2015, March 31, 2014 and March 31, 2013 consists of the following:
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Current income tax provision: | |||||||||||
Federal | $ | — | $ | — | $ | — | |||||
State | 47 | 132 | 103 | ||||||||
Foreign | 7,458 | 6,128 | 5,202 | ||||||||
7,505 | 6,260 | 5,305 | |||||||||
Deferred income tax benefit: | |||||||||||
Federal | — | — | — | ||||||||
State | — | — | — | ||||||||
Foreign | 404 | (143 | ) | (241 | ) | ||||||
Total income tax provision from continuing operations | $ | 7,909 | $ | 6,117 | $ | 5,064 | |||||
Income (loss) from continuing operations before income taxes consisted of the following:
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
United States | $ | (23,020 | ) | $ | (11,224 | ) | $ | (6,963 | ) | ||
Foreign | 7,182 | 6,131 | 2,140 | ||||||||
Total | $ | (15,838 | ) | $ | (5,093 | ) | $ | (4,823 | ) | ||
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Significant components of the Company's deferred tax balances are as follows:
(in thousands) | March 31, 2015 | March 31, 2014 | |||||
Deferred tax assets: | |||||||
Net operating loss carryforwards | $ | 28,180 | $ | 24,971 | |||
Deferred revenues | 1,288 | 2,708 | |||||
Accruals, reserves and allowances | 6,828 | 7,698 | |||||
Stock compensation | 16,936 | 15,796 | |||||
Foreign tax credit carryovers | 18,781 | 15,181 | |||||
Partnership interest | 6 | 44 | |||||
Other | 1,353 | 1,445 | |||||
Total deferred tax assets | $ | 73,372 | $ | 67,843 | |||
Deferred tax liabilities | |||||||
Fixed assets | $ | (12,876 | ) | $ | (15,020 | ) | |
Intangible assets | (150 | ) | (118 | ) | |||
Unbilled receivables | (3,230 | ) | (5,821 | ) | |||
Other | (565 | ) | (426 | ) | |||
Total deferred tax liabilities | $ | (16,821 | ) | $ | (21,385 | ) | |
Valuation allowance | $ | (56,673 | ) | $ | (46,175 | ) | |
Net deferred tax assets (liabilities) | $ | (122 | ) | $ | 283 | ||
Due to the uncertainties surrounding the timing and realization of the benefits from our tax attributes in future tax returns, the Company has placed a valuation allowance against primarily all of our otherwise recognizable net deferred tax assets as of March 31, 2015 and March 31, 2014. As a result, the Company increased its valuation allowance through the operating statement as follows:
Years ended March 31 | |||||||
(in thousands) | 2015 | 2014 | |||||
Through continuing operation | $ | 10,498 | $ | 7,091 | |||
Increase in valuation allowance | $ | 10,498 | $ | 7,091 | |||
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The income tax provision from continuing operations differs from the amount computed by applying the U.S. statutory federal income tax rate of 34% to the pretax income (loss) as a result of the following differences:
Years ended March 31 | ||||||||
2015 | 2014 | 2013 | ||||||
Federal tax at statutory rate | 34.0 | % | 34.0 | % | 34.0 | % | ||
State tax, net of federal benefit | 2.7 | % | (1.4 | )% | (7.7 | )% | ||
Foreign tax rate differential | 4.5 | % | 8.6 | % | 2.9 | % | ||
LLC income minority interest not taxed | 0.2 | % | 1.4 | % | (1.3 | )% | ||
Revaluation of deferred taxes due to changes in effective income tax rates | (0.6 | )% | (0.8 | )% | 3.8 | % | ||
Foreign withholding taxes (credits) | — | % | (0.9 | )% | — | % | ||
Permanent differences and other | (17.8 | )% | 15.2 | % | 3.7 | % | ||
Stock compensation | (4.5 | )% | (37.0 | )% | (34.9 | )% | ||
Change in valuation allowance | (68.4 | )% | (139.0 | )% | (105.5 | )% | ||
Total tax benefit | (49.9 | )% | (119.9 | )% | (105.0 | )% | ||
As of March 31, 2015, the Company had net operating loss carryforwards of approximately $133.7 million for federal and $70.1 million for state purposes. Federal and state net operating loss carryforwards begin to expire in year 2027 and 2016, respectively. As of March 31, 2015, the Company had foreign tax credit carryforwards of approximately $18.8 million for federal income tax purposes that begin to expire in the year 2019.
The U.S. Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on a corporation's ability to utilize net operating loss carryovers ("NOLs") if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three year period. In the event that an ownership change has occurred, or were to occur, utilization of the Company's NOLs would be subject to an annual limitation under Section 382 as determined by multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. The Company could experience an ownership change under Section 382 as a result of events in the past in combination with events in the future. If so, the use of the Company's NOLs, or a portion thereof, against future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of the NOLs before utilization. To the extent the Company's use of net operating loss carryforwards is significantly limited under the rules of Section 382 (as a result of our IPO or otherwise), its income could be subject to U.S. corporate income tax earlier than it would if it was able to use net operating loss carryforwards, which would result in lower profits. Any carry-forwards that expire prior to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a corresponding reduction of the valuation allowance.
The Company recognizes excess tax benefits associated with share-based compensation and motion picture exhibitor options to stockholders' equity only when realized. As of March 31, 2015, the Company has approximately $23.0 million of unrealized excess tax benefits associated with share-based compensation and exhibitor options. These tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized, rather than a reduction of the provision for income taxes.
The Company adopted accounting for uncertain tax positions pursuant to ASC 740, Income Taxes. The following table summarizes the activity related to our unrecognized tax benefits (in thousands):
Balance as of March 31, 2014 | $ | 346 | |
Increases related to prior year tax positions | — | ||
Increase related to current year tax positions | — | ||
Expiration of the statute of limitations for the assessment of taxes | — | ||
Settlements | — | ||
Balance as of March 31, 2015 | $ | 346 | |
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Approximately $0.3 million of the unrecognized tax benefits will decrease the effective tax rate if recognized, subject to the valuation allowance.
It is not anticipated that there will be a significant change in the unrecognized tax benefits over the next 12 months.
Due to the net operating loss carryforwards, our United States federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.
The Company's policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. As of March 31, 2015, amounts for accrued interest and penalties associated with uncertain tax positions were not significant.
On September 13, 2013, the U.S. Treasury Department released final income tax regulations on the deduction and capitalization of expenditures related to tangible property. These final regulations apply to tax years beginning on or after January 1, 2014. The tangible property regulations required the Company to make additional tax accounting method changes for its tax return year ended March 31, 2015. The impact of these changes was not material to its consolidated financial statements.
As of March 31, 2015, unremitted earnings of the subsidiary outside of the United States were approximately $38.5 million, on which no United States taxes had been provided. The Company's current intention is to reinvest these earnings outside the United States. It is not practicable to estimate the amount of additional taxes that might be payable upon repatriation of foreign earnings.
11. Related-party transactions
On May 19, 2011, the Company entered into a separation agreement and general release of claims with Joshua Greer, a former director and executive officer of the Company. Pursuant to the terms of the separation agreement, Mr. Greer received the following benefits: (i) cash severance of $450,000 paid in 10 equal installments, with the first such installment paid on October 15, 2011; (ii) reimbursement from us for insurance coverage under COBRA for 18 months following July 15, 2011 or such earlier time as Mr. Greer becomes eligible for insurance through another employer; (iii) a pro-rated cash performance bonus for fiscal year 2012 (to be paid no later than June 15, 2012), in an amount equal to 30% of 80% of Mr. Greer's salary, computed assuming that Mr. Greer had remained as our president through the end of fiscal year 2012; and (iv) acceleration of a time-based vesting stock option for 105,000 shares granted to Mr. Greer on July 15, 2010 as of July 15, 2011, which remained exercisable for six months following the end of the term of the consulting agreement that we entered into with Mr. Greer on the same date. A second stock option for 105,000 shares granted to Mr. Greer on July 15, 2010 was entirely forfeited and cancelled without consideration. The Company entered into a consulting agreement with Mr. Greer pursuant to which Mr. Greer was paid $275,000 per year commencing as of July 16, 2011. The consulting agreement with Mr. Greer expired on July 16, 2012. On June 21, 2012, Mr. Greer notified us of his resignation from our board of directors, effective on July 16, 2012 upon the expiration of the consulting agreement. During the year ended March 31, 2013, the Company paid Mr. Greer $225,000 pursuant to his separation agreement and $148,958 pursuant to his consulting agreement.
The Company entered into a consulting agreement, effective as of May 29, 2012 (the "DCH Agreement"), with DCH Consultants LLC ("DCH"), an entity controlled by Mr. David Habiger. Mr. Habiger is a member of the Company's Board of Directors, its Nominating and Corporate Governance Committee and its Compensation Committee.
Pursuant to the DCH Agreement, DCH provided certain consulting services regarding the application of one or more of our technologies in the consumer electronics industry. The DCH Agreement had a term of 4 months and DCH was entitled to receive aggregate fixed compensation of $20,000 per month during the term of the DCH Agreement. Although we had the right to extend the engagement for up to two additional months on the same terms, by providing DCH with 10 days written notice prior to the end of the original term, we did not extend the DCH Agreement and it expired as of September 29, 2012.
During the fiscal year ended March 31, 2013, the Company paid DCH $80,239 pursuant to the DCH Agreement.
During the fiscal year ended March 31, 2015 and March 31, 2014, there were no related party transactions.
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12. Segment and geographic information
For financial reporting purposes the Company currently has one reportable segment. The Company has three operating segments: cinema, consumer electronics and professional. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is its Chief Executive Officer. The Company aggregates its three operating segments into one reportable segment based on qualitative factors including similar economic characteristics and the nature of the products and services. The Company's product portfolio is used in applications that enable a premium 3D viewing experience. The Company currently generates substantially all of its revenue from the license of its RealD Cinema Systems and the sale of its eyewear, which together enable a digital projector to show 3D motion of pictures.
The Company's top 10 customers with an accounts receivable balance represented approximately 25% and 47% of its net accounts receivable as of March 31, 2015 and March 31, 2014, respectively. The Company's top 10 customers accounted for approximately 55%, 46% and 44% of its revenue for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
As of March 31, 2015, the Company had two licensees that accounted for more than 10% of its gross license revenue, one of which accounted for 15% and the other 11%. As of March 31, 2014, the Company had two licensees that accounted for more than 10% of its gross license revenue, one of which accounted for 14% and the other 13%. No licensee accounted for more than 10% of our gross license revenue in fiscal year 2013.
Geographic information
Revenue by geographic region, as determined based on the location of the Company's customers or the anticipated destination of use was as follows:
Years ended March 31 | |||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||
Domestic (United States and Canada) | $ | 71,081 | $ | 96,159 | $ | 106,979 | |||||
China | 19,243 | 16,642 | 8,615 | ||||||||
Rest of the world | 73,139 | 86,433 | 99,958 | ||||||||
Total revenues | $ | 163,463 | $ | 199,234 | $ | 215,552 | |||||
Long-lived tangible assets, net of accumulated depreciation, by geographic region were as follows:
(in thousands) | March 31, 2015 | March 31, 2014 | |||||
Domestic (United States and Canada) | $ | 87,134 | $ | 105,708 | |||
China | 10,185 | 8,085 | |||||
Rest of the world | 5,523 | 15,490 | |||||
Total long-lived tangible assets | $ | 102,842 | $ | 129,283 | |||
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13. Quarterly financial data (unaudited)
Three months ended | |||||||||||||||
March 31, 2015 | December 31, 2014 | September 30, 2014 | June 30, 2014 | ||||||||||||
(Dollars in thousands, except per share data) | (1) | (1) | |||||||||||||
Net revenue | $ | 27,905 | $ | 32,571 | $ | 47,768 | $ | 55,219 | |||||||
Gross profit | 10,242 | 14,963 | 25,552 | 30,021 | |||||||||||
Net income (loss) | (17,635 | ) | (11,290 | ) | (751 | ) | 5,929 | ||||||||
Net income (loss) attributable to RealD Inc. common stockholders | $ | (17,710 | ) | $ | (11,290 | ) | $ | (751 | ) | $ | 5,929 | ||||
Earning (loss) per common shares: | |||||||||||||||
Basic | $ | (0.36 | ) | $ | (0.23 | ) | $ | (0.02 | ) | $ | 0.12 | ||||
Diluted | $ | (0.36 | ) | $ | (0.23 | ) | $ | (0.02 | ) | $ | 0.11 | ||||
_______________________________________________________________________________
(1) | During the third quarter of fiscal year 2015, the Company identified certain errors and, accordingly, performed additional analyses and supplementary review procedures, following the guidance of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 250 Accounting Changes and Error Corrections and the Securities and Exchange Commission (SEC) Staff Accounting Bulletin Topic 1 Financial Statements. Upon completion of these procedures, the Company concluded that the effects of the errors were not material to any prior year previously reported amounts but are material to previously reported interim amounts for the first and second quarters of the current fiscal year. Accordingly, in the third quarter ended December 31, 2014 Form 10-Q, the Company restated certain previously reported interim condensed consolidated balance sheet, condensed consolidated statements of operations and condensed consolidated statements of cash flows amounts to correct these errors (also see Note 2, "Effect of certain correction on certain financial statements" from the Quarterly Report on Form 10-Q for the quarter ended December 31, 2014). |
Three months ended | |||||||||||||||
(Dollars in thousands, except per share data) | March 31, 2014 | December 31, 2013 | September 30, 2013 | June 30, 2013 | |||||||||||
Net revenue | $ | 40,648 | $ | 55,438 | $ | 43,929 | $ | 59,219 | |||||||
Gross profit | 19,902 | 27,270 | 19,906 | 28,181 | |||||||||||
Net loss | (4,855 | ) | (155 | ) | (4,664 | ) | (1,536 | ) | |||||||
Net loss attributable to RealD Inc. common stockholders | $ | (4,950 | ) | $ | (271 | ) | $ | (4,651 | ) | $ | (1,534 | ) | |||
Loss per common share: | |||||||||||||||
Basic | $ | (0.10 | ) | $ | (0.01 | ) | $ | (0.09 | ) | $ | (0.03 | ) | |||
Diluted | $ | (0.10 | ) | $ | (0.01 | ) | $ | (0.09 | ) | $ | (0.03 | ) | |||
Years ended March 31 | |||||||||
(Number of calendar days) | 2015 | 2014 | Number of days change | Percentage change | |||||
1st fiscal quarter | 91 | 91 | — | — | % | ||||
2nd fiscal quarter | 92 | 92 | — | — | % | ||||
3rd fiscal quarter | 92 | 92 | — | — | % | ||||
4th fiscal quarter | 90 | 90 | — | — | % | ||||
Total number of calendar days | 365 | 365 | — | — | % | ||||
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Years ended March 31 | |||||||||
(Number of calendar days) | 2014 | 2013 | Number of days change | Percentage change | |||||
1st fiscal quarter | 91 | 91 | — | — | % | ||||
2nd fiscal quarter | 92 | 91 | 1 | 1.1 | % | ||||
3rd fiscal quarter | 92 | 101 | (9 | ) | (8.9 | )% | |||
4th fiscal quarter | 90 | 90 | — | — | % | ||||
Total number of calendar days (1) | 365 | 373 | (8 | ) | (2.1 | )% | |||
_______________________________________________________________________________
(1) | Represents total number of calendar days difference between fiscal year 2014 and 2013 (also see "Accounting period" caption under Note 2, "Summary of significant accounting policies"). |
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Item 9. Changes in and disagreements with accountants on accounting and financial disclosure
None.
Item 9A. Controls and procedures
Evaluation of disclosure controls and procedures
We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015 and concluded that the disclosure controls and procedures were not effective to meet the reasonable assurance objective for which they were designed as a result of the material weakness described below. Notwithstanding such material weakness, however, management has concluded that the consolidated financial statements in this report fairly present the Company’s financial position, results of operations and cash flows for all periods and dates presented in all material respects.
Management's report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal controls over financial reporting based on the framework in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) ("COSO 2013"). Based on our evaluation, management has concluded that our internal control over financial reporting was not effective as of March 31, 2015, as described below.
Management identified control deficiencies that in the aggregate represent a material weakness in our internal control over financial reporting as of March 31, 2015. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We have identified deficiencies in the design and/or operations of our controls including: (i) deficiencies in review level controls over accrual accounts, non-standard transactions and their related accounting entries which are not reviewed in sufficient detail by knowledgeable personnel to ensure that entries are recorded correctly; (ii) deficiencies in controls to understand and capture customer level activity in a timely manner in order to ensure that the financial statements reflect the accounting consequences of customers taking advantage of various contract incentive programs and terms; (iii) deficiencies in review level controls to ensure that intercompany accounts and transactions are appropriately reconciled and that intercompany profit elimination entries are accurate; and (iv) deficiencies in entity level controls to ensure that all personnel within the organization understand and sponsor their role in ensuring an appropriate control environment and understand clearly what their responsibilities are in executing their control activities.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
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Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Our independent registered public accounting firm, Ernst & Young LLP, which has audited and reported on our financial statements, issued an attestation report regarding our internal controls over financial reporting as of March 31, 2015. Ernst & Young LLP's report is included in this report.
Remediation of material weakness in internal control over financial reporting
Our management is committed to remediating the material weakness. We have initiated a plan to address the identified deficiencies and to enhance our overall financial control environment. We believe the material weakness in the control environment described above was a result of our failure to:
• | maintain sufficient personnel with appropriate levels of accounting knowledge, experience and training commensurate with the nature and complexity of our business and contract activity; |
• | design and maintain adequate procedures or controls over the accurate recording, presentation and disclosure of revenue and related costs of our non-standard contracts and transactions; |
• | sufficiently monitor our contract terms, customer activities and the related accounting impact; |
• | maintain adequate communications between our sales and finance departments to discuss ongoing exhibitor/ licensee activity that has a financial statement impact; and |
• | maintain adequate review and approval of procedures to check that technical accounting guidance is followed and applied to the elimination of intercompany accounts on a cumulative basis. |
We have taken, and are continuing to take, the following steps to remediate such deficiencies:
• | hire more finance and accounting personnel with technical accounting expertise to increase bandwidth for review by accounting management; |
• | commence a comprehensive risk assessment process to assess risks and identify, design, implement and re-evaluate our control activities to address the risks identified, including implementation of monitoring controls related to the design and operating effectiveness of control activities; |
• | review customer contracts to identify, document and monitor customer-specific terms in order to ensure that the financial statements reflect, on a timely basis, the accounting consequences of such provisions, and implement processes to capture information from our sales and finance departments in order to make reasonable estimates of accruals; |
• | establish procedures to reconcile, validate and review intercompany balances on a cumulative basis, and in a timely manner; |
• | evaluate our training programs and develop additional training programs to ensure proper training of our finance and accounting personnel world-wide; |
• | strengthen our policies and procedures and determine guidelines for documentation of controls throughout our domestic and international locations for consistency of design and operations; and |
• | upgrade our manual systems to automated and enhance existing automated systems. |
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We will not consider the material weakness remediated until our controls are operational for a sufficient period of time, tested and management concludes that these controls are operating effectively. We believe that the foregoing actions will support the improvement of our internal controls over financial reporting.
Changes in internal control over financial reporting
Other than matters discussed in this Item 9A, there were no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of RealD Inc.
We have audited RealD Inc.’s (the “Company”) internal control over financial reporting as of March 31, 2015, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). RealD Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified deficiencies in its internal controls related to accounting for transactions as well as deficiencies in entity level controls to ensure that personnel understand and sponsor their roles and responsibilities in executing control activities. These deficiencies in the aggregate constitute a material weakness in internal control. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of RealD Inc. as of March 31, 2015 and 2014 and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2015. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2015 financial statements, and this report does not affect our report dated June 11, 2015, which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, RealD Inc. has not maintained effective internal control over financial reporting as of March 31, 2015, based on the COSO criteria.
/s/ Ernst & Young LLP | ||
Los Angeles, California | ||
June 11, 2015 | ||
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Item 9B. Other information
None.
PART III
Item 10. Directors, executive officers and corporate governance
Information required by this item regarding directors and director nominees, executive officers, the board of directors and its committees, and certain corporate governance matters is incorporated by reference to the information contained in RealD's definitive Proxy Statement for its 2015 Annual Meeting of Stockholders or in an amendment to this Form 10-K. Information required by this item regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference to the information set forth in RealD's definitive Proxy Statement for its 2015 Annual Meeting of Stockholders or in an amendment to this Form 10-K.
Item 11. Executive compensation
Information required by this item regarding executive compensation is incorporated by reference to the information set forth in RealD's definitive Proxy Statement for its 2015 Annual Meeting of Stockholders or in an amendment to this Form 10-K.
Item 12. Security ownership of certain beneficial owners and management and related stockholder matters
Information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth in RealD's definitive Proxy Statement for its 2015 Annual Meeting of Stockholders or in an amendment to this Form 10-K. Information required by this item regarding securities authorized for issuance under our equity compensation plans is incorporated by reference to the information set forth in RealD's definitive Proxy Statement for its 2015 Annual Meeting of Stockholders or in an amendment to this Form 10-K.
Item 13. Certain relationships and related transactions, and director independence
Information required by this item regarding certain relationships and related transactions is incorporated by reference to the information set forth in RealD's definitive Proxy Statement for its 2015 Annual Meeting of Stockholders or in an amendment to this Form 10-K. Information required by this item regarding director independence is incorporated by reference to the information set forth in RealD's definitive Proxy Statement for its 2015 Annual Meeting of Stockholders or in an amendment to this Form 10-K.
Item 14. Principal accounting fees and services
Information required by this item regarding principal accounting fees and services is incorporated by reference to the information set forth in RealD's definitive Proxy Statement for its 2015 Annual Meeting of Stockholders or in an amendment to this Form 10-K.
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PART IV
Item 15. Exhibit and financial statement schedules
(a) | The following documents are filed as part of or are included in this Annual Report on Form 10-K: |
(1) | Financial Statements |
See Index to Consolidated Financial Statements on page 62 of this Annual Report on Form 10-K.
(2) | Financial Statement Schedules |
Financial Statement Schedule II: Valuation and Qualifying Accounts that follows the Notes to Consolidated Financial Statements is filed as part of this Annual Report Form 10-K. Other financial statement schedules have been omitted since they are either not required or the information is otherwise included.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Balance at beginning of period | Additions charged to cost and expenses | Other Adjustments/ Deductions(1) | Balance at end of period (2) | ||||||||||||
Allowance for doubtful accounts and customer credits: | |||||||||||||||
Year ended March 31, 2015 | $ | 4,086 | $ | 4,701 | $ | (2,922 | ) | $ | 5,865 | ||||||
Year ended March 31, 2014 | $ | 2,649 | $ | 2,389 | $ | (952 | ) | $ | 4,086 | ||||||
Year ended March 31, 2013 | $ | 4,224 | $ | — | $ | (1,575 | ) | $ | 2,649 | ||||||
Deferred tax valuation allowance: | |||||||||||||||
Year ended March 31, 2015 | $ | 46,175 | $ | 10,498 | $ | — | $ | 56,673 | |||||||
Year ended March 31, 2014 | $ | 39,084 | $ | 7,091 | $ | — | $ | 46,175 | |||||||
Year ended March 31, 2013 | $ | 33,994 | $ | 5,090 | $ | — | $ | 39,084 | |||||||
_______________________________________________________________________________
(1) | Other adjustments and deductions primarily consist of adjustments to deferred revenue and write-offs of amounts previously charged to the provision. |
(2) | Balance at March 31, 2014 was misstated in the Annual Report on Form 10-K for the fiscal year ended March 31, 2014, which did not result in any financial statement adjustments. The schedule above reflects the corrected balance. |
(3) | List of Exhibits |
The Exhibits filed as part of this Annual Report on Form 10-K, or incorporated by reference, are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RealD Inc. | |||
(Registrant) | |||
June 11, 2015 | By: | /s/ MICHAEL V. LEWIS | |
Michael V. Lewis | |||
Chief Executive Officer | |||
POWER OF ATTORNEY
Each person whose individual signature appears below hereby constitutes and appoints Michael V. Lewis, Andrew A. Skarupa and Vivian Yang, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ MICHAEL V. LEWIS | Chief Executive Officer and Director (Principal Executive Officer) | June 11, 2015 | ||
Michael V. Lewis | ||||
/s/ ANDREW A. SKARUPA | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | June 11, 2015 | ||
Andrew A. Skarupa | ||||
/s/ LAURA J. ALBER | Director | June 11, 2015 | ||
Laura J. Alber | ||||
/s/ FRANK J. BIONDI, JR. | Director | June 11, 2015 | ||
Frank J. Biondi, Jr. | ||||
/s/ RICHARD L. GRAND-JEAN | Director | June 11, 2015 | ||
Richard L. Grand-Jean | ||||
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/s/ SHERRY LANSING | Director | June 11, 2015 | ||
Sherry Lansing | ||||
/s/ DAVID HABIGER | Director | June 11, 2015 | ||
David Habiger | ||||
/s/ P. GORDON HODGE | Director | June 11, 2015 | ||
P. Gordon Hodge | ||||
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EXHIBIT INDEX
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed Herewith | |||||||||||
Form | SEC File No. | Exhibit | Filing Date | |||||||||||
3.1 | Amended and Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on July 15, 2010. | 10-Q | 001-34818 | 3.1 | July 29, 2011 | |||||||||
3.2 | Amended and Restated Bylaws as amended and restated. | 8-K | 001-34818 | 3.1 | April 7, 2015 | |||||||||
4.1 | Specimen of common stock certificate. | S-1/A | 333-165988 | 4.1 | May 26, 2010 | |||||||||
4.2 | Amended and Restated Investors' Rights Agreement, dated December 24, 2007, by and among the registrant, the founders and the investors named therein. | S-1/A | 333-165988 | 4.2 | May 26, 2010 | |||||||||
4.3 | Amendment and Agreement to Amended and Restated Investors' Rights Agreement, dated June 11, 2010, by and among the registrant and the other signatories thereto. | S-1/A | 333-165988 | 4.6 | June 29, 2010 | |||||||||
4.4 | Side letter, dated June 25, 2010, to Amended and Restated Investors' Rights Agreement, as amended. | S-1/A | 333-165988 | 4.8 | June 29, 2010 | |||||||||
10.1# | 2004 Amended and Restated Stock Incentive Plan. | S-1/A | 333-165988 | 10.1 | June 29, 2010 | |||||||||
10.2# | Form of Stock Option Agreement for 2004 Amended and Restated Stock Incentive Plan. | S-1 | 333-165988 | 10.2 | April 9, 2010 | |||||||||
10.3# | 2010 Stock Incentive Plan. | S-1/A | 333-165988 | 10.3 | June 29, 2010 | |||||||||
10.4# | 2010 Stock Incentive Plan—Form of Nonstatutory Stock Option Agreement between the Chief Executive Officer and the registrant. | S-1/A | 333-165988 | 10.4 | June 29, 2010 | |||||||||
10.5# | 2010 Stock Incentive Plan—Form of Nonstatutory Stock Option Agreement between the executive officers and the registrant. | S-1/A | 333-165988 | 10.5 | June 29, 2010 | |||||||||
10.6# | 2010 Stock Incentive Plan—Form of Performance Stock Option Agreement issued in connection with the initial public offering between the Chief Executive Officer and the registrant. | S-1/A | 333-165988 | 10.6 | June 29, 2010 | |||||||||
10.7# | 2010 Stock Incentive Plan—Form of Performance Stock Option Agreement issued in connection with the initial public offering between the executive officers and the registrant. | S-1/A | 333-165988 | 10.7 | June 29, 2010 | |||||||||
10.8# | 2010 Stock Incentive Plan—Form of Stock Unit Agreement between the non-employee directors and the registrant. | S-1/A | 333-165988 | 10.8 | June 29, 2010 | |||||||||
10.9# | Employment Agreement, dated May 25, 2010, between Michael V. Lewis and the registrant. | S-1/A | 333-165988 | 10.9 | June 29, 2010 | |||||||||
10.10# | Employee Invention Assignment and Confidentiality Agreement dated May 25, 2010 between Michael V. Lewis and the registrant. | S-1/A | 333-165988 | 10.1 | June 29, 2010 | |||||||||
10.11# | Indemnification Agreement, dated April 8, 2010, between Michael V. Lewis and the registrant. | S-1/A | 333-165988 | 10.1 | May 26, 2010 | |||||||||
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Exhibit Number | Exhibit Description | Incorporated by Reference | Filed Herewith | |||||||||||
10.12# | Form of Separation Agreement and General Release of Claims between Michael V. Lewis and the registrant. | S-1/A | 333-165988 | 10.1 | May 26, 2010 | |||||||||
10.13# | Form of Indemnification Agreement between the registrant and its directors and officers. | S-1 | 333-165988 | 10.1 | April 9, 2010 | |||||||||
10.14+ | Real D System License Agreement (U.S. 2008), dated October 15, 2008, by and between REGAL Cinemas, Inc. and the registrant. | S-1/A | 333-165988 | 10.1 | June 29, 2010 | |||||||||
10.15+ | Real D Nonqualified Stock Option Grant and Real D Stock Option Agreement, both dated, October 15, 2008, by and between REGAL Cinemas, Inc. and the registrant. | S-1/A | 333-165988 | 10.2 | May 10, 2010 | |||||||||
10.16+ | Amended and Restated Real D System License Agreement (U.S. 2009), dated May 19, 2009, by and between Cinemark USA, Inc. and the registrant. | S-1/A | 333-165988 | 10.2 | June 29, 2010 | |||||||||
10.17+ | Real D Nonqualified Stock Option Grant and Real D Stock Option Agreement, both dated May 19, 2009, by and between Cinemark USA, Inc. and the registrant. | S-1/A | 333-165988 | 10.2 | May 10, 2010 | |||||||||
10.18+ | Second Amended and Restated RealD System License Agreement (2010), dated May 9, 2010, by and between American Multi-Cinema, Inc. and the registrant. | S-1/A | 333-165988 | 10.2 | June 29, 2010 | |||||||||
10.19 | Operating Agreement of Digital Link II, LLC, dated March 2, 2007. | S-1/A | 333-165988 | 10.2 | May 10, 2010 | |||||||||
10.20+ | RealD Inc. Amended and Restated Nonqualified Stock Option Grant and RealD Inc. Amended and Restated Stock Option Agreement, both dated May 9, 2010, by and between American Multi-Cinema, Inc. and the registrant. | S-1/A | 333-165988 | 10.2 | May 10, 2010 | |||||||||
10.21# | Director Offer Letter and Consent, dated May 17, 2010, by and between P. Gordon Hodge and the registrant. | S-1/A | 333-165988 | 10.3 | May 26, 2010 | |||||||||
10.22# | Employment Agreement, dated May 25, 2010, between Andrew A. Skarupa and the registrant. | S-1/A | 333-165988 | 10.3 | June 29, 2010 | |||||||||
10.23# | Employment Agreement, dated May 25, 2010, between Joshua Greer and the registrant. | S-1/A | 333-165988 | 10.3 | June 29, 2010 | |||||||||
10.24# | Employment Agreement, dated May 25, 2010, between Joseph Peixoto and the registrant. | S-1/A | 333-165988 | 10.3 | June 29, 2010 | |||||||||
10.25# | Employment Agreement, dated May 25, 2010, between Robert Mayson and the registrant. | S-1/A | 333-165988 | 10.3 | June 29, 2010 | |||||||||
10.26# | Form of Separation Agreement and General Release of Claims between the registrant and Andrew A. Skarupa, Joshua Greer, Joseph Peixoto and Robert Mayson. | S-1/A | 333-165988 | 10.3 | May 26, 2010 | |||||||||
10.27# | Form of Employee Invention Assignment and Confidentiality Agreement between the registrant and Andrew A. Skarupa, Joshua Greer, Joseph Peixoto, Robert Mayson and other non-executive employees. | S-1/A | 333-165988 | 10.3 | May 26, 2010 | |||||||||
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Exhibit Number | Exhibit Description | Incorporated by Reference | Filed Herewith | |||||||||||
10.28# | Employment Agreement, dated January 21, 2010, between Craig Gatarz and the registrant. | S-1/A | 333-165988 | 10.3 | May 26, 2010 | |||||||||
10.29# | Credit and Security Agreement, dated June 24, 2010, by and between City National Bank and the registrant. | S-1/A | 333-165988 | 10.3 | June 29, 2010 | |||||||||
10.30# | Amended and Restated Agreement of Employment, dated September 1, 2007, between Andrew A. Skarupa and the registrant. | S-1/A | 333-165988 | 10.4 | June 29, 2010 | |||||||||
10.31# | Amended and Restated Agreement of Employment, dated September 1, 2007, between Joseph Peixoto and the registrant. | S-1/A | 333-165988 | 10.4 | June 29, 2010 | |||||||||
10.32# | Employment Agreement, dated February 25, 2010, between Robert Mayson and the registrant. | S-1/A | 333-165988 | 10.4 | May 26, 2010 | |||||||||
10.33 | Employment Agreement, dated November 5, 2008, between Robert Mayson and RealD Europe Limited.# | S-1/A | 333-165988 | 10.4 | May 26, 2010 | |||||||||
10.34# | Director Offer Letter and Consent, dated May 20, 2010, by and between Sherry Lansing and the registrant. | S-1/A | 333-165988 | 10.4 | May 26, 2010 | |||||||||
10.35# | Director Offer Letter and Consent, dated May 17, 2010, by and between Frank J. Biondi, Jr. and the registrant. | S-1/A | 333-165988 | 10.4 | May 26, 2010 | |||||||||
10.36# | Director Offer Letter and Consent, dated May 17, 2010, by and between Richard Grand-Jean and the registrant. | S-1/A | 333-165988 | 10.4 | May 26, 2010 | |||||||||
10.37# | Director Offer Letter and Consent, dated May 20, 2010, by and between James Cameron and the registrant. | S-1/A | 333-165988 | 10.4 | June 29, 2010 | |||||||||
10.38# | 2010 Management Incentive Plan. | S-1/A | 333-165988 | 10.4 | June 29, 2010 | |||||||||
10.39# | Employment Agreement, dated October 18, 2010, between Craig Gatarz and the registrant. | S-1 | 333-170766 | 10.4 | November 22, 2010 | |||||||||
10.40+ | First Amendment to Real D System License Agreement (U.S. 2008), dated as of January 26, 2011, by and between RealD Inc. and Regal Cinemas, Inc. | 8-K | 001-34818 | 10.1 | January 27, 2011 | |||||||||
10.41 | First Amendment to Credit and Security Agreement, dated as of April 5, 2011, between RealD, Inc. and City National Bank. | 8-K | 001-34818 | 10.1 | April 8, 2011 | |||||||||
10.42 | Continuing Guaranty, dated as of April 5, 2011, executed by ColorLink Inc. in favor of City National Bank. | 8-K | 001-34818 | 10.2 | April 8, 2011 | |||||||||
10.43 | Continuing Guaranty, dated as of April 5, 2011, executed by Stereographics Corporation in favor of City National Bank. | 8-K | 001-34818 | 10.3 | April 8, 2011 | |||||||||
10.44# | Separation Agreement and General Release of Claims, dated as of May 16, 2011, by and between Joshua Greer and the registrant. | 10-K | 001-34818 | 10.4 | June 10, 2011 | |||||||||
10.45# | Consulting Agreement, dated as of May 16, 2011, by and between Joshua Greer and the registrant. | 10-K | 001-34818 | 10.5 | June 10, 2011 | |||||||||
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Exhibit Number | Exhibit Description | Incorporated by Reference | Filed Herewith | |||||||||||
10.46# | 2010 Stock Incentive Plan—Form of Stock Unit Agreement between the executive officers and the registrant. | 10-K | 001-34818 | 10.5 | June 10, 2011 | |||||||||
10.47+ | First Amendment to Amended and Restated RealD System License Agreement (U.S. 2009), dated as of July 20, 2011, by and between Cinemark USA, Inc. and the registrant. | 8-K | 001-34818 | 10.1 | July 21, 2011 | |||||||||
10.48+ | Amendment Number 1 to the Second Amended and Restated RealD System License Agreement, dated as of July 28, 2011, by and between American Multi-Cinema, Inc. and the registrant. | 8-K | 001- | 10.1 | July 29, 2011 | |||||||||
10.49# | RealD 2011 Employee Stock Purchase Plan. | 8-K | 001-34818 | 10.1 | August 2, 2011 | |||||||||
10.50 | Second Amendment to Credit and Security Agreement, dated as of December 6, 2011, between City National Bank and the registrant, acknowledged by each of ColorLink, Inc. and Stereographics Corporation. | 8-K | 001-34818 | 10.1 | December 8, 2011 | |||||||||
10.51# | Employment Agreement, dated April 18, 2012, between Robert Mayson and the registrant. | 8-K | 001-34818 | 10.1 | April 18, 2012 | |||||||||
10.52# | Secondment Letter, dated April 18, 2012, by and between Robert Mayson and the registrant. | 8-K | 001-34818 | 10.2 | April 18, 2012 | |||||||||
10.53+ | Credit Agreement, dated as of April 19, 2012, among City National Bank, U.S. Bank National Association, HSBC Bank USA, N.A., the lenders party thereto and the registrant. | 8-K/A | 001-34818 | 10.1 | April 25, 2012 | |||||||||
10.54 | General Continuing Guaranty, dated as of April 19, 2012, executed by Stereographics Corporation and ColorLink Inc. in favor of City National Bank and the lenders party to the Credit Agreement, dated as of April 19, 2012. | 8-K/A | 001-34818 | 10.2 | April 25, 2012 | |||||||||
10.55+ | Security Agreement, dated as of April 19, 2012, among Stereographics Corporation, ColorLink Inc., City National Bank and the registrant. | 8-K/A | 001-34818 | 10.3 | April 25, 2012 | |||||||||
10.56 | Consulting Agreement, dated May 29, 2012, by and between DCH Consultants LLC and the registrant | 10-Q | 001-34818 | 10.6 | July 31, 2012 | |||||||||
10.57# | Director Offer Letter and Consent, dated January 27, 2013, by and between Laura Alber and the registrant. | 10-K | 001-34818 | 10.6 | June 6, 2013 | |||||||||
10.58# | Employment Agreement, dated February 6, 2013, between Minard Hamilton and the registrant. | 10-K | 001-34818 | 10.6 | June 6, 2013 | |||||||||
10.59# | Separation Agreement and General Release with Minard Hamilton dated November 11, 2013. | 10-Q | 001-34818 | 10.1 | February 5, 2014 | |||||||||
10.60# | Separation Agreement and General Release with Joseph Peixoto dated October 21, 2013. | 10-Q | 001-34818 | 10.2 | February 5, 2014 | |||||||||
10.61# | Employment Agreement, dated March 25, 2015, between RealD Inc. and Michael V. Lewis | 8-K | 001-34818 | 99.1 | March 27, 2015 | |||||||||
104
Exhibit Number | Exhibit Description | Incorporated by Reference | Filed Herewith | |||||||||||
10.62# | Employment Agreement, dated March 25, 2015, between RealD Inc. and Andrew A. Skarupa | 8-K | 001-34818 | 99.2 | March 27, 2015 | |||||||||
10.63# | Employment Agreement, dated March 25, 2015, between RealD Inc. and Leo Bannon | 8-K | 001-34818 | 99.3 | March 27, 2015 | |||||||||
10.64# | Employment Agreement, dated March 25, 2015, between RealD Inc. and Anthony Marcoly, and related Side Letter | X | ||||||||||||
10.65# | Employment Agreement, dated March 25, 2015, between RealD Inc. and Vivian Yang | X | ||||||||||||
21.1 | List of significant subsidiaries of the registrant. | X | ||||||||||||
23.1 | Consent of Independent Registered Public Accounting Firm. | X | ||||||||||||
24.1 | Power of Attorney (included on signature page to this Annual Report on Form 10-K). | X | ||||||||||||
31.1 | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
31.2 | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
101.INS* | XBRL Instance Document. | |||||||||||||
101.SCH* | XBRL Taxonomy Extension Schema Document. | |||||||||||||
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||||||||
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. | |||||||||||||
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||
_______________________________________________________________________________
+ | Certain provisions of this exhibit have been omitted pursuant to a request for confidential treatment. |
105
# | Indicates management contract or compensatory plan, contract, or agreement. |
* | XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
106
EXHIBIT 10.64 March 25, 2015 Anthony Marcoly 312 17th Street Seal Beach, CA 90740 Dear Anthony: On behalf of RealD Inc., a Delaware corporation (the “Company”), I am pleased to provide you with this letter setting forth the terms and conditions of your employment with the Company (the “Agreement”). Effective as of March 25, 2015 (the “Effective Date”) this Agreement amends, restates and supersedes in its entirety your Employment Agreement with the Company dated December 21, 2014. 1. Title; Duties; Reporting. You will serve as the Company’s President, Worldwide Cinema and shall report directly to the Executive Vice President, Global Operations of the Company. You shall be a member of the Company’s senior management team and shall have such duties and responsibilities as shall be consistent with your position. You shall work out of the Company’s offices in Beverly Hills, CA, with travel to other locations, including the Company’s facilities in Boulder, CO, trade shows and customer visits, as necessary to fulfill your duties and responsibilities. You will also devote your full time, efforts, abilities, and energies to promote the general welfare and interests of the Company and any related enterprises of the Company. You will loyally, conscientiously and professionally do and perform all duties and responsibilities of your position, as well as any other duties and responsibilities as may be reasonably assigned to you by the Company, consistent with your position. You will strictly adhere to and obey all Company rules, policies, procedures, regulations and guidelines including, but not limited to, those contained in the Company’s employee handbook, as well as any others that the Company may establish. You will strictly adhere to all applicable state and/or federal laws and/or regulations relating to your employment with the Company. (a) No Conflicting Obligations. By signing this Agreement, you confirm to the Company that you have no contractual commitments or other legal obligations that would prohibit you from performing your duties for the Company. (b) Outside Activities. Notwithstanding anything to the contrary contained herein, you may (i) serve as a director or member of a committee or organization involving no actual or potential conflict of interest with the Company and its subsidiaries and affiliates; (ii) deliver lectures and fulfill speaking engagements; (iii) engage in charitable and community activities; and (iv) invest your personal assets in such form or manner that will not violate this Agreement; provided, however, that the activities described in clauses (i), (ii), (iii) or (iv) do not materially affect or interfere with the performance of your duties and obligations to the Company and further, provided, that the Company’s Chief Executive Officer must provide his/her advance written consent with respect to the items referenced in clause (i). 2. Term. (a) Length of Term. The term of this Agreement shall extend from the Effective Date through March 31, 2017 (the “Term”) unless terminated earlier in accordance with the terms herein. On April 1, 2017, and on each subsequent April 1st thereafter, the end date of the Term shall automatically be extended by one (1) additional year, unless either party has previously provided at least sixty (60) days’ written notice to the other party to not so extend the Term. Once such notice has been provided, then the Term shall no longer be extended on any following April 1st. Notwithstanding anything to the contrary, this Agreement shall in all cases expire no later than (and cannot be extended beyond) March 31, 2019. Upon expiration of the Term due to either parties’ providing written notice to not extend the Term then, except as provided in Section 2(c) below, your employment with the Company shall terminate
(if not terminated earlier in accordance with the terms herein) as of the end of the Term. The terms of Sections 6 through 13 shall survive any termination or expiration of this Agreement or of your employment. (b) Resignation. If you voluntarily terminate your employment for any reason, you shall be deemed to have immediately resigned from all positions as an employee or officer with the Company, and any of its affiliates, as of your last day of employment. Upon termination of your employment for any reason, you shall be deemed to have immediately resigned from any position as an employee, officer and/or director of the Company or any of its affiliates, as of your last day of employment. (c) At-Will Status After Expiration of the Term. If the Term ends on March 31, 2019 and if you are then still employed by the Company, then your employment shall thereafter continue on an “at will” basis and during such at-will period, either party can terminate your employment without obligation (including, without limitation, any obligation to provide severance payments or benefits) and/or the Company can change any or all of the terms of your employment at any time for any reason or no reason by providing written notice of the same. For the avoidance of doubt, no advance written notice will be required to effectuate a termination of your employment after the expiration of the Term. (d) No Eligibility for Severance. For the avoidance of doubt, the act of either party providing written notice of its intention to not extend the Term, or the expiration of the Term either on March 31, 2019 or as a result of a party providing such written notice to not extend the Term, shall not trigger any rights to or eligibility for severance, including without limitation, those payments and benefits described under Sections 3(e)(i) or 3(e)(ii). After expiration of the Term, however, you will remain eligible to receive severance in accordance with the Company’s severance policy for comparable level executives of the Company as in effect from time to time. 3. Compensation. (a) Base Salary. (i) As of the Effective Date, your base salary is $460,000 per year, payable in accordance with the Company’s standard payroll procedures. (ii) For all purposes of this Agreement, the term “Base Salary” shall refer to the base salary in effect from time to time. During the Term, your Base Salary will be reviewed annually and is subject to increase (but not decrease) at the discretion of the Board or a committee of members of the Board. (b) Bonus. During each fiscal year of the Term, beginning with the fiscal year ending March 31, 2015, you will annually be eligible to earn a cash performance bonus (“Performance Bonus”) with a target amount of eighty percent (80%) of your Base Salary. The Performance Bonus will be issued and administered under the Company's 2010 Management Incentive Plan (or any successor incentive compensation plan). Your actual bonus, if any, for each fiscal year shall be determined by the Company and the Board (or an appropriate committee thereof) and based 50% on the Company’s performance and 50% on your successful completion of the performance objectives (“MBO Goals”) reasonably prescribed and established for you by the Company (although you may have input into the development of such MBO Goals). The Performance Bonus shall be paid to you no later than the 15th day of the third month immediately following the fiscal year with respect to which the Performance Bonus relates. To earn any Performance Bonus, you must remain employed by the Company through the end of the fiscal year(s) with respect to which the Performance Bonus relates, except in the event a “Pro-Rated Bonus” (defined below) is payable pursuant to Section 3(e)(i)(B) below (Qualifying Termination), Section 4(d) below (death) or Section 4(e) below (Disability). Your Performance Bonus for fiscal year ending March 31, 2015 will be pro-rated based on the Effective Date. (c) Equity. You shall be eligible to be considered for equity awards during each year of the Term at the discretion of the Board (or an appropriate committee thereof). (d) Company-Sponsored Benefits.
As a member of the senior management team of the Company, you will also be eligible to receive all employee benefits pursuant to the Company’s standard benefit plans that the Company generally provides to the other members of the senior management team that may be in effect from time to time. These currently include, without limitation, paid time away, group health benefits, 401(k) retirement benefits, business expense reimbursements, and Company-paid holidays. The Company may, in its sole discretion and from time to time, amend or eliminate any of these benefits. (e) Severance and Other Termination Benefits. (i) Qualifying Termination. If your employment is terminated during the Term without Cause (as defined below) by the Company or by you for “Good Reason” (as defined below) (each, a “Qualifying Termination”), the Company shall cause to occur each of the following: (A) pay you cash severance installment payments in an aggregate amount equal to one hundred percent (100%) of your annual Base Salary as in effect on your Termination Date (“Cash Severance”) being paid in ten monthly pro-rata installments with the first installment of Cash Severance being paid on the 90th day after your “separation from service” (within the meaning of Internal Revenue Code (“Code”) Section 409A (“Section 409A”)) from the Company (“Termination Date”), and the last installment being paid on the first anniversary of the Termination Date; (B) pay you a pro-rated cash Performance Bonus, calculated as follows: the product of (x) the Performance Bonus that would have been earned during the fiscal year in which the Qualifying Termination occurred, assuming that the Qualifying Termination had not occurred and that you remained as President, Worldwide Cinema of the Company through the end of such fiscal year, which Performance Bonus, if any, shall be based on the extent to which the Company achieved the MBO Goals (or the performance standards set forth in the 2010 Management Incentive Plan or any successor incentive plan) during such fiscal year, multiplied by (y) a fraction, the numerator of which is the number of days of the Company’s fiscal year prior to the Termination Date and the denominator of which is 365 days. This pro-rated Performance Bonus (a “Pro-Rated Bonus”) shall be paid to you no later than the 15th day of the third month immediately following the fiscal year in which the Qualifying Termination has occurred; (C) accelerate the vesting of your RSUs and other time-based vesting equity awards, if any, in accordance with their applicable vesting schedules, as if you had provided an additional twelve (12) months of service to the Company as its President, Worldwide Cinema as of the Termination Date; (D) the Company will continue to pay the cost (to the same extent that the Company was doing so immediately before the Termination Date) for all group employee benefit coverage continuation under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) to the same extent provided by the Company’s group plans immediately before the Termination Date for eighteen (18) months after the Termination Date or until you become eligible for group insurance benefits from another employer, whichever occurs first, provided that you timely elect COBRA coverage (“COBRA Benefits”). You agree (i) at any time either before or during the period of time you are receiving benefits under this subsection (C), to inform the Company promptly in writing if you become eligible to receive group health coverage from another employer; and (ii) that you may not increase the number of your designated dependents, if any, during this time unless you do so at your own expense. The period of such COBRA Benefits shall be considered part of your COBRA coverage entitlement period; provided, however, if the Company determines, in its sole discretion, that it cannot pay for the COBRA Benefits without potentially incurring financial cost or penalties under applicable law (including without limitation, Section 2716 of the Public Health Service Act), then the Company shall, in lieu thereof, pay you a taxable cash amount that it would otherwise have paid for the COBRA Benefits, in monthly installments over the same time period, which payment shall be made regardless of whether you elect health care continuation coverage; and (E) the “Accrued Obligations” (defined below) as of the Termination Date. For avoidance of doubt, the payments and benefits that may be provided under Sections 3(e)(i) above or 3(e)(ii) below shall not be provided more than once and if payments and benefits are provided under
either one of these subsections, then no payments or benefits will otherwise be provided again under either one of these subsections. For avoidance of doubt, any Cash Severance benefits provided under Sections 3(e) (i) above or 3(e)(ii) below shall be calculated prior to giving effect to any reduction in Base Salary or target Performance Bonus that would give rise to your right to terminate for Good Reason. Additionally, any Cash Severance benefits provided under Sections 3(e)(i) above or 3(e)(ii) below shall be calculated prior to giving effect to any elected or agreed upon temporary forbearance from payment of the Base Salary or Performance Bonus. (ii) Change in Control. If, during the Term, there is a Qualifying Termination and your Termination Date occurs (because of such Qualifying Termination) during the time period that commences on the date that is ninety (90) days before a “Change in Control” (defined below) and extends through the date that is twenty-four (24) months after a Change in Control (such Qualifying Termination, a “CiC Qualifying Termination”), then the severance benefits provided to you under Section 3(e)(i) shall be enhanced as follows: (a) the amount of the total Cash Severance in Section 3(e)(i)(A) shall instead be equal to one hundred fifty percent (150%) of: (x) the then annual Base Salary plus (y) the target Performance Bonus that could have been earned during the fiscal year in which the Qualifying Termination occurred, assuming that the Qualifying Termination had not occurred and that you remained as President, Worldwide Cinema of the Company through the end of such fiscal year; (b) in lieu of the Pro-Rated Bonus you will instead receive an amount equal to the Performance Bonus multiplied by a fraction, the numerator of which is the number of days of the Company’s fiscal year prior to the Termination Date and the denominator of which is 365 days (the “Target Pro-Rated Bonus”); and (c) in lieu of the vesting acceleration benefits specified in Section 3(e)(i) (C), one hundred percent (100%) of the shares of common stock you have the option to purchase (the “Options”), including any additional stock options, restricted stock units, performance stock units, and other equity compensation incentives granted to you during the Term (collectively, the “Equity Incentives”) which are outstanding and unvested as of the Termination Date shall become fully vested and exercisable as of the later of your Termination Date or immediately prior to the date of the Change in Control. For purposes of determining the number of shares that will vest pursuant to the foregoing provision with respect to any performance based vesting Options or Equity Incentives that have multiple vesting levels depending upon the level of performance, vesting acceleration shall occur, unless otherwise specifically provided in applicable award agreement, at the greater of (x) the target level or (y) the applicable award level as determined in accordance with the performance vesting criteria based on the level of actual performance actually attained through the date of the Change in Control (if calculable). Subject to Section 12 below, in the event of a CiC Qualifying Termination, your Cash Severance and the Target Pro-Rated Bonus shall instead be fully paid to you in a single lump sum payment on the 90th day after your Termination Date. For avoidance of doubt, you will still receive the COBRA Benefits in the event of a CiC Qualifying Termination and the particular payments and benefits that may be provided under a subsection of Sections 3(e)(i) or 3(e)(ii) shall not be duplicated and if payments and benefits are provided under one such subsection then no payments or benefits will be provided under the other subsection and vice-versa. (iii) Release of Claims. Notwithstanding anything to the contrary, in order to receive any payments or benefits under Section 3(e)(i) or Section 3(e)(ii) as applicable, you must timely execute and deliver (and not revoke) a separation agreement and general release of claims in favor of the Company, any affiliates or related entities, and their employees and affiliates, in the form and content attached as Exhibit A hereto, within the time period specified in the release, but in no event after the 60th day following the Termination Date. However, you shall receive payment or benefits from the Company of the Accrued Obligations, as applicable, regardless of whether a separation agreement and general release of claims in the form and content attached as Exhibit A hereto is executed and timely provided to the Company. (iv) Golden Parachute Excise Tax. If any payment or benefit received or to be received by you (including any payment or benefit received pursuant to this Agreement or otherwise) would be (in whole or part) subject to the excise tax imposed by Code Section 4999, or any successor provision thereto, or any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the “Excise Tax”), then the payments or benefits provided under this Agreement or any other agreement pursuant to which you receive payments that give rise to the Excise Tax will either be: (a) paid in full; or (b) reduced to the extent necessary to make such payments and benefits not subject to such Excise Tax. The Company shall reduce or eliminate the payments first by reducing those payments that are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments that are to be paid the farthest in time from the determination. You shall receive the greater, on an after-tax basis, of (a) or
(b). However, if the imposition of such Excise Tax could be avoided by approval of stockholders as described in Code Section 280G(b)(5)(B), then you may request the Company to solicit a vote of such stockholders (described in Code Section 280G(b)(5)(B) and in which case you will cooperate and execute any such waivers of compensation as may be necessary to enable the stockholder vote to comply with the requirements specified under Code Section 280G and the regulations promulgated thereunder. In no event will the Company be required to gross up any payment or benefit to you to avoid the effects of the Excise Tax or to pay any regular or excise taxes arising from the application of the Excise Tax. Unless the Company and you otherwise agree in writing, any parachute payment calculation will be made in writing by independent public accountants selected by the Company, whose calculations will be conclusive and binding upon the Company and you for all purposes. The Company and you will furnish to the accountants such information and documents as the accountants may reasonably request in order to make a parachute payment determination. The accountants also will provide its calculations, together with detailed supporting documentation, both to the Company and to you, before making any payments that may be subject to the Excise Tax. As expressly permitted by Q/A #32 of the Code Section 280G regulations, with respect to performing any present value calculations that are required in connection with this Section, the parties affirmatively elect to utilize the Applicable Federal Rates that are in effect on the Effective Date (the “Agreement AFRs”) and the accountants shall therefore use such Agreement AFRs in their determinations and calculations. (f) Expense Reimbursement. You shall be reimbursed for all documented reasonable business expenses that are incurred in the ordinary course of business in accordance with the Company’s expense reimbursement policy as in effect from time to time. Any reimbursements or in-kind benefits provided under this Agreement that are subject to Section 409A shall be made or provided in compliance with the requirements of Section 409A, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during the period of time specified in this Agreement, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a fiscal year may not affect the expenses eligible for reimbursement or in-kind benefits to be provided, in any other fiscal year, (iii) the reimbursement of an eligible expense will be made no later than the last day of the fiscal year following the year in which the expense is incurred, and (iv) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. 1. Other Termination Rules. Notwithstanding anything to the contrary in this Agreement whether express or implied, the Company may at any time terminate your employment with the Company and the Term, for any reason or no reason, and with or without Cause, and you may resign from your employment with or without Good Reason and terminate the Term, all as set forth in greater detail in this Section 4. If your employment terminates due to your resignation without Good Reason, or due to your death or Disability or by the Company for Cause, or the Agreement is terminated at the end of the Term due to non-renewal in accordance with Section 2, then you will not be eligible for any severance benefits, except as provided in Sections 4(d) and 4(e). (a) The following definitions shall apply for purposes of this Agreement: (i) “Accrued Obligations” shall mean the sum of (i) any portion of your accrued but unpaid Base Salary through the Termination Date; (ii) subject to Section 13, any compensation previously earned but deferred by you (together with any interest or earnings thereon) that has not yet been paid and that is not otherwise to be paid at a later date pursuant to any deferred compensation arrangement of the Company to which you are a party, if any; (iii) any reimbursements that you are entitled to receive under Section 3(e) of the Agreement or otherwise; and (iv) any vested benefits or amounts that you are otherwise entitled to receive under any plan, policy, practice or program of or any other contract or agreement with the Company in accordance with the terms thereof (other than any such plan, policy, practice or program of the Company that provides benefits in the nature of severance or continuation pay). (ii) “Cause” shall mean (i) your commission of fraud against the Company, (ii) your willful misconduct that materially harms the Company’s interests, (iii) your material violation of Company policies or practices, (iv) your willful use or disclosure of Confidential Information (as defined below) that is unauthorized by this Agreement, or (v) your performance of any act or omission which, if you were prosecuted, would constitute a felony, in each case as determined by the Board (or a committee of members of the Board), whose determination shall be conclusive and binding.
(iii) “Change in Control” shall mean: (1) any person or group of persons (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended ( the “Exchange Act”) together with its affiliates, but excluding (i) the Company or any of its subsidiaries, (ii) any employee benefit plans of the Company, or (iii) a corporation or other entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company (individually, a “Person” and collectively, “Persons”), is or becomes, directly or indirectly, the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing 50% or more of the combined voting power of the Company’s then-outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); (2) the majority of the Board is replaced, during any 12-month period by persons whose appointment or election is not endorsed by a majority of the Board prior to such appointment or election; (3) the consummation of a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or other entity regardless of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company, such surviving entity or any parent thereof outstanding immediately after such merger or consolidation; or (3) there is consummated an agreement for the sale or disposition of all or substantially all of the Company’s assets. (iv) “Confidential Information” shall mean: The Company’s confidential and proprietary business information, including but not limited to, the Company’s products, services, customers, contracts, fees, prices, costs, business affairs, marketing, accounting, financial statements, employees, research, inventions, data, software, and any other confidential and proprietary business information of any kind, nature or description, tangible or intangible, in whatever form. (v) “Disability” shall mean your medically-determined incapacity due to physical or mental illness which makes you unable to perform substantially the duties pertaining to your employment with or without reasonable accommodation for a period of six (6) consecutive months. (vi) “Good Reason” shall mean any one or more of the following: (1) a material diminution in your Base Salary or Performance Bonus target, (2) a material diminution in your authority, reporting, or duties or responsibilities as the Company’s President, Worldwide Cinema, (3) a material change in the geographic location at which you must perform your services to the Company, which shall be defined to be a relocation of your principal workplace to a new location that is more than thirty miles away from the workplace location specified in Section 1 above, or (4) a material breach by the Company of this Agreement. (vii) “Separation from Service” has the meaning set forth in Treasury Regulations Section 1.409A-1(h)(1). (viii) “termination or resignation for Good Reason” shall mean any termination or resignation by you of your employment for Good Reason. (ix) “termination without Cause” shall mean any termination of your employment by the Company for any reason other than Cause or your death or Disability. (b) Termination for Cause. The Company may terminate your employment and the Term at any time for Cause, provided, however, that in the event the Board determines to terminate your employment for Cause, such termination shall only become effective if the Board shall first provide you with written notice detailing the alleged grounds for such Cause, and if such act or omission is susceptible to cure, provide you a 30 day period to cure such act or omission. Upon a termination of your employment by the Company for Cause, you only will be entitled to any
salary and other benefits earned, but unpaid, and any reimbursement for expenses owed to you by the Company, as of the Termination Date. (c) Termination without Cause. The Company shall have the unilateral right to terminate your employment and the Term at any time without Cause, and without notice, in the Company’s sole and absolute discretion. Any such termination without Cause shall not constitute a breach of any term of this Agreement, express or implied, or a wrongful deprivation of your office or position. If the Company terminates your employment and the Term without Cause, it shall be treated as a Qualifying Termination and the Company shall have no obligation to you, except to continue to pay you (or cause to occur, if applicable) the amounts (and actions) set forth in Section 3(e)(i) above in accordance with the terms thereof and any related provisions of this Agreement. (d) Termination due to Death. Your employment and the Term will be automatically terminated on the date of your death. In the event of your death, the Company shall pay your estate or assignees (or allow your estate or assignees to retain, as applicable) within thirty (30) days of the Termination Date the Accrued Obligations, subject to Section 13 below. In addition, you shall be eligible to receive a Pro-Rated Bonus for the year in which your employment is terminated, calculated with reference to the Termination Date and calculated and paid as provided in Section 3(e)(i)(B) above. The vested Equity Incentives as of the date of your death shall be exercisable by your estate or assignees until the earliest of (x) twelve (12) months following the Termination Date; (y) the scheduled expiration date of the Equity Incentives; or (z) the date on which the Equity Incentives are canceled (and not substituted or assumed) pursuant to a Change in Control or merger or acquisition or similar transaction involving the Company. (e) Termination due to Disability. If you are subject to a Disability, and if within thirty (30) days after written notice is provided to you by the Company you shall not have returned to perform substantially your duties, your employment and the Term may be terminated by the Company for Disability. During any period prior to such termination during which you are unable to perform substantially such duties due to Disability, the Company shall continue to pay all amounts required to be paid under this Agreement (including without limitation your Base Salary), offset by any amounts payable to your under any disability insurance plan or policy provided by the Company, and the Company shall continue to provide all benefits to you hereunder. Upon termination of your employment due to Disability, the Company shall pay you (or allow you to retain, as applicable) within thirty (30) days of such termination the Accrued Obligations, subject to Section 13 below. In addition, you shall be eligible to receive a Pro- Rated Bonus for the year in which your employment is terminated, calculated with reference to the Termination Date and calculated and paid as provided in Section 3(e)(i)(B) above. The vested Equity Incentives as of the Termination Date shall be exercisable by you until the earliest of (x) twelve (12) months following the Termination Date; (y) the scheduled expiration date of the Equity Incentives; or (z) the date on which the Equity Incentives are canceled (and not substituted or assumed) pursuant to a Change in Control or merger or acquisition or similar transaction involving the Company. (f) Resignation for Good Reason. You may terminate your employment and the Term at any time for Good Reason, provided that you provide written notice to the Company describing the existence of any Good Reason condition(s) within ninety (90) days of the date of the initial existence of the condition(s) or else you will be deemed to have waived any Good Reason with respect to such condition(s). Upon the Company’s receipt of such written notice, the Company shall then have thirty (30) days during which it may cure or remedy the condition(s). If the Company does cure or remedy the condition(s) during such thirty (30) day period then Good Reason will be deemed to have not occurred with respect to such condition(s). If the Company does not cure or remedy the condition(s) during such thirty (30) day period, then your employment with the Company and the Term shall be terminated for Good Reason as of the day following the expiration of the thirty (30) day cure/remedy period. If you terminate your employment for Good Reason in accordance with the provisions of this Section 4(f), it shall be treated as a Qualifying Termination and the Company shall pay you (or cause to occur, if applicable) the amounts (and actions) set forth in Section 3(e)(i) above in accordance with the terms thereof and any related provisions of this Agreement. (g) Resignation without Good Reason. You may terminate your employment and the Term at any time for no reason, or for any reason that does not otherwise constitute Good Reason, in your sole and absolute discretion. You agree to use reasonable efforts to provide written notice to the Company of your termination of employment without Good Reason at least three (3) months prior to the effective date of your resignation (and such notice must specify the effective date of your resignation of employment). In the event you so terminate your employment without Good Reason, you shall only be entitled to receive (subject to Section 13 below) the Accrued Obligations through the effective date of your resignation, as well as all other compensation and benefits required under this Agreement through the effective date of your resignation, and neither you nor the Company shall have any further obligations to the other except as set forth in Section 6 (Confidential Information), Section 7 (Covenants) and Sections 8 through and
including 13. However, in the event you terminate your employment without Good Reason and your Termination Date occurs prior to the end of the required minimum three (3) month notice period provided in this Section 4(g), then the Option and any additional stock options or stock appreciation rights granted to you after the Effective Date shall immediately expire and be forfeited as of such Termination Date. The Company is not obligated to actually utilize your services at any time during the three-month period preceding the effective date of your resignation, and may prevent you from accessing any of the Company premises or resources during such three-month period. Additionally, as long as the Company provides you with any compensation and benefits that would have been earned by you pursuant to Sections 3(a), 3(b) and 3(c) during the three-month period preceding the effective date of your resignation had you remained employed during such period, the Company may terminate your employment prior to the expiration of such three-month period without triggering any rights to or eligibility for severance, including without limitation those payments and benefits described under Sections 3(e)(i) or 3(e)(ii). 5. Confidential Information. As an employee of the Company, you will have access to certain confidential information of the Company and you may, during the course of your employment or thereafter, develop certain information or inventions which will be the property of the Company. In consideration of, and as a condition to, your employment with the Company, and as an essential inducement to the Company to enter into this Agreement, this Agreement is expressly subject to your executing (and complying with) the RealD Inc. Employee Invention Assignment and Confidentiality Agreement (the “Confidentiality Agreement”) in the form enclosed hereto as Exhibit B. 6. Covenants. You agree to timely and fully comply with all of the covenants set forth in this Section 7 and further understand and agree that such covenants shall survive any termination of your employment and termination or expiration of this Agreement. (a) Return of Company Property. On your Termination Date, or at any other time as required by the Company, you will immediately surrender to the Company all Company property, including but not limited to, Confidential Information (as such term is defined in the Confidentiality Agreement), keys, key cards, computers, telephones, pagers, credit cards, automobiles, equipment and/or other similar property of the Company. The Company shall reimburse you for any reasonable expenses to ship its property back to the Company’s offices, as applicable. (b) Non-disparagement. You will not at any time during the period of your employment with the Company and during any period in which you are receiving severance payments under Section 3(e), make (or direct anyone else to make) any disparaging statements (oral or written) about the Company, or any of its affiliated entities, officers, directors, employees, stockholders, representatives or agents, or any of the Company’s products or services or work-in-progress, that are harmful to their businesses, business reputations or personal reputations. (c) Cooperation. You agree that, upon the Company’s request and without any payment therefore, you shall reasonably cooperate with the Company (and be available as necessary) after the Termination Date in connection with any matters involving events that occurred during your period of employment with the Company. (d) Amounts Due. You will fully pay off any outstanding amounts owed to the Company no later than their applicable due date or within thirty days of the Termination Date (if no other due date has previously been established). Within thirty (30) days of the Termination Date, you will submit any outstanding business expense reports to the Company for business expenses incurred prior to the Termination Date. (e) Company Resources. As of the Termination Date, you will no longer represent that you are an officer, director or employee of the Company or any Company affiliate and you will immediately discontinue using the Company mailing address, telephone, facsimile machines, voice mail and e-mail. (f) Notice of New Employment. You will provide written notice to the Company within three (3) business days after the date that you agree to accept new full or part time employment or agree to provide consulting or other services to another entity or venture. (g) Representations. You represent that you have not entered into any agreements, understandings, or arrangements with any person or entity that you would breach as a result of, or that would in any way preclude or prohibit you from entering into, this Agreement with the Company or performing any of the duties and responsibilities provided for in this Agreement. You represent that you do not possess any confidential, proprietary business information belonging to any other entity, and will not use any confidential, proprietary business information belonging to any other entity in connection with your employment with the Company. You represent that you are not resigning employment or relocating any residence in reliance on any promise or representation by the Company
regarding the kind, character, or existence of such work, or the length of time such work will last, or the compensation therefor. (h) Clawback Policy. Without limiting the requirement in Section 1 that you will strictly adhere to and obey Company policies, you understand and acknowledge that the Company has adopted a policy (which the Company may in the future amend in its discretion) on the recoupment of compensation (“Clawback Policy”). As a result, you may be required to repay to the Company certain previously paid compensation (that was earned or accrued on or after the Effective Date) in accordance with any such Clawback Policy and/or in accordance with applicable law. (i) Violations. You acknowledge that (i) upon a violation of any of the covenants contained in this Section 7; or (ii) if the Company is terminating your employment for Cause as provided under this Agreement, the Company would sustain irreparable harm as a result and that the Company would not have entered into this Agreement without such restrictions, and, therefore, you agree that in addition to any other remedies which the Company may have, the Company shall be entitled, without bond of any kind, to seek equitable relief including specific performance and injunctions restraining you from committing or continuing any such violation. 7. Entire Agreement. This Agreement and its Exhibits, the Employee Invention Assignment and Confidentiality Agreement, and the Company’s 2010 Stock Incentive Plan, and any other plans or agreements referenced herein, as amended or superseded from time to time, contain the entire agreement between you and the Company regarding their terms and supersede any and all prior written or oral understandings. Except as otherwise provided herein, this Agreement may not be amended or modified except in a writing, executed by you and a duly authorized officer of the Company other than yourself. This Agreement may be executed by facsimile signatures and in counterparts, each of which shall constitute an original, and all of which shall constitute one and the same instrument. 8. Choice of Law; Severability; Waiver. This Agreement will be governed by the laws of the State of California, United States, without reference to the conflict of law provisions thereof. If any provision of this Agreement, or portion thereof, shall be held invalid or unenforceable by a court of competent jurisdiction, such invalidity or unenforceability shall attach only to such provision or portion thereof, and shall not in any manner affect or render invalid or unenforceable any other provision, or portion thereof, of this Agreement. No breach of any provision hereof can be waived unless in writing. Waiver of any one breach of any provision hereof will not be deemed to be a waiver of any other breach of the same or any other provision of this Agreement. 9. Successors and Assigns. The Company may assign this Agreement to any successor (whether by amalgamation, merger, consolidation, sale of assets, purchase or otherwise) to all or substantially all of the equity, assets or business of the Company, and this Agreement will be binding upon and inure to the benefit of such successors and assigns, including any successor entity. You may not assign this Agreement or your obligations hereunder. 10. Notice. Any and all notices required or permitted to be given to you or the Company pursuant to the provisions of this Agreement will be in writing, and will be effective and deemed to provide such party sufficient notice hereunder on the earliest of the following: (i) at the time of personal delivery, if delivery is in person; (ii) one (1) business day after deposit with an express overnight courier for United States deliveries, or two (2) business days after such deposit for deliveries outside of the United States; (iii) three (3) business days after deposit in the United States mail by certified mail (return receipt requested) for United States deliveries. All notices that the Company is required to or may desire to give you that are not delivered personally will be sent with postage and/or other charges prepaid and properly addressed to you at your home address of record with the Company, or at such other address as you may from time to time designate by one of the indicated means of notice herein. All notices that you are required to or may desire to give to the Company that are not delivered personally will be sent with postage and/or other charges prepaid and properly addressed to the Company’s General Counsel at its principal office, or at such other office as the Company may from time to time designate by one of the indicated means of notice herein. 11. Withholding and Taxes. The Company shall have the right to withhold and deduct from any payment hereunder any federal, state or local taxes of any kind required by law to be withheld with respect to any such payment. The Company (including, without limitation, members of the Board) shall not be liable to you or other persons as to any unexpected or adverse tax consequence realized by you and you shall be solely responsible for the timely payment of all taxes arising from this Agreement that are imposed on you. 12. Section 409A. The payments under this Agreement are intended to be exempt from the application of Section 409A pursuant to the “short-term deferral” exception and “separation pay plan” exception under Section 409A to the fullest extent possible and any ambiguity herein shall be interpreted accordingly. Each individual payment provided under Sections 3(e), 4 (d) or 4(e) is intended to be a separate payment and not a series of payments for purposes of Section 409A. Anything in this
Agreement to the contrary notwithstanding, if the severance payment above constitutes an item of nonqualified deferred compensation subject to Section 409A, the Company and you shall take all steps necessary (including with regard to any post- termination services you may perform) to ensure that any such termination constitutes a “separation from service” within the meaning of Section 409A. In addition, if you are deemed at the time of your “separation from service” to be a “specified employee” within the meaning of that term under Section 409A and to the extent delaying commencement of payment of nonqualified deferred compensation (that is payable on account of your separation from service) is required in order to avoid the imposition of taxes under Section 409A, then all such payments and benefits will instead be paid to you in a lump sum without interest on the earlier of (a) the first business day of the seventh month following your “separation from service” or (b) five business days after the date the Company receives written confirmation of your death. To the extent any severance benefits provided under this Agreement are nonqualified deferred compensation subject to Section 409A, to the extent necessary as required to avoid the imposition of taxes under Section 409A, any accelerated payment of Cash Severance pursuant to Section 3(e)(ii) shall occur only if the Change in Control qualifies as a change in the ownership or effective control of the Company or change in the ownership of a substantial portion of its assets within the meaning of Treasury Regulations Section 1.409A-3(i) (5). It is intended that payments under this Agreement will be exempt from or comply with Section 409A, but the Company makes no representation or covenant to ensure that the payments under this Agreement are exempt from, or compliant with, Section 409A, and will have no liability to you or any other party if a payment under this Agreement that is intended to be exempt from, or compliant with, Section 409A is not so exempt or compliant. 13. Exhibits. All Exhibits attached to this Agreement shall be incorporated herein by this reference as though fully set forth herein. [Remainder of Page Intentionally Left Blank]
If you decide to accept the terms of this Agreement, please sign this Agreement and the Employee Invention Assignment and Confidentiality Agreement in the spaces indicated and return it to me. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this Agreement and Employee Invention Assignment and Confidentiality Agreement. Should you have anything else that you wish to discuss, please do not hesitate to contact me. Sincerely, RealD Inc. By: /s/ Michael V. Lewis Michael V. Lewis Chief Executive Officer I have read, understand, and accept this offer. Furthermore, in choosing to accept this offer, I agree that I am not relying on any representations, whether verbal or written, except as specifically set out within this Agreement. /s/ Anthony Marcoly Anthony Marcoly Date: March 25, 2015 Enclosures: EXHIBIT A: FORM OF SEPARATION AGREEMENT AND RELEASE OF CLAIMS EXHIBIT B: EMPLOYEE INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENT
March 26, 2015 Anthony Marcoly c/o RealD Inc. 100 N. Crescent Drive, Suite 200 Beverly Hills, CA 90210 Re: Fiscal 2016 Bonus Dear Anthony: Reference is made to that certain Employment Agreement (the “Agreement”) dated March 26, 2015 between you and RealD Inc. (the “Company”). Capitalized terms used but not defined herein shall have the meaning given them in the Agreement. Pursuant to the Agreement, you are eligible to earn a cash performance bonus (the “Performance Bonus”) for each fiscal year of the Term. This letter confirms that for fiscal year ending March 31, 2016, you will receive a Performance Bonus payout of not less than $368,000 (the “FY 2016 Bonus”), provided that you must remain employed in good standing by the Company through and including the last day of the fiscal year ending March 31, 2016 to earn or receive the FY 2016 Bonus; provided, however, that if a Qualifying Termination occurs prior to March 31, 2016, then subject to your satisfaction of the terms and conditions of the Agreement for payment of the Pro-Rated Bonus (including timely delivery of an effective release of claims against the Company), your Pro-Rated Bonus severance benefit will be calculated with respect to the full guaranteed amount of your FY2016 Bonus, pro-rated to reflect the number of days in the fiscal year prior to your Qualifying Termination, but not reduced with respect to actual performance during the 2016 fiscal year. For example, if your employment terminates in a Qualifying Termination on December 31, 2015, your Pro-Rated Bonus severance benefit amount would be $276,000. Similarly, for purposes of calculating any Target Pro-Rated Bonus severance benefit to which you may become entitled to under the terms of the Agreement pursuant to a CIC Qualifying Termination that occurs prior to March 31, 2016 the target amount of your Performance Bonus used in such calculation will be $368,000. Additionally, this letter confirms that the Compensation Committee of the Board of Directors of the Company approved equity awards with an equivalent value of $425,000 in the aggregate, 50% of which is in the form of restricted stock units and 50% of which is in the form of performance stock units, each under the Company's 2010 Stock Incentive Plan (“Stock Plan”) as was provided in your original Employment Agreement with the Company which you executed on December 21, 2014. The equity terms and conditions will be set forth in the agreements evidencing the grant, and which you must execute as a condition of grant, with vesting to commence on the Effective Date and in accordance with the vesting schedule set forth in the Stock Plan agreements. This letter agreement, together with the Agreement and its Exhibits, the Employee Invention Assignment and Confidentiality Agreement, and the Stock Plan, sets forth all of the terms of your employment with the Company. This letter agreement may only be changed or supplemented in a writing signed by you and the Chief Executive Officer of the Company. Please acknowledge your agreement with the foregoing by signing this letter agreement in the space indicated below and returning it to me. Sincerely, RealD inc. By: /s/ Michael V. Lewis Michael V. Lewis Chief Executive Officer ACKNOWLEDGED AND AGREED: /s/ Anthony Marcoly By: Anthony Marcoly Dated this 26th day of March, 2015
EXHIBIT A FORM OF SEPARATION AGREEMENT AND RELEASE OF CLAIMS
-1- 114068972 v1 SEPARATION AGREEMENT AND GENERAL RELEASE OF CLAIMS This Separation Agreement and General Release of Claims (the “Agreement”) is entered into by and between RealD Inc., a Delaware corporation (the “Company”), and _____________ (“Executive”) (together “the Parties”). This Agreement is effective only if it has been executed by each of the Parties and the revocation period has expired without revocation as set forth in Sections 5(c) and (d) below (the “Effective Date”). WHEREAS, Executive was an employee of the Company and served as its _____________ pursuant to an employment agreement with the Company with an effective date of February ___, 2015 (the “Employment Agreement”); WHEREAS, the Company and Executive mutually agree that (i) Executive’s employment with the Company was terminated [by the Company without Cause] [by Executive for Good Reason] (a “Qualifying Termination”) on [DATE] (the “Termination Date”), and (ii) that Executive will release the Company and its affiliates from any and all claims as of the Effective Date; WHEREAS, [a Change in Control (as defined in the Employment Agreement) occurred on [DATE];] and WHEREAS, in accordance with the Employment Agreement, a Qualifying Termination of Executive’s employment means that Executive is eligible to receive certain separation benefits provided that, among other things, Executive timely complies with the requirements of Section 3(e)(iii) of the Employment Agreement. NOW, THEREFORE, in consideration of the mutual promises contained herein, the Parties agree as follows: 1. Qualifying Termination of Employment. Executive and the Company acknowledge and agree that Executive’s employment with the Company terminated as of the close of business on the Termination Date without regard to whether Executive signs this Agreement or agrees to the following terms and conditions, and that such termination was treated as a Qualifying Termination by the Company. As of the Termination Date, it is mutually agreed that Executive is no longer [an employee] [or director] of the Company and no longer holds any positions or offices with the Company [except for his membership on the Company’s Board of Directors]. 2. Separation Benefits. In consideration for Executive’s general release of all claims set forth below and Executive’s other obligations under this Agreement and in satisfaction of all of the Company’s obligations to Executive and further provided that: (i) this Agreement is signed by Executive and delivered to the Company on or before [DATE], (ii) this Agreement is not revoked by Executive under Section 5 below and therefore becomes effective on or before [DATE], (iii) Executive remains in continuing material compliance with all of the terms of this Agreement, and (iv) the termination of Executive’s employment with the Company is treated as a Qualifying Termination by the Company, then the Company agrees to provide (and continue to provide) the separation benefits specified in Section 3(a) below to Executive.
-2- 114068972 v1 In the event that the Company believes Executive is not in continuing material compliance with the terms of this Agreement, then the Company shall provide Executive with written notice of the same and the Company’s intention to terminate the separation benefits specified in Section 3(a) below within ninety (90) days of the date on which the general counsel of the Company or a member of the Board (other than Executive) first becomes aware of the initial existence of the condition(s) giving rise to such lack of material compliance. If the Company does not timely provide such notice during the applicable 90 days, then the Company will be deemed to have waived the right to assert any such breach with respect to such condition(s) provided that at least one of such persons with knowledge of the initial existence of the condition(s) remains in service with the Company through the conclusion of the ninety day notice period. Notwithstanding the foregoing, in the event that the actions or inactions giving rise to such lack of material compliance are reasonably capable of being cured, the written notice from the Company shall provide Executive with at least twenty (20) days to cure such noncompliance, prior to the effective date of the termination of separation benefits specified in Section 3(a) below. During such twenty (20) day period, the Company will suspend payment(s) of the separation benefits specified in Section 3(a) below, and if the actions or inactions giving rise to such lack of material compliance are not timely cured, then the Company shall immediately terminate any and all such separation payments and benefits. In the event that Executive cures the circumstances giving rise to such lack of material compliance within such twenty (20) day period, the Company shall remove the suspension and continue to provide the separation payments and benefits specified in Section 3(a) below. 3. Payments, Benefits and Taxes. (a) Separation Benefits. The Company will provide to Executive the payments and benefits specified in Section 3(e)(i) (or Section 3(e)(ii) if a Change in Control is consummated before the 90th day after the Termination Date) of the Employment Agreement, subject to Section 3(e)(iv) of the Employment Agreement, but in no event will payments be provided under both Sections 3(e)(i) and 3(e)(ii) of the Employment Agreement. Subject to Section 3(e) below, such payments and benefits will be provided to Executive at the times specified in the Employment Agreement. (b) Taxes. Any tax obligations of Executive and tax liability therefore, including without limitation any penalties or interest based upon such tax obligations, that arise from the benefits and payments made to Executive shall be Executive’s sole responsibility and liability. All payments or benefits made under this Agreement to Executive shall be subject to applicable tax withholding laws and regulations and Executive shall be required to timely and fully satisfy any such withholding as a condition of receipt of any payments or benefits. The terms of Section 11 of the Employment Agreement are also applicable to this Agreement and to all payments and benefits provided hereunder. (c) WARN Payments. The payments to Executive hereunder shall be considered as including any and all payments by the Company that could or in fact become payable in connection with the Executive’s termination of employment pursuant to any applicable legal requirements, including, without limitation, the Worker Adjustment and Retraining Notification Act (the “WARN” Act), California Labor Code sections 1400-1408, or any other similar foreign, federal or state law.
-3- 114068972 v1 (d) Full Payment. Except with respect to any “Excluded Claims” (defined below), Executive represents and warrants to the Company that, as of the Effective Date, the payments set forth in Section 3(a) herein constitute all payments or obligations owed by the Company to Executive in connection with any employment, severance, retention, or a change in control plan or arrangement. (e) Internal Revenue Code Section 409A. The terms of Section 12 of the Employment Agreement are also applicable to this Agreement and to all payments and benefits provided hereunder. 4. Executive’s Representations, Warranties and Covenants. (a) Executive reaffirms that he will continue to be bound by, and will continue to comply with, all of the terms and conditions and covenants in Sections 5 and 6 of the Employment Agreement and also all terms and conditions of the Confidentiality Agreement (as such term is defined in the Employment Agreement). (b) Executive represents and warrants to the Company that, as of the Effective Date, Executive has no outstanding agreement or obligation that is in conflict with any of the provisions of this Agreement, or that would preclude Executive from complying with the provisions hereof, and further certifies that Executive will not enter into any such conflicting agreement. (c) Executive represents and warrants to the Company that, as of the Effective Date, Executive has not filed any claim against the Company or its affiliates and has not assigned to any third party any claims against the Company or its affiliates. (d) Executive acknowledges that Executive has had the opportunity to fully review this Agreement and, if Executive so chooses, to consult with counsel, and is fully aware of Executive’s rights and obligations under this Agreement. 5. Executive’s Release of Claims. In exchange for the Company’s promises set forth herein, all of which are good and valuable consideration, Executive hereby covenants not to sue and releases and forever discharges the Company, its owners, parents, subsidiaries, attorneys, insurers, agents, employees, stockholders, directors, officers, affiliates, predecessors and successors of and from any and all rights, claims, actions, demands, causes of action, obligations, attorneys’ fees, costs, damages, and liabilities of whatever kind or nature, in law or in equity, that Executive may have (whether known or not known) (collectively, “Claims”), accruing to Executive as of the Effective Date, that Executive has ever had, including but not limited to Claims based on and/or arising under Title VII of the Civil Rights Act of 1964, as amended, The Americans with Disabilities Act, The Family Medical Leave Act, The Equal Pay Act, The Employee Retirement Income Security Act, The Fair Labor Standards Act, and/or the California Fair Employment and Housing Act; The California Constitution, The California Government Code, The California Labor Code, The Industrial Welfare Commission’s Orders, the Worker Adjustment and Retraining Notification Act, California Labor Code sections 1400-1408, and any and all other Claims Executive may have under any other federal, state or local Constitution, Statute, Ordinance and/or Regulation; and all other Claims arising under common law including but not limited to tort, express and/or implied contract and/or quasi-contract, arising out of or, in
-4- 114068972 v1 any way, related to Executive’s previous relationship with the Company as an employee, consultant and/or director. Furthermore, Executive acknowledges that Executive is waiving and releasing any rights Executive may have under the Older Workers Benefit Protection Act and Age Discrimination in Employment Act of 1967 (“ADEA”), as amended, and that this waiver and release is knowing and voluntary. Executive acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive further acknowledges that Executive has been advised by this writing that in accordance with ADEA: (a) Executive should consult with an attorney prior to executing this Agreement; (b) Executive has at least twenty-one (21) days within which to consider this Agreement; (c) Executive has up to seven (7) days following the execution of this Agreement by the Executive to revoke the Agreement by timely providing written notice of revocation to the Company; and (d) this Agreement shall not be effective until the revocation period in Section 5(c) has expired without revocation by Executive. The Company and Executive agree that the release set forth in this Section 5 shall be and remain in effect in all respects as a complete general release as to the matters released. Notwithstanding anything to the contrary herein, the Parties agree that Executive is not waiving any Claims he may have that arise from or are incurred in connection with any of the following matters (collectively, the “Excluded Claims”). (i) the Company’s breach of its obligations under Section 3(a) above or under Section 3(e)(i) and 3(e)(ii) of the Employment Agreement; (ii) claims for indemnification under Section 2802 of the California Labor Code, under the Company’s Certificate of Incorporation or by-laws, pursuant to an indemnification agreement between you and the Company and under any insurance policy of the Company or the established policies of the Company or any affiliate thereof expressly providing for such indemnity between Executive and the Company or any affiliate thereof; (iii) claims for any vested benefits under the terms of any of the Company’s pension, profit sharing, health, welfare, stock option, restricted stock, stock incentive, deferred compensation, supplemental compensation and any other welfare, benefit or other plan of the Company; (iv) claims for workers’ compensation benefits; and (v) any transactions or agreements entered into, and any occurrences, acts or omissions occurring, after the Effective Date. 6. Civil Code Section 1542. Executive and the Company acknowledge that they are familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST
-5- 114068972 v1 HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR. Executive, being aware of said Code section, agrees to expressly waive any rights Executive may have thereunder (except with respect to Excluded Claims), as well as under any other statute or common law principles of similar effect. 7. Labor Code Section 206.5. Upon receipt by Executive of the “Accrued Obligations” (as such term is defined in the Employment Agreement) including all of his salary and unused vacation time, each accrued through the Termination Date, Executive acknowledges that these payments represent all such monies due to Executive through the Termination Date. In light of the payment by the Company of all wages due, or to become due to Executive (excluding any additional amounts payable to Executive under Section 3(e) of the Employment Agreement), California Labor Code Section 206.5 is not applicable to the Parties hereto. That section provides in pertinent part as follows: No employer shall require the execution of any release of any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made. 8. Governing Law. This Agreement will be governed by the internal substantive laws, but not the choice of law rules, of the State of California. 9. Assignment. This Agreement and all rights under this Agreement will be binding upon and inure to the benefit of and be enforceable by the Parties hereto and their respective owners, agents, officers, stockholders, employees, directors, attorneys, insurers, subsidiaries, parents, affiliates, successors, personal or legal representatives, executors, administrators, heirs, distributes, devisees, legatees, and assigns. This Agreement is personal in nature, and none of the Parties to this Agreement will, without the written consent of the other, assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity; except that the rights and obligations of the Company under this Agreement may be assigned (without the consent of the Executive) to an entity which becomes the successor to the Company as the result of a merger or other corporate reorganization or similar transaction or sale of substantially all the assets to a successor which continues the business of the Company or any other subsidiary of the Company. 10. Notices. The terms of Section 10 of the Employment Agreement are also applicable to this Agreement. 11. Integration and Interpretation. This Agreement, and the surviving provisions of the Employment Agreement, represents the entire agreement and understanding between the parties as to the subject matter hereof and supersedes all prior agreements whether written or oral. The terms of this Agreement have been voluntarily agreed to by Executive and Company, and the language used in this Agreement shall be deemed to be the language chosen to express the mutual intent of the Parties. This Agreement shall be construed without regard to any presumption or rule requiring construction against Company or Executive, or in favor of the Party receiving a particular benefit under this Agreement.
-6- 114068972 v1 12. Modification. This Agreement may only be amended in a writing signed by Executive and an authorized representative of the Company and which expressly references that this Agreement is being amended. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed by the party against whom enforcement of the change or modification is sought. Failure or delay on the part of either party hereto to enforce any right, power, or privilege hereunder will not be deemed to constitute a waiver thereof. Additionally, a waiver by either party or a breach of any promise hereof by the other party will not operate as or be construed to constitute a waiver of any subsequent waiver by such other party. 13. Severability. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 14. No Representations. Each Party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither Party has relied upon any representations or statements made by any other Party hereto which are not specifically set forth in this Agreement. By entering into this Agreement, the Company is not acknowledging or admitting any fault, wrongdoing, or liability on its part in any way. 15. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Executive represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through Executive to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein. 16. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that: (a) They have read this Agreement; (b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel; (c) They understand the terms and consequences of this Agreement and of the releases it contains; and (d) They are fully aware of the legal and binding effect of this Agreement. 17. Execution in Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which when together shall be deemed to constitute the executed original,
-7- 114068972 v1 and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of the undersigned. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the dates shown below. [__________________] REALD INC. By: By: [NAME/TITLE] Dated: Dated:
EXHIBIT B EMPLOYEE INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENT
50825782 v1 -1- EMPLOYEE INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENT In consideration of, and as a condition to, my employment with RealD Inc., a Delaware corporation (the “Company”), I hereby represent to, and agree with, the Company as follows: 1. Purpose of Agreement. I understand that the Company is engaged in a continuous program of research, development, production and marketing in connection with its business and that it is critical for the Company to preserve and protect its “Proprietary Information” (as defined in Section 7 below), its rights in “Inventions” (as defined in Section 2 below) and in all related intellectual property rights. Accordingly, I am entering into this Employee Invention Assignment and Confidentiality Agreement (this “Agreement”) as a condition of my employment with the Company, whether or not I am expected to create inventions of value for the Company. 2. Disclosure of Inventions. I will promptly disclose in confidence to the Company all inventions, improvements, designs, original works of authorship, formulas, processes, compositions of matter, computer software programs, databases, mask works and trade secrets (the “Inventions”) that I make or conceive or first reduce to practice or create, either alone or jointly with others, during the period of my employment, whether or not in the course of my employment, and whether or not such Inventions are patentable, copyrightable or protectible as trade secrets. 3. Work for Hire; Assignment of Inventions. I acknowledge and agree that any copyrightable works prepared by me within the scope of my employment are “works for hire” under the Copyright Act and that the Company will be considered the author and owner of such copyrightable works. I agree that all Inventions that (i) are developed using equipment, supplies, facilities or trade secrets of the Company, (ii) result from work performed by me for the Company, or (iii) relate to the Company’s business or current or anticipated research and development (the “Assigned Inventions”), will be the sole and exclusive property of the Company and are hereby irrevocably assigned by me to the Company. 4. Labor Code Section 2870 Notice. I have been notified and understand that the provisions of Sections 3 and 5 of this Agreement do not apply to any Assigned Invention that qualifies fully under the provisions of Section 2870 of the California Labor Code, which states as follows: ANY PROVISION IN AN EMPLOYMENT AGREEMENT WHICH PROVIDES THAT AN EMPLOYEE SHALL ASSIGN, OR OFFER TO ASSIGN, ANY OF HIS OR HER RIGHTS IN AN INVENTION TO HIS OR HER EMPLOYER SHALL NOT APPLY TO AN INVENTION THAT THE EMPLOYEE DEVELOPED ENTIRELY ON HIS OR HER OWN TIME WITHOUT USING THE EMPLOYER’S EQUIPMENT, SUPPLIES, FACILITIES, OR TRADE SECRET INFORMATION EXCEPT FOR THOSE INVENTIONS THAT EITHER: (1) RELATE AT THE TIME
50825782 v1 -2- OF CONCEPTION OR REDUCTION TO PRACTICE OF THE INVENTION TO THE EMPLOYER’S BUSINESS, OR ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT OF THE EMPLOYER; OR (2) RESULT FROM ANY WORK PERFORMED BY THE EMPLOYEE FOR THE EMPLOYER. TO THE EXTENT A PROVISION IN AN EMPLOYMENT AGREEMENT PURPORTS TO REQUIRE AN EMPLOYEE TO ASSIGN AN INVENTION OTHERWISE EXCLUDED FROM BEING REQUIRED TO BE ASSIGNED UNDER CALIFORNIA LABOR CODE SECTION 2870(a), THE PROVISION IS AGAINST THE PUBLIC POLICY OF THIS STATE AND IS UNENFORCEABLE. 5. Assignment of Other Rights. In addition to the foregoing assignment of Assigned Inventions to the Company, I hereby irrevocably transfer and assign to the Company: (i) all worldwide patents, patent applications, copyrights, mask works, trade secrets and other intellectual property rights in any Assigned Inventions; and (ii) any and all “Moral Rights” (as defined below) that I may have in or with respect to any Assigned Inventions. I also hereby forever waive and agree never to assert any and all Moral Rights I may have in or with respect to any Assigned Inventions, even after termination of my work on behalf of the Company. “Moral Rights” mean any rights to claim authorship of an Assigned Inventions, to object to or prevent the modification of any Assigned Inventions, or to withdraw from circulation or control the publication or distribution of any Assigned Inventions, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a “moral right”. 6. Assistance. I agree to assist the Company in every proper way to obtain for the Company and enforce patents, copyrights, mask work rights, trade secret rights and other legal protections for the Company’s Assigned Inventions in any and all countries. I will execute any documents that the Company may reasonably request for use in obtaining or enforcing such patents, copyrights, mask work rights, trade secrets and other legal protections. My obligations under this paragraph will continue beyond the termination of my employment with the Company, provided that the Company will compensate me at a reasonable rate after such termination for time or expenses actually spent by me at the Company’s request on such assistance. I appoint the Secretary of the Company as my attorney‐in‐fact to execute documents on my behalf for this purpose. 7. Proprietary Information. I understand that my employment by the Company creates a relationship of confidence and trust with respect to any information of a confidential or secret nature that may be disclosed to me by the Company that relates to the business of the Company or to the business of any parent, subsidiary, affiliate, customer or supplier of the Company or any other party with whom the Company agrees to hold information of such party in confidence (the “Proprietary Information”). Such Proprietary Information includes, but is not limited to, Assigned Inventions, marketing plans, product plans, business strategies, financial information, forecasts, personnel information, customer lists and domain names.
50825782 v1 -3- 8. Confidentiality. At all times, both during my employment and after its termination, I will keep and hold all such Proprietary Information in strict confidence and trust. I will not use or disclose any Proprietary Information without the prior written consent of the Company, except as may be necessary to perform my duties as an employee of the Company for the benefit of the Company. Upon termination of my employment with the Company, I will promptly deliver to the Company all documents and materials of any nature pertaining to my work with the Company. I will not take with me any documents or materials or copies thereof containing any Proprietary Information. 9. No Breach of Prior Agreement. I represent that my performance of all the terms of this Agreement and my duties as an employee of the Company will not breach any invention assignment, proprietary information, confidentiality or similar agreement with any former employer or other party. I represent that I will not bring with me to the Company or use in the performance of my duties for the Company any documents or materials or intangibles of a former employer or third party that are not generally available to the public or have not been legally transferred to the Company. 10. Efforts; Duty Not to Compete. I understand that my employment with the Company requires my undivided attention and effort during normal business hours. While I am employed by the Company, I will not, without the Company’s express prior written consent, provide services to, or assist in any manner, any business or third party which competes with the current or planned business of the Company. 11. Notification. I hereby authorize the Company to notify my actual or future employers of the terms of this Agreement and my responsibilities hereunder. 12. Non‐Solicitation of Employees/Consultants. During my employment with the Company and for a period of one (1) year thereafter, I will not directly or indirectly solicit away employees or consultants of the Company for my own benefit or for the benefit of any other person or entity. 13. Non‐Solicitation of Suppliers/Customers. During my employment with the Company and after termination of my employment, I will not directly or indirectly solicit or take away suppliers or customers of the Company if the identity of the supplier or customer or information about the supplier or customer relationship is a trade secret or is otherwise deemed confidential information within the meaning of California law. 14. Injunctive Relief. I understand that in the event of a breach or threatened breach of this Agreement by me the Company may suffer irreparable harm and will therefore be entitled to injunctive relief to enforce this Agreement. 15. Governing Law; Severability. This Agreement will be governed by and construed in accordance with the laws of the State of California, without giving effect to that body of laws pertaining to conflict of laws. If any provision of this Agreement is determined by any court or arbitrator of competent jurisdiction to be invalid, illegal or unenforceable in any
50825782 v1 -4- respect, such provision will be enforced to the maximum extent possible given the intent of the parties hereto. If such clause or provision cannot be so enforced, such provision shall be stricken from this Agreement and the remainder of this Agreement shall be enforced as if such invalid, illegal or unenforceable clause or provision had (to the extent not enforceable) never been contained in this Agreement. Notwithstanding the forgoing, if the value of this Agreement based upon the substantial benefit of the bargain for any party is materially impaired, which determination as made by the presiding court or arbitrator of competent jurisdiction shall be binding, then this Agreement will not be enforceable against such affected party and both parties agree to renegotiate such provision(s) in good faith. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed an original, and all of which together shall constitute one and the same agreement. 17. Titles and Headings. The titles, captions and headings of this Agreement are included for ease of reference only and will be disregarded in interpreting or construing this Agreement. Unless otherwise specifically stated, all references herein to “sections” and “exhibits” will mean “sections” and “exhibits” to this Agreement. 18. Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement and understanding of the parties with respect to the subject matter of this Agreement, and supersede all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof. 19. Amendment and Waivers. This Agreement may be amended only by a written agreement executed by each of the parties hereto. No amendment of or waiver of, or modification of any obligation under this Agreement will be enforceable unless set forth in a writing signed by the party against which enforcement is sought. Any amendment effected in accordance with this section will be binding upon all parties hereto and each of their respective successors and assigns. No delay or failure to require performance of any provision of this Agreement shall constitute a waiver of that provision as to that or any other instance. No waiver granted under this Agreement as to any one provision herein shall constitute a subsequent waiver of such provision or of any other provision herein, nor shall it constitute the waiver of any performance other than the actual performance specifically waived. 20. Successors and Assigns; Assignment. Except as otherwise provided in this Agreement, this Agreement, and the rights and obligations of the parties hereunder, will be binding upon and inure to the benefit of their respective successors, assigns, heirs, executors, administrators and legal representatives. The Company may assign any of its rights and obligations under this Agreement. No other party to this Agreement may assign, whether voluntarily or by operation of law, any of its rights and obligations under this Agreement, except with the prior written consent of the Company.
50825782 v1 -5- 21. Further Assurances. The parties agree to execute such further documents and instruments and to take such further actions as may be reasonably necessary to carry out the purposes and intent of this Agreement. 22. “At Will” Employment. I understand that this Agreement does not constitute a contract of employment or obligate the Company to employ me for any stated period of time. I understand that if I am an “at will” employee of the Company, my employment can be terminated at any time, for any reason or for no reason, by either the Company or myself. This Agreement shall be effective as of the first day of my employment by the Company. RealD Inc.: By: __________________________ Michael V. Lewis Chief Executive Officer Date: __________________________ Employee: Signature Print Name: _______________________ Date: __________________________
EXHIBIT 10.65 March 25, 2015 Vivian Yang c/o RealD Inc. 100 N. Crescent Drive, Suite 200 Beverly Hills, CA 90210 Dear Vivian: On behalf of RealD Inc., a Delaware corporation (the “Company”), I am pleased to provide you with this letter setting forth the terms and conditions of your employment with the Company (the “Agreement”). 1. Title; Duties; Reporting. You will serve as the Company’s Executive Vice President, General Counsel and Secretary and shall report directly to the Chief Executive Officer of the Company. You shall be a member of the Company’s senior management team and shall have such duties and responsibilities as shall be consistent with your position. You shall work out of the Company’s offices in Beverly Hills, CA, with travel to other locations, including the Company’s facilities in Boulder, CO, as necessary to fulfill your duties and responsibilities. You will also devote your full time, efforts, abilities, and energies to promote the general welfare and interests of the Company and any related enterprises of the Company. You will loyally, conscientiously and professionally do and perform all duties and responsibilities of your position, as well as any other duties and responsibilities as may be reasonably assigned to you by the Company, consistent with your position. You will strictly adhere to and obey all Company rules, policies, procedures, regulations and guidelines including, but not limited to, those contained in the Company’s employee handbook, as well as any others that the Company may establish. You will strictly adhere to all applicable state and/or federal laws and/or regulations relating to your employment with the Company. (a) No Conflicting Obligations. By signing this Agreement, you confirm to the Company that you have no contractual commitments or other legal obligations that would prohibit you from performing your duties for the Company. (b) Effective Date. The effective date of this Agreement shall be March 25, 2015 (the “Effective Date”). (c) Outside Activities. Notwithstanding anything to the contrary contained herein, you may (i) serve as a director or member of a committee or organization involving no actual or potential conflict of interest with the Company and its subsidiaries and affiliates; (ii) deliver lectures and fulfill speaking engagements; (iii) engage in charitable and community activities; and (iv) invest your personal assets in such form or manner that will not violate this Agreement; provided, however, that the activities described in clauses (i), (ii), (iii) or (iv) do not materially affect or interfere with the performance of your duties and obligations to the Company and further, provided, that the Company’s Chief Executive Officer must provide his/her advance written consent with respect to the items referenced in clause (i). 2. Term. (a) Length of Term. The term of this Agreement shall extend from the Effective Date through March 31, 2017 (the “Term”) unless terminated earlier in accordance with the terms herein. On April 1, 2017, and on each subsequent April 1st thereafter, the end date of the Term shall automatically be extended by one (1) additional year, unless either party has previously provided at least sixty (60) days’ written notice to the other party to not so extend the Term. Once such notice has been provided, then the Term shall no longer be extended on any following April 1st. Notwithstanding anything to the contrary, this Agreement shall in all cases expire no later than (and cannot be extended beyond) March 31, 2019. Upon expiration of the Term due to either parties’ providing written notice to not extend the Term then, except as provided in Section 2(c) below, your employment with the Company shall terminate
(if not terminated earlier in accordance with the terms herein) as of the end of the Term. The terms of Sections 6 through 13 shall survive any termination or expiration of this Agreement or of your employment. (b) Resignation. If you voluntarily terminate your employment for any reason, you shall be deemed to have immediately resigned from all positions as an employee or officer with the Company, and any of its affiliates, as of your last day of employment. Upon termination of your employment for any reason, you shall be deemed to have immediately resigned from any position as an employee, officer and/or director of the Company or any of its affiliates, as of your last day of employment. (c) At-Will Status After Expiration of the Term. If the Term ends on March 31, 2019 and if you are then still employed by the Company, then your employment shall thereafter continue on an “at will” basis and during such at-will period, either party can terminate your employment without obligation (including, without limitation, any obligation to provide severance payments or benefits) and/or the Company can change any or all of the terms of your employment at any time for any reason or no reason by providing written notice of the same. For the avoidance of doubt, no advance written notice will be required to effectuate a termination of your employment after the expiration of the Term. (d) No Eligibility for Severance. For the avoidance of doubt, the act of either party providing written notice of its intention to not extend the Term, or the expiration of the Term either on March 31, 2019 or as a result of a party providing such written notice to not extend the Term, shall not trigger any rights to or eligibility for severance, including without limitation, those payments and benefits described under Sections 3(e)(i) or 3(e)(ii). After expiration of the Term, however, you will remain eligible to receive severance in accordance with the Company’s severance policy for comparable level executives of the Company as in effect from time to time. 3. Compensation. (a) Base Salary. (i) As of the Effective Date, your base salary is $350,000 per year, payable in accordance with the Company’s standard payroll procedures. (ii) For all purposes of this Agreement, the term “Base Salary” shall refer to the base salary in effect from time to time. During the Term, your Base Salary will be reviewed annually and is subject to increase (but not decrease) at the discretion of the Board or a committee of members of the Board. (b) Bonus. During each fiscal year of the Term, beginning with the fiscal year ending March 31, 2015, you will annually be eligible to earn a cash performance bonus (“Performance Bonus”) with a target amount of eighty percent (80%) of your Base Salary. The Performance Bonus will be issued and administered under the Company's 2010 Management Incentive Plan (or any successor incentive compensation plan). Your actual bonus, if any, for each fiscal year shall be determined by the Company and the Board (or an appropriate committee thereof) and based 50% on the Company’s performance and 50% on your successful completion of the performance objectives (“MBO Goals”) reasonably prescribed and established for you by the Company (although you may have input into the development of such MBO Goals). The Performance Bonus shall be paid to you no later than the 15th day of the third month immediately following the fiscal year with respect to which the Performance Bonus relates. To earn any Performance Bonus, you must remain employed by the Company through the end of the fiscal year(s) with respect to which the Performance Bonus relates, except in the event a “Pro-Rated Bonus” (defined below) is payable pursuant to Section 3(e)(i)(B) below (Qualifying Termination), Section 4(d) below (death) or Section 4(e) below (Disability). (c) Equity. You shall be eligible to be considered for equity awards during each year of the Term at the discretion of the Board (or an appropriate committee thereof). (d) Company-Sponsored Benefits.
As a member of the senior management team of the Company, you will also be eligible to receive all employee benefits pursuant to the Company’s standard benefit plans that the Company generally provides to the other members of the senior management team that may be in effect from time to time. These currently include, without limitation, paid time away, group health benefits, 401(k) retirement benefits, business expense reimbursements, and Company-paid holidays. The Company may, in its sole discretion and from time to time, amend or eliminate any of these benefits. (e) Severance and Other Termination Benefits. (i) Qualifying Termination. If your employment is terminated during the Term without Cause (as defined below) by the Company or by you for “Good Reason” (as defined below) (each, a “Qualifying Termination”), the Company shall cause to occur each of the following: (A) pay you cash severance installment payments in an aggregate amount equal to one hundred percent (100%) of your annual Base Salary as in effect on your Termination Date (“Cash Severance”) being paid in ten monthly pro-rata installments with the first installment of Cash Severance being paid on the 90th day after your “separation from service” (within the meaning of Internal Revenue Code (“Code”) Section 409A (“Section 409A”)) from the Company (“Termination Date”), and the last installment being paid on the first anniversary of the Termination Date; (B) pay you a pro-rated cash Performance Bonus, calculated as follows: the product of (x) the Performance Bonus that would have been earned during the fiscal year in which the Qualifying Termination occurred, assuming that the Qualifying Termination had not occurred and that you remained as General Counsel of the Company through the end of such fiscal year, which Performance Bonus, if any, shall be based on the extent to which the Company achieved the MBO Goals (or the performance standards set forth in the 2010 Management Incentive Plan or any successor incentive plan) during such fiscal year, multiplied by (y) a fraction, the numerator of which is the number of days of the Company’s fiscal year prior to the Termination Date and the denominator of which is 365 days. This pro-rated Performance Bonus (a “Pro-Rated Bonus”) shall be paid to you no later than the 15th day of the third month immediately following the fiscal year in which the Qualifying Termination has occurred; (C) accelerate the vesting of your restricted stock units and other time-based vesting equity awards, if any, in accordance with their applicable vesting schedules, as if you had provided an additional twelve (12) months of service to the Company as its General Counsel as of the Termination Date; (D) the Company will continue to pay the cost (to the same extent that the Company was doing so immediately before the Termination Date) for all group employee benefit coverage continuation under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) to the same extent provided by the Company’s group plans immediately before the Termination Date for eighteen (18) months after the Termination Date or until you become eligible for group insurance benefits from another employer, whichever occurs first, provided that you timely elect COBRA coverage (“COBRA Benefits”). You agree (i) at any time either before or during the period of time you are receiving benefits under this subsection (C), to inform the Company promptly in writing if you become eligible to receive group health coverage from another employer; and (ii) that you may not increase the number of your designated dependents, if any, during this time unless you do so at your own expense. The period of such COBRA Benefits shall be considered part of your COBRA coverage entitlement period; provided, however, if the Company determines, in its sole discretion, that it cannot pay for the COBRA Benefits without potentially incurring financial cost or penalties under applicable law (including without limitation, Section 2716 of the Public Health Service Act), then the Company shall, in lieu thereof, pay you a taxable cash amount that it would otherwise have paid for the COBRA Benefits, in monthly installments over the same time period, which payment shall be made regardless of whether you elect health care continuation coverage; and (E) the “Accrued Obligations” (defined below) as of the Termination Date. For avoidance of doubt, the payments and benefits that may be provided under Sections 3(e)(i) above or 3(e)(ii) below shall not be provided more than once and if payments and benefits are provided under
either one of these subsections, then no payments or benefits will otherwise be provided again under either one of these subsections. For avoidance of doubt, any Cash Severance benefits provided under Sections 3(e) (i) above or 3(e)(ii) below shall be calculated prior to giving effect to any reduction in Base Salary or target Performance Bonus that would give rise to your right to terminate for Good Reason. Additionally, any Cash Severance benefits provided under Sections 3(e)(i) above or 3(e)(ii) below shall be calculated prior to giving effect to any elected or agreed upon temporary forbearance from payment of the Base Salary or Performance Bonus. (ii) Change in Control. If, during the Term, there is a Qualifying Termination and your Termination Date occurs (because of such Qualifying Termination) during the time period that commences on the date that is ninety (90) days before a “Change in Control” (defined below) and extends through the date that is twenty-four (24) months after a Change in Control (such Qualifying Termination, a “CiC Qualifying Termination”), then the severance benefits provided to you under Section 3(e)(i) shall be enhanced as follows: (a) the amount of the total Cash Severance in Section 3(e)(i)(A) shall instead be equal to one hundred fifty percent (150%) of: (x) the then annual Base Salary plus (y) the target Performance Bonus that could have been earned during the fiscal year in which the Qualifying Termination occurred, assuming that the Qualifying Termination had not occurred and that you remained as General Counsel of the Company through the end of such fiscal year; (b) in lieu of the Pro-Rated Bonus you will instead receive an amount equal to the target Performance Bonus multiplied by a fraction, the numerator of which is the number of days of the Company’s fiscal year prior to the Termination Date and the denominator of which is 365 days (the “Target Pro-Rated Bonus”); and (c) in lieu of the vesting acceleration benefits specified in Section 3(e)(i)(C), one hundred percent (100%) of the shares of common stock you have the option to purchase (the “Options”), including any additional stock options, restricted stock units, performance stock units, and other equity compensation incentives granted to you during the Term (collectively, the “Equity Incentives”) which are outstanding and unvested as of the Termination Date shall become fully vested and exercisable as of the later of your Termination Date or immediately prior to the date of the Change in Control. For purposes of determining the number of shares that will vest pursuant to the foregoing provision with respect to any performance based vesting Options or Equity Incentives that have multiple vesting levels depending upon the level of performance, vesting acceleration shall occur, unless otherwise specifically provided in applicable award agreement, at the greater of (x) the target level or (y) the applicable award level as determined in accordance with the performance vesting criteria based on the level of actual performance actually attained through the date of the Change in Control (if calculable). Subject to Section 12 below, in the event of a CiC Qualifying Termination, your Cash Severance and the Target Pro-Rated Bonus shall instead be fully paid to you in a single lump sum payment on the 90th day after your Termination Date. For avoidance of doubt, you will still receive the COBRA Benefits in the event of a CiC Qualifying Termination and the particular payments and benefits that may be provided under a subsection of Sections 3(e)(i) or 3(e)(ii) shall not be duplicated and if payments and benefits are provided under one such subsection then no payments or benefits will be provided under the other subsection and vice-versa. (iii) Release of Claims. Notwithstanding anything to the contrary, in order to receive any payments or benefits under Section 3(e)(i) or Section 3(e)(ii) as applicable, you must timely execute and deliver (and not revoke) a separation agreement and general release of claims in favor of the Company, any affiliates or related entities, and their employees and affiliates, in the form and content attached as Exhibit A hereto, within the time period specified in the release, but in no event after the 60th day following the Termination Date. However, you shall receive payment or benefits from the Company of the Accrued Obligations, as applicable, regardless of whether a separation agreement and general release of claims in the form and content attached as Exhibit A hereto is executed and timely provided to the Company. (iv) Golden Parachute Excise Tax. If any payment or benefit received or to be received by you (including any payment or benefit received pursuant to this Agreement or otherwise) would be (in whole or part) subject to the excise tax imposed by Code Section 4999, or any successor provision thereto, or any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the “Excise Tax”), then the payments or benefits provided under this Agreement or any other agreement pursuant to which you receive payments that give rise to the Excise Tax will either be: (a) paid in full; or (b) reduced to the extent necessary to make such payments and benefits not subject to such Excise Tax. The Company shall reduce or eliminate the payments first by reducing those payments that are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments that are to be paid the farthest in time from the determination. You shall receive the greater, on an after-tax basis, of (a) or
(b). However, if the imposition of such Excise Tax could be avoided by approval of stockholders as described in Code Section 280G(b)(5)(B), then you may request the Company to solicit a vote of such stockholders (described in Code Section 280G(b)(5)(B) and in which case you will cooperate and execute any such waivers of compensation as may be necessary to enable the stockholder vote to comply with the requirements specified under Code Section 280G and the regulations promulgated thereunder. In no event will the Company be required to gross up any payment or benefit to you to avoid the effects of the Excise Tax or to pay any regular or excise taxes arising from the application of the Excise Tax. Unless the Company and you otherwise agree in writing, any parachute payment calculation will be made in writing by independent public accountants selected by the Company, whose calculations will be conclusive and binding upon the Company and you for all purposes. The Company and you will furnish to the accountants such information and documents as the accountants may reasonably request in order to make a parachute payment determination. The accountants also will provide its calculations, together with detailed supporting documentation, both to the Company and to you, before making any payments that may be subject to the Excise Tax. As expressly permitted by Q/A #32 of the Code Section 280G regulations, with respect to performing any present value calculations that are required in connection with this Section, the parties affirmatively elect to utilize the Applicable Federal Rates that are in effect on the Effective Date (the “Agreement AFRs”) and the accountants shall therefore use such Agreement AFRs in their determinations and calculations. (f) Expense Reimbursement. You shall be reimbursed for all documented reasonable business expenses that are incurred in the ordinary course of business in accordance with the Company’s expense reimbursement policy as in effect from time to time. Any reimbursements or in-kind benefits provided under this Agreement that are subject to Section 409A shall be made or provided in compliance with the requirements of Section 409A, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during the period of time specified in this Agreement, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a fiscal year may not affect the expenses eligible for reimbursement or in-kind benefits to be provided, in any other fiscal year, (iii) the reimbursement of an eligible expense will be made no later than the last day of the fiscal year following the year in which the expense is incurred, and (iv) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. 1. Other Termination Rules. Notwithstanding anything to the contrary in this Agreement whether express or implied, the Company may at any time terminate your employment with the Company and the Term, for any reason or no reason, and with or without Cause, and you may resign from your employment with or without Good Reason and terminate the Term, all as set forth in greater detail in this Section 4. If your employment terminates due to your resignation without Good Reason, or due to your death or Disability or by the Company for Cause, or the Agreement is terminated at the end of the Term due to non-renewal in accordance with Section 2, then you will not be eligible for any severance benefits, except as provided in Sections 4(d) and 4(e). (a) The following definitions shall apply for purposes of this Agreement: (i) “Accrued Obligations” shall mean the sum of (i) any portion of your accrued but unpaid Base Salary through the Termination Date; (ii) subject to Section 13, any compensation previously earned but deferred by you (together with any interest or earnings thereon) that has not yet been paid and that is not otherwise to be paid at a later date pursuant to any deferred compensation arrangement of the Company to which you are a party, if any; (iii) any reimbursements that you are entitled to receive under Section 3(e) of the Agreement or otherwise; and (iv) any vested benefits or amounts that you are otherwise entitled to receive under any plan, policy, practice or program of or any other contract or agreement with the Company in accordance with the terms thereof (other than any such plan, policy, practice or program of the Company that provides benefits in the nature of severance or continuation pay). (ii) “Cause” shall mean (i) your commission of fraud against the Company, (ii) your willful misconduct that materially harms the Company’s interests, (iii) your material violation of Company policies or practices, (iv) your willful use or disclosure of Confidential Information (as defined below) that is unauthorized by this Agreement, or (v) your performance of any act or omission which, if you were prosecuted, would constitute a felony, in each case as determined by the Board (or a committee of members of the Board), whose determination shall be conclusive and binding.
(iii) “Change in Control” shall mean: (1) any person or group of persons (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended ( the “Exchange Act”) together with its affiliates, but excluding (i) the Company or any of its subsidiaries, (ii) any employee benefit plans of the Company, or (iii) a corporation or other entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company (individually, a “Person” and collectively, “Persons”), is or becomes, directly or indirectly, the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing 50% or more of the combined voting power of the Company’s then-outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); (2) the majority of the Board is replaced, during any 12-month period by persons whose appointment or election is not endorsed by a majority of the Board prior to such appointment or election; (3) the consummation of a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or other entity regardless of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company, such surviving entity or any parent thereof outstanding immediately after such merger or consolidation; or (3) there is consummated an agreement for the sale or disposition of all or substantially all of the Company’s assets. (iv) “Confidential Information” shall mean: The Company’s confidential and proprietary business information, including but not limited to, the Company’s products, services, customers, contracts, fees, prices, costs, business affairs, marketing, accounting, financial statements, employees, research, inventions, data, software, and any other confidential and proprietary business information of any kind, nature or description, tangible or intangible, in whatever form. (v) “Disability” shall mean your medically-determined incapacity due to physical or mental illness which makes you unable to perform substantially the duties pertaining to your employment with or without reasonable accommodation for a period of six (6) consecutive months. (vi) “Good Reason” shall mean any one or more of the following: (1) a material diminution in your Base Salary or Performance Bonus target, (2) a material diminution in your authority, reporting, or duties or responsibilities as the Company’s Executive Vice President, General Counsel and Secretary, (3) a material change in the geographic location at which you must perform your services to the Company, which shall be defined to be a relocation of your principal workplace to a new location that is more than thirty miles away from the workplace location specified in Section 1 above, or (4) a material breach by the Company of this Agreement. (vii) “Separation from Service” has the meaning set forth in Treasury Regulations Section 1.409A-1(h)(1). (viii) “termination or resignation for Good Reason” shall mean any termination or resignation by you of your employment for Good Reason. (ix) “termination without Cause” shall mean any termination of your employment by the Company for any reason other than Cause or your death or Disability. (b) Termination for Cause. The Company may terminate your employment and the Term at any time for Cause, provided, however, that in the event the Board determines to terminate your employment for Cause, such termination shall only become effective if the Board shall first provide you with written notice detailing the alleged grounds for such Cause, and if such act or omission is susceptible to cure, provide you a 30 day period to cure such act
or omission. Upon a termination of your employment by the Company for Cause, you only will be entitled to any salary and other benefits earned, but unpaid, and any reimbursement for expenses owed to you by the Company, as of the Termination Date. (c) Termination without Cause. The Company shall have the unilateral right to terminate your employment and the Term at any time without Cause, and without notice, in the Company’s sole and absolute discretion. Any such termination without Cause shall not constitute a breach of any term of this Agreement, express or implied, or a wrongful deprivation of your office or position. If the Company terminates your employment and the Term without Cause, it shall be treated as a Qualifying Termination and the Company shall have no obligation to you, except to continue to pay you (or cause to occur, if applicable) the amounts (and actions) set forth in Section 3(e)(i) above in accordance with the terms thereof and any related provisions of this Agreement. (d) Termination due to Death. Your employment and the Term will be automatically terminated on the date of your death. In the event of your death, the Company shall pay your estate or assignees (or allow your estate or assignees to retain, as applicable) within thirty (30) days of the Termination Date the Accrued Obligations, subject to Section 13 below. In addition, you shall be eligible to receive a Pro-Rated Bonus for the year in which your employment is terminated, calculated with reference to the Termination Date and calculated and paid as provided in Section 3(e)(i)(B) above. The vested Equity Incentives as of the date of your death shall be exercisable by your estate or assignees until the earliest of (x) twelve (12) months following the Termination Date; (y) the scheduled expiration date of the Equity Incentives; or (z) the date on which the Equity Incentives are canceled (and not substituted or assumed) pursuant to a Change in Control or merger or acquisition or similar transaction involving the Company. (e) Termination due to Disability. If you are subject to a Disability, and if within thirty (30) days after written notice is provided to you by the Company you shall not have returned to perform substantially your duties, your employment and the Term may be terminated by the Company for Disability. During any period prior to such termination during which you are unable to perform substantially such duties due to Disability, the Company shall continue to pay all amounts required to be paid under this Agreement (including without limitation your Base Salary), offset by any amounts payable to your under any disability insurance plan or policy provided by the Company, and the Company shall continue to provide all benefits to you hereunder. Upon termination of your employment due to Disability, the Company shall pay you (or allow you to retain, as applicable) within thirty (30) days of such termination the Accrued Obligations, subject to Section 13 below. In addition, you shall be eligible to receive a Pro- Rated Bonus for the year in which your employment is terminated, calculated with reference to the Termination Date and calculated and paid as provided in Section 3(e)(i)(B) above. The vested Equity Incentives as of the Termination Date shall be exercisable by you until the earliest of (x) twelve (12) months following the Termination Date; (y) the scheduled expiration date of the Equity Incentives; or (z) the date on which the Equity Incentives are canceled (and not substituted or assumed) pursuant to a Change in Control or merger or acquisition or similar transaction involving the Company. (f) Resignation for Good Reason. You may terminate your employment and the Term at any time for Good Reason, provided that you provide written notice to the Company describing the existence of any Good Reason condition(s) within ninety (90) days of the date of the initial existence of the condition(s) or else you will be deemed to have waived any Good Reason with respect to such condition(s). Upon the Company’s receipt of such written notice, the Company shall then have thirty (30) days during which it may cure or remedy the condition(s). If the Company does cure or remedy the condition(s) during such thirty (30) day period then Good Reason will be deemed to have not occurred with respect to such condition(s). If the Company does not cure or remedy the condition(s) during such thirty (30) day period, then your employment with the Company and the Term shall be terminated for Good Reason as of the day following the expiration of the thirty (30) day cure/remedy period. If you terminate your employment for Good Reason in accordance with the provisions of this Section 4(f), it shall be treated as a Qualifying Termination and the Company shall pay you (or cause to occur, if applicable) the amounts (and actions) set forth in Section 3(e)(i) above in accordance with the terms thereof and any related provisions of this Agreement. (g) Resignation without Good Reason. You may terminate your employment and the Term at any time for no reason, or for any reason that does not otherwise constitute Good Reason, in your sole and absolute discretion. You agree to use reasonable efforts to provide written notice to the Company of your termination of employment without Good Reason at least three (3) months prior to the effective date of your resignation (and such notice must specify the effective date of your resignation of employment). In the event you so terminate your employment without Good Reason, you shall only be entitled to receive (subject to Section 13 below) the Accrued Obligations through the effective date of your resignation, as well as all other compensation and benefits required under this Agreement through the effective date of your resignation, and neither you nor the Company shall have any further obligations to
the other except as set forth in Section 6 (Confidential Information), Section 7 (Covenants) and Sections 8 through and including 13. However, in the event you terminate your employment without Good Reason and your Termination Date occurs prior to the end of the required minimum three (3) month notice period provided in this Section 4(g), then the Option and any additional stock options or stock appreciation rights granted to you after the Effective Date shall immediately expire and be forfeited as of such Termination Date. The Company is not obligated to actually utilize your services at any time during the three-month period preceding the effective date of your resignation, and may prevent you from accessing any of the Company premises or resources during such three-month period. Additionally, as long as the Company provides you with any compensation and benefits that would have been earned by you pursuant to Sections 3(a), 3(b) and 3(c) during the three-month period preceding the effective date of your resignation had you remained employed during such period, the Company may terminate your employment prior to the expiration of such three-month period without triggering any rights to or eligibility for severance, including without limitation those payments and benefits described under Sections 3(e)(i) or 3(e)(ii). 5. Confidential Information. As an employee of the Company, you will have access to certain confidential information of the Company and you may, during the course of your employment or thereafter, develop certain information or inventions which will be the property of the Company. In consideration of, and as a condition to, your continued employment with the Company, and as an essential inducement to the Company to enter into this Agreement, this Agreement is expressly subject to your continuing to abide by the terms of the RealD Inc. Employee Invention Assignment and Confidentiality Agreement previously executed by you and the Company (the “Confidentiality Agreement”) in the form enclosed hereto as Exhibit B. 6. Covenants. You agree to timely and fully comply with all of the covenants set forth in this Section 7 and further understand and agree that such covenants shall survive any termination of your employment and termination or expiration of this Agreement. (a) Return of Company Property. On your Termination Date, or at any other time as required by the Company, you will immediately surrender to the Company all Company property, including but not limited to, Confidential Information (as such term is defined in the Confidentiality Agreement), keys, key cards, computers, telephones, pagers, credit cards, automobiles, equipment and/or other similar property of the Company. The Company shall reimburse you for any reasonable expenses to ship its property back to the Company’s offices, as applicable. (b) Non-disparagement. You will not at any time during the period of your employment with the Company and during any period in which you are receiving severance payments under Section 3(e), make (or direct anyone else to make) any disparaging statements (oral or written) about the Company, or any of its affiliated entities, officers, directors, employees, stockholders, representatives or agents, or any of the Company’s products or services or work-in-progress, that are harmful to their businesses, business reputations or personal reputations. (c) Cooperation. You agree that, upon the Company’s request and without any payment therefore, you shall reasonably cooperate with the Company (and be available as necessary) after the Termination Date in connection with any matters involving events that occurred during your period of employment with the Company. (d) Amounts Due. You will fully pay off any outstanding amounts owed to the Company no later than their applicable due date or within thirty days of the Termination Date (if no other due date has previously been established). Within thirty (30) days of the Termination Date, you will submit any outstanding business expense reports to the Company for business expenses incurred prior to the Termination Date. (e) Company Resources. As of the Termination Date, you will no longer represent that you are an officer, director or employee of the Company or any Company affiliate and you will immediately discontinue using the Company mailing address, telephone, facsimile machines, voice mail and e-mail. (f) Representations. You represent that you have not entered into any agreements, understandings, or arrangements with any person or entity that you would breach as a result of, or that would in any way preclude or prohibit you from entering into, this Agreement with the Company or performing any of the duties and responsibilities provided for in this Agreement. You represent that you do not possess any confidential, proprietary business information belonging to any other entity, and will not use any confidential, proprietary business information belonging to any other entity in connection with your employment with the Company. You represent that you are not resigning employment or relocating any residence in reliance on any promise or representation by the Company regarding the kind, character, or existence of such work, or the length of time such work will last, or the compensation therefor.
(g) Clawback Policy. Without limiting the requirement in Section 1 that you will strictly adhere to and obey Company policies, you understand and acknowledge that the Company has adopted a policy (which the Company may in the future amend in its discretion) on the recoupment of compensation (“Clawback Policy”). As a result, you may be required to repay to the Company certain previously paid compensation (that was earned or accrued on or after the Effective Date) in accordance with any such Clawback Policy and/or in accordance with applicable law. (h) Violations. You acknowledge that (i) upon a violation of any of the covenants contained in this Section 7; or (ii) if the Company is terminating your employment for Cause as provided under this Agreement, the Company would sustain irreparable harm as a result and that the Company would not have entered into this Agreement without such restrictions, and, therefore, you agree that in addition to any other remedies which the Company may have, the Company shall be entitled, without bond of any kind, to seek equitable relief including specific performance and injunctions restraining you from committing or continuing any such violation. 7. Entire Agreement. This Agreement and its Exhibits, and the Employee Invention Assignment and Confidentiality Agreement, and any other plans or agreements referenced herein, as amended or superseded from time to time, contain the entire agreement between you and the Company regarding their terms and supersede any and all prior written or oral understandings. Except as otherwise provided herein, this Agreement may not be amended or modified except in a writing, executed by you and a duly authorized officer of the Company other than yourself. This Agreement may be executed by facsimile signatures and in counterparts, each of which shall constitute an original, and all of which shall constitute one and the same instrument. 8. Choice of Law; Severability; Waiver. This Agreement will be governed by the laws of the State of California, United States, without reference to the conflict of law provisions thereof. If any provision of this Agreement, or portion thereof, shall be held invalid or unenforceable by a court of competent jurisdiction, such invalidity or unenforceability shall attach only to such provision or portion thereof, and shall not in any manner affect or render invalid or unenforceable any other provision, or portion thereof, of this Agreement. No breach of any provision hereof can be waived unless in writing. Waiver of any one breach of any provision hereof will not be deemed to be a waiver of any other breach of the same or any other provision of this Agreement. 9. Successors and Assigns. The Company may assign this Agreement to any successor (whether by amalgamation, merger, consolidation, sale of assets, purchase or otherwise) to all or substantially all of the equity, assets or business of the Company, and this Agreement will be binding upon and inure to the benefit of such successors and assigns, including any successor entity. You may not assign this Agreement or your obligations hereunder. 10. Notice. Any and all notices required or permitted to be given to you or the Company pursuant to the provisions of this Agreement will be in writing, and will be effective and deemed to provide such party sufficient notice hereunder on the earliest of the following: (i) at the time of personal delivery, if delivery is in person; (ii) one (1) business day after deposit with an express overnight courier for United States deliveries, or two (2) business days after such deposit for deliveries outside of the United States; (iii) three (3) business days after deposit in the United States mail by certified mail (return receipt requested) for United States deliveries. All notices that the Company is required to or may desire to give you that are not delivered personally will be sent with postage and/or other charges prepaid and properly addressed to you at your home address of record with the Company, or at such other address as you may from time to time designate by one of the indicated means of notice herein. All notices that you are required to or may desire to give to the Company that are not delivered personally will be sent with postage and/or other charges prepaid and properly addressed to the Company’s General Counsel at its principal office, or at such other office as the Company may from time to time designate by one of the indicated means of notice herein. 11. Withholding and Taxes. The Company shall have the right to withhold and deduct from any payment hereunder any federal, state or local taxes of any kind required by law to be withheld with respect to any such payment. The Company (including, without limitation, members of the Board) shall not be liable to you or other persons as to any unexpected or adverse tax consequence realized by you and you shall be solely responsible for the timely payment of all taxes arising from this Agreement that are imposed on you. 12. Section 409A. The payments under this Agreement are intended to be exempt from the application of Section 409A pursuant to the “short-term deferral” exception and “separation pay plan” exception under Section 409A to the fullest extent possible and any ambiguity herein shall be interpreted accordingly. Each individual payment provided under Sections 3(e), 4 (d) or 4(e) is intended to be a separate payment and not a series of payments for purposes of Section 409A. Anything in this Agreement to the contrary notwithstanding, if the severance payment above constitutes an item of nonqualified deferred compensation subject to Section 409A, the Company and you shall take all steps necessary (including with regard to any post- termination services you may perform) to ensure that any such termination constitutes a “separation from service” within the
meaning of Section 409A. In addition, if you are deemed at the time of your “separation from service” to be a “specified employee” within the meaning of that term under Section 409A and to the extent delaying commencement of payment of nonqualified deferred compensation (that is payable on account of your separation from service) is required in order to avoid the imposition of taxes under Section 409A, then all such payments and benefits will instead be paid to you in a lump sum without interest on the earlier of (a) the first business day of the seventh month following your “separation from service” or (b) five business days after the date the Company receives written confirmation of your death. To the extent any severance benefits provided under this Agreement are nonqualified deferred compensation subject to Section 409A, to the extent necessary as required to avoid the imposition of taxes under Section 409A, any accelerated payment of Cash Severance pursuant to Section 3(e)(ii) shall occur only if the Change in Control qualifies as a change in the ownership or effective control of the Company or change in the ownership of a substantial portion of its assets within the meaning of Treasury Regulations Section 1.409A-3(i) (5). It is intended that payments under this Agreement will be exempt from or comply with Section 409A, but the Company makes no representation or covenant to ensure that the payments under this Agreement are exempt from, or compliant with, Section 409A, and will have no liability to you or any other party if a payment under this Agreement that is intended to be exempt from, or compliant with, Section 409A is not so exempt or compliant. 13. Exhibits. All Exhibits attached to this Agreement shall be incorporated herein by this reference as though fully set forth herein. [Remainder of Page Intentionally Left Blank]
If you decide to accept the terms of this Agreement, please sign this Agreement in the space indicated and return it to me. We will provide a duplicate copy of this Agreement to you for your records. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this Agreement and that you are continuing to abide by the terms of the Employee Invention Assignment and Confidentiality Agreement previously executed by you in the form enclosed here as Exhibit B. Should you have anything else that you wish to discuss, please do not hesitate to contact me. Sincerely, RealD Inc. By: /s/ Michael V. Lewis Michael V. Lewis Chief Executive Officer I have read, understand, and accept this offer. Furthermore, in choosing to accept this offer, I agree that I am not relying on any representations, whether verbal or written, except as specifically set out within this Agreement. /s/ Vivian Yang Vivian Yang Date: March 25, 2015 Enclosures: EXHIBIT A: FORM OF SEPARATION AGREEMENT AND RELEASE OF CLAIMS EXHIBIT B: EMPLOYEE INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENT
EXHIBIT A FORM OF SEPARATION AGREEMENT AND RELEASE OF CLAIMS
-1- 114068972 v1 SEPARATION AGREEMENT AND GENERAL RELEASE OF CLAIMS This Separation Agreement and General Release of Claims (the “Agreement”) is entered into by and between RealD Inc., a Delaware corporation (the “Company”), and _____________ (“Executive”) (together “the Parties”). This Agreement is effective only if it has been executed by each of the Parties and the revocation period has expired without revocation as set forth in Sections 5(c) and (d) below (the “Effective Date”). WHEREAS, Executive was an employee of the Company and served as its _____________ pursuant to an employment agreement with the Company with an effective date of February ___, 2015 (the “Employment Agreement”); WHEREAS, the Company and Executive mutually agree that (i) Executive’s employment with the Company was terminated [by the Company without Cause] [by Executive for Good Reason] (a “Qualifying Termination”) on [DATE] (the “Termination Date”), and (ii) that Executive will release the Company and its affiliates from any and all claims as of the Effective Date; WHEREAS, [a Change in Control (as defined in the Employment Agreement) occurred on [DATE];] and WHEREAS, in accordance with the Employment Agreement, a Qualifying Termination of Executive’s employment means that Executive is eligible to receive certain separation benefits provided that, among other things, Executive timely complies with the requirements of Section 3(e)(iii) of the Employment Agreement. NOW, THEREFORE, in consideration of the mutual promises contained herein, the Parties agree as follows: 1. Qualifying Termination of Employment. Executive and the Company acknowledge and agree that Executive’s employment with the Company terminated as of the close of business on the Termination Date without regard to whether Executive signs this Agreement or agrees to the following terms and conditions, and that such termination was treated as a Qualifying Termination by the Company. As of the Termination Date, it is mutually agreed that Executive is no longer [an employee] [or director] of the Company and no longer holds any positions or offices with the Company [except for his membership on the Company’s Board of Directors]. 2. Separation Benefits. In consideration for Executive’s general release of all claims set forth below and Executive’s other obligations under this Agreement and in satisfaction of all of the Company’s obligations to Executive and further provided that: (i) this Agreement is signed by Executive and delivered to the Company on or before [DATE], (ii) this Agreement is not revoked by Executive under Section 5 below and therefore becomes effective on or before [DATE], (iii) Executive remains in continuing material compliance with all of the terms of this Agreement, and (iv) the termination of Executive’s employment with the Company is treated as a Qualifying Termination by the Company, then the Company agrees to provide (and continue to provide) the separation benefits specified in Section 3(a) below to Executive.
-2- 114068972 v1 In the event that the Company believes Executive is not in continuing material compliance with the terms of this Agreement, then the Company shall provide Executive with written notice of the same and the Company’s intention to terminate the separation benefits specified in Section 3(a) below within ninety (90) days of the date on which the general counsel of the Company or a member of the Board (other than Executive) first becomes aware of the initial existence of the condition(s) giving rise to such lack of material compliance. If the Company does not timely provide such notice during the applicable 90 days, then the Company will be deemed to have waived the right to assert any such breach with respect to such condition(s) provided that at least one of such persons with knowledge of the initial existence of the condition(s) remains in service with the Company through the conclusion of the ninety day notice period. Notwithstanding the foregoing, in the event that the actions or inactions giving rise to such lack of material compliance are reasonably capable of being cured, the written notice from the Company shall provide Executive with at least twenty (20) days to cure such noncompliance, prior to the effective date of the termination of separation benefits specified in Section 3(a) below. During such twenty (20) day period, the Company will suspend payment(s) of the separation benefits specified in Section 3(a) below, and if the actions or inactions giving rise to such lack of material compliance are not timely cured, then the Company shall immediately terminate any and all such separation payments and benefits. In the event that Executive cures the circumstances giving rise to such lack of material compliance within such twenty (20) day period, the Company shall remove the suspension and continue to provide the separation payments and benefits specified in Section 3(a) below. 3. Payments, Benefits and Taxes. (a) Separation Benefits. The Company will provide to Executive the payments and benefits specified in Section 3(e)(i) (or Section 3(e)(ii) if a Change in Control is consummated before the 90th day after the Termination Date) of the Employment Agreement, subject to Section 3(e)(iv) of the Employment Agreement, but in no event will payments be provided under both Sections 3(e)(i) and 3(e)(ii) of the Employment Agreement. Subject to Section 3(e) below, such payments and benefits will be provided to Executive at the times specified in the Employment Agreement. (b) Taxes. Any tax obligations of Executive and tax liability therefore, including without limitation any penalties or interest based upon such tax obligations, that arise from the benefits and payments made to Executive shall be Executive’s sole responsibility and liability. All payments or benefits made under this Agreement to Executive shall be subject to applicable tax withholding laws and regulations and Executive shall be required to timely and fully satisfy any such withholding as a condition of receipt of any payments or benefits. The terms of Section 11 of the Employment Agreement are also applicable to this Agreement and to all payments and benefits provided hereunder. (c) WARN Payments. The payments to Executive hereunder shall be considered as including any and all payments by the Company that could or in fact become payable in connection with the Executive’s termination of employment pursuant to any applicable legal requirements, including, without limitation, the Worker Adjustment and Retraining Notification Act (the “WARN” Act), California Labor Code sections 1400-1408, or any other similar foreign, federal or state law.
-3- 114068972 v1 (d) Full Payment. Except with respect to any “Excluded Claims” (defined below), Executive represents and warrants to the Company that, as of the Effective Date, the payments set forth in Section 3(a) herein constitute all payments or obligations owed by the Company to Executive in connection with any employment, severance, retention, or a change in control plan or arrangement. (e) Internal Revenue Code Section 409A. The terms of Section 12 of the Employment Agreement are also applicable to this Agreement and to all payments and benefits provided hereunder. 4. Executive’s Representations, Warranties and Covenants. (a) Executive reaffirms that he will continue to be bound by, and will continue to comply with, all of the terms and conditions and covenants in Sections 5 and 6 of the Employment Agreement and also all terms and conditions of the Confidentiality Agreement (as such term is defined in the Employment Agreement). (b) Executive represents and warrants to the Company that, as of the Effective Date, Executive has no outstanding agreement or obligation that is in conflict with any of the provisions of this Agreement, or that would preclude Executive from complying with the provisions hereof, and further certifies that Executive will not enter into any such conflicting agreement. (c) Executive represents and warrants to the Company that, as of the Effective Date, Executive has not filed any claim against the Company or its affiliates and has not assigned to any third party any claims against the Company or its affiliates. (d) Executive acknowledges that Executive has had the opportunity to fully review this Agreement and, if Executive so chooses, to consult with counsel, and is fully aware of Executive’s rights and obligations under this Agreement. 5. Executive’s Release of Claims. In exchange for the Company’s promises set forth herein, all of which are good and valuable consideration, Executive hereby covenants not to sue and releases and forever discharges the Company, its owners, parents, subsidiaries, attorneys, insurers, agents, employees, stockholders, directors, officers, affiliates, predecessors and successors of and from any and all rights, claims, actions, demands, causes of action, obligations, attorneys’ fees, costs, damages, and liabilities of whatever kind or nature, in law or in equity, that Executive may have (whether known or not known) (collectively, “Claims”), accruing to Executive as of the Effective Date, that Executive has ever had, including but not limited to Claims based on and/or arising under Title VII of the Civil Rights Act of 1964, as amended, The Americans with Disabilities Act, The Family Medical Leave Act, The Equal Pay Act, The Employee Retirement Income Security Act, The Fair Labor Standards Act, and/or the California Fair Employment and Housing Act; The California Constitution, The California Government Code, The California Labor Code, The Industrial Welfare Commission’s Orders, the Worker Adjustment and Retraining Notification Act, California Labor Code sections 1400-1408, and any and all other Claims Executive may have under any other federal, state or local Constitution, Statute, Ordinance and/or Regulation; and all other Claims arising under common law including but not limited to tort, express and/or implied contract and/or quasi-contract, arising out of or, in
-4- 114068972 v1 any way, related to Executive’s previous relationship with the Company as an employee, consultant and/or director. Furthermore, Executive acknowledges that Executive is waiving and releasing any rights Executive may have under the Older Workers Benefit Protection Act and Age Discrimination in Employment Act of 1967 (“ADEA”), as amended, and that this waiver and release is knowing and voluntary. Executive acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive further acknowledges that Executive has been advised by this writing that in accordance with ADEA: (a) Executive should consult with an attorney prior to executing this Agreement; (b) Executive has at least twenty-one (21) days within which to consider this Agreement; (c) Executive has up to seven (7) days following the execution of this Agreement by the Executive to revoke the Agreement by timely providing written notice of revocation to the Company; and (d) this Agreement shall not be effective until the revocation period in Section 5(c) has expired without revocation by Executive. The Company and Executive agree that the release set forth in this Section 5 shall be and remain in effect in all respects as a complete general release as to the matters released. Notwithstanding anything to the contrary herein, the Parties agree that Executive is not waiving any Claims he may have that arise from or are incurred in connection with any of the following matters (collectively, the “Excluded Claims”). (i) the Company’s breach of its obligations under Section 3(a) above or under Section 3(e)(i) and 3(e)(ii) of the Employment Agreement; (ii) claims for indemnification under Section 2802 of the California Labor Code, under the Company’s Certificate of Incorporation or by-laws, pursuant to an indemnification agreement between you and the Company and under any insurance policy of the Company or the established policies of the Company or any affiliate thereof expressly providing for such indemnity between Executive and the Company or any affiliate thereof; (iii) claims for any vested benefits under the terms of any of the Company’s pension, profit sharing, health, welfare, stock option, restricted stock, stock incentive, deferred compensation, supplemental compensation and any other welfare, benefit or other plan of the Company; (iv) claims for workers’ compensation benefits; and (v) any transactions or agreements entered into, and any occurrences, acts or omissions occurring, after the Effective Date. 6. Civil Code Section 1542. Executive and the Company acknowledge that they are familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST
-5- 114068972 v1 HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR. Executive, being aware of said Code section, agrees to expressly waive any rights Executive may have thereunder (except with respect to Excluded Claims), as well as under any other statute or common law principles of similar effect. 7. Labor Code Section 206.5. Upon receipt by Executive of the “Accrued Obligations” (as such term is defined in the Employment Agreement) including all of his salary and unused vacation time, each accrued through the Termination Date, Executive acknowledges that these payments represent all such monies due to Executive through the Termination Date. In light of the payment by the Company of all wages due, or to become due to Executive (excluding any additional amounts payable to Executive under Section 3(e) of the Employment Agreement), California Labor Code Section 206.5 is not applicable to the Parties hereto. That section provides in pertinent part as follows: No employer shall require the execution of any release of any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made. 8. Governing Law. This Agreement will be governed by the internal substantive laws, but not the choice of law rules, of the State of California. 9. Assignment. This Agreement and all rights under this Agreement will be binding upon and inure to the benefit of and be enforceable by the Parties hereto and their respective owners, agents, officers, stockholders, employees, directors, attorneys, insurers, subsidiaries, parents, affiliates, successors, personal or legal representatives, executors, administrators, heirs, distributes, devisees, legatees, and assigns. This Agreement is personal in nature, and none of the Parties to this Agreement will, without the written consent of the other, assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity; except that the rights and obligations of the Company under this Agreement may be assigned (without the consent of the Executive) to an entity which becomes the successor to the Company as the result of a merger or other corporate reorganization or similar transaction or sale of substantially all the assets to a successor which continues the business of the Company or any other subsidiary of the Company. 10. Notices. The terms of Section 10 of the Employment Agreement are also applicable to this Agreement. 11. Integration and Interpretation. This Agreement, and the surviving provisions of the Employment Agreement, represents the entire agreement and understanding between the parties as to the subject matter hereof and supersedes all prior agreements whether written or oral. The terms of this Agreement have been voluntarily agreed to by Executive and Company, and the language used in this Agreement shall be deemed to be the language chosen to express the mutual intent of the Parties. This Agreement shall be construed without regard to any presumption or rule requiring construction against Company or Executive, or in favor of the Party receiving a particular benefit under this Agreement.
-6- 114068972 v1 12. Modification. This Agreement may only be amended in a writing signed by Executive and an authorized representative of the Company and which expressly references that this Agreement is being amended. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed by the party against whom enforcement of the change or modification is sought. Failure or delay on the part of either party hereto to enforce any right, power, or privilege hereunder will not be deemed to constitute a waiver thereof. Additionally, a waiver by either party or a breach of any promise hereof by the other party will not operate as or be construed to constitute a waiver of any subsequent waiver by such other party. 13. Severability. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 14. No Representations. Each Party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither Party has relied upon any representations or statements made by any other Party hereto which are not specifically set forth in this Agreement. By entering into this Agreement, the Company is not acknowledging or admitting any fault, wrongdoing, or liability on its part in any way. 15. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Executive represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through Executive to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein. 16. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that: (a) They have read this Agreement; (b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel; (c) They understand the terms and consequences of this Agreement and of the releases it contains; and (d) They are fully aware of the legal and binding effect of this Agreement. 17. Execution in Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which when together shall be deemed to constitute the executed original,
-7- 114068972 v1 and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of the undersigned. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the dates shown below. [__________________] REALD INC. By: By: [NAME/TITLE] Dated: Dated:
EXHIBIT B EMPLOYEE INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENT
50825782 v1 -1- EMPLOYEE INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENT In consideration of, and as a condition to, my employment with RealD Inc., a Delaware corporation (the “Company”), I hereby represent to, and agree with, the Company as follows: 1. Purpose of Agreement. I understand that the Company is engaged in a continuous program of research, development, production and marketing in connection with its business and that it is critical for the Company to preserve and protect its “Proprietary Information” (as defined in Section 7 below), its rights in “Inventions” (as defined in Section 2 below) and in all related intellectual property rights. Accordingly, I am entering into this Employee Invention Assignment and Confidentiality Agreement (this “Agreement”) as a condition of my employment with the Company, whether or not I am expected to create inventions of value for the Company. 2. Disclosure of Inventions. I will promptly disclose in confidence to the Company all inventions, improvements, designs, original works of authorship, formulas, processes, compositions of matter, computer software programs, databases, mask works and trade secrets (the “Inventions”) that I make or conceive or first reduce to practice or create, either alone or jointly with others, during the period of my employment, whether or not in the course of my employment, and whether or not such Inventions are patentable, copyrightable or protectible as trade secrets. 3. Work for Hire; Assignment of Inventions. I acknowledge and agree that any copyrightable works prepared by me within the scope of my employment are “works for hire” under the Copyright Act and that the Company will be considered the author and owner of such copyrightable works. I agree that all Inventions that (i) are developed using equipment, supplies, facilities or trade secrets of the Company, (ii) result from work performed by me for the Company, or (iii) relate to the Company’s business or current or anticipated research and development (the “Assigned Inventions”), will be the sole and exclusive property of the Company and are hereby irrevocably assigned by me to the Company. 4. Labor Code Section 2870 Notice. I have been notified and understand that the provisions of Sections 3 and 5 of this Agreement do not apply to any Assigned Invention that qualifies fully under the provisions of Section 2870 of the California Labor Code, which states as follows: ANY PROVISION IN AN EMPLOYMENT AGREEMENT WHICH PROVIDES THAT AN EMPLOYEE SHALL ASSIGN, OR OFFER TO ASSIGN, ANY OF HIS OR HER RIGHTS IN AN INVENTION TO HIS OR HER EMPLOYER SHALL NOT APPLY TO AN INVENTION THAT THE EMPLOYEE DEVELOPED ENTIRELY ON HIS OR HER OWN TIME WITHOUT USING THE EMPLOYER’S EQUIPMENT, SUPPLIES, FACILITIES, OR TRADE SECRET INFORMATION EXCEPT FOR THOSE INVENTIONS THAT EITHER: (1) RELATE AT THE TIME
50825782 v1 -2- OF CONCEPTION OR REDUCTION TO PRACTICE OF THE INVENTION TO THE EMPLOYER’S BUSINESS, OR ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT OF THE EMPLOYER; OR (2) RESULT FROM ANY WORK PERFORMED BY THE EMPLOYEE FOR THE EMPLOYER. TO THE EXTENT A PROVISION IN AN EMPLOYMENT AGREEMENT PURPORTS TO REQUIRE AN EMPLOYEE TO ASSIGN AN INVENTION OTHERWISE EXCLUDED FROM BEING REQUIRED TO BE ASSIGNED UNDER CALIFORNIA LABOR CODE SECTION 2870(a), THE PROVISION IS AGAINST THE PUBLIC POLICY OF THIS STATE AND IS UNENFORCEABLE. 5. Assignment of Other Rights. In addition to the foregoing assignment of Assigned Inventions to the Company, I hereby irrevocably transfer and assign to the Company: (i) all worldwide patents, patent applications, copyrights, mask works, trade secrets and other intellectual property rights in any Assigned Inventions; and (ii) any and all “Moral Rights” (as defined below) that I may have in or with respect to any Assigned Inventions. I also hereby forever waive and agree never to assert any and all Moral Rights I may have in or with respect to any Assigned Inventions, even after termination of my work on behalf of the Company. “Moral Rights” mean any rights to claim authorship of an Assigned Inventions, to object to or prevent the modification of any Assigned Inventions, or to withdraw from circulation or control the publication or distribution of any Assigned Inventions, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a “moral right”. 6. Assistance. I agree to assist the Company in every proper way to obtain for the Company and enforce patents, copyrights, mask work rights, trade secret rights and other legal protections for the Company’s Assigned Inventions in any and all countries. I will execute any documents that the Company may reasonably request for use in obtaining or enforcing such patents, copyrights, mask work rights, trade secrets and other legal protections. My obligations under this paragraph will continue beyond the termination of my employment with the Company, provided that the Company will compensate me at a reasonable rate after such termination for time or expenses actually spent by me at the Company’s request on such assistance. I appoint the Secretary of the Company as my attorney‐in‐fact to execute documents on my behalf for this purpose. 7. Proprietary Information. I understand that my employment by the Company creates a relationship of confidence and trust with respect to any information of a confidential or secret nature that may be disclosed to me by the Company that relates to the business of the Company or to the business of any parent, subsidiary, affiliate, customer or supplier of the Company or any other party with whom the Company agrees to hold information of such party in confidence (the “Proprietary Information”). Such Proprietary Information includes, but is not limited to, Assigned Inventions, marketing plans, product plans, business strategies, financial information, forecasts, personnel information, customer lists and domain names.
50825782 v1 -3- 8. Confidentiality. At all times, both during my employment and after its termination, I will keep and hold all such Proprietary Information in strict confidence and trust. I will not use or disclose any Proprietary Information without the prior written consent of the Company, except as may be necessary to perform my duties as an employee of the Company for the benefit of the Company. Upon termination of my employment with the Company, I will promptly deliver to the Company all documents and materials of any nature pertaining to my work with the Company. I will not take with me any documents or materials or copies thereof containing any Proprietary Information. 9. No Breach of Prior Agreement. I represent that my performance of all the terms of this Agreement and my duties as an employee of the Company will not breach any invention assignment, proprietary information, confidentiality or similar agreement with any former employer or other party. I represent that I will not bring with me to the Company or use in the performance of my duties for the Company any documents or materials or intangibles of a former employer or third party that are not generally available to the public or have not been legally transferred to the Company. 10. Efforts; Duty Not to Compete. I understand that my employment with the Company requires my undivided attention and effort during normal business hours. While I am employed by the Company, I will not, without the Company’s express prior written consent, provide services to, or assist in any manner, any business or third party which competes with the current or planned business of the Company. 11. Notification. I hereby authorize the Company to notify my actual or future employers of the terms of this Agreement and my responsibilities hereunder. 12. Non‐Solicitation of Employees/Consultants. During my employment with the Company and for a period of one (1) year thereafter, I will not directly or indirectly solicit away employees or consultants of the Company for my own benefit or for the benefit of any other person or entity. 13. Non‐Solicitation of Suppliers/Customers. During my employment with the Company and after termination of my employment, I will not directly or indirectly solicit or take away suppliers or customers of the Company if the identity of the supplier or customer or information about the supplier or customer relationship is a trade secret or is otherwise deemed confidential information within the meaning of California law. 14. Injunctive Relief. I understand that in the event of a breach or threatened breach of this Agreement by me the Company may suffer irreparable harm and will therefore be entitled to injunctive relief to enforce this Agreement. 15. Governing Law; Severability. This Agreement will be governed by and construed in accordance with the laws of the State of California, without giving effect to that body of laws pertaining to conflict of laws. If any provision of this Agreement is determined by any court or arbitrator of competent jurisdiction to be invalid, illegal or unenforceable in any
50825782 v1 -4- respect, such provision will be enforced to the maximum extent possible given the intent of the parties hereto. If such clause or provision cannot be so enforced, such provision shall be stricken from this Agreement and the remainder of this Agreement shall be enforced as if such invalid, illegal or unenforceable clause or provision had (to the extent not enforceable) never been contained in this Agreement. Notwithstanding the forgoing, if the value of this Agreement based upon the substantial benefit of the bargain for any party is materially impaired, which determination as made by the presiding court or arbitrator of competent jurisdiction shall be binding, then this Agreement will not be enforceable against such affected party and both parties agree to renegotiate such provision(s) in good faith. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed an original, and all of which together shall constitute one and the same agreement. 17. Titles and Headings. The titles, captions and headings of this Agreement are included for ease of reference only and will be disregarded in interpreting or construing this Agreement. Unless otherwise specifically stated, all references herein to “sections” and “exhibits” will mean “sections” and “exhibits” to this Agreement. 18. Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement and understanding of the parties with respect to the subject matter of this Agreement, and supersede all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof. 19. Amendment and Waivers. This Agreement may be amended only by a written agreement executed by each of the parties hereto. No amendment of or waiver of, or modification of any obligation under this Agreement will be enforceable unless set forth in a writing signed by the party against which enforcement is sought. Any amendment effected in accordance with this section will be binding upon all parties hereto and each of their respective successors and assigns. No delay or failure to require performance of any provision of this Agreement shall constitute a waiver of that provision as to that or any other instance. No waiver granted under this Agreement as to any one provision herein shall constitute a subsequent waiver of such provision or of any other provision herein, nor shall it constitute the waiver of any performance other than the actual performance specifically waived. 20. Successors and Assigns; Assignment. Except as otherwise provided in this Agreement, this Agreement, and the rights and obligations of the parties hereunder, will be binding upon and inure to the benefit of their respective successors, assigns, heirs, executors, administrators and legal representatives. The Company may assign any of its rights and obligations under this Agreement. No other party to this Agreement may assign, whether voluntarily or by operation of law, any of its rights and obligations under this Agreement, except with the prior written consent of the Company.
50825782 v1 -5- 21. Further Assurances. The parties agree to execute such further documents and instruments and to take such further actions as may be reasonably necessary to carry out the purposes and intent of this Agreement. 22. “At Will” Employment. I understand that this Agreement does not constitute a contract of employment or obligate the Company to employ me for any stated period of time. I understand that if I am an “at will” employee of the Company, my employment can be terminated at any time, for any reason or for no reason, by either the Company or myself. This Agreement shall be effective as of the first day of my employment by the Company. RealD Inc.: By: __________________________ Michael V. Lewis Chief Executive Officer Date: __________________________ Employee: Signature Print Name: _______________________ Date: __________________________
EXHIBIT 21.1
LIST OF SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
1. | Stereographics Corporation - Incorporated in California |
2. | ColorLink, Inc. - Incorporated in Delaware |
3. | Digital Link LLC - Incorporated in California |
4. | Digital Link II LLC - Incorporated in Delaware |
5. | Real D International Godo Kaisha - Incorporated in Japan |
6. | Real D Europe Limited - Incorporated in the United Kingdom |
7. | RealD Hong Kong Limited - Incorporated in Hong Kong |
8. | RealD Shanghai 3D Equipment Leasing Co., Ltd. - Incorporated in China |
9. | RealD DDMG Acquisition, LLC - Incorporated in Delaware |
10. | RealD Brasil Ltda. - Incorporated in Brazil |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements on Form S-8:
• | Registration Statement (Form S-8 No. 333-168538) pertaining to the 2004 Amended and Restated Stock Incentive Plan and the 2010 Stock Incentive Plan of RealD Inc. |
• | Registration Statement (Form S-8 No. 333-176109) pertaining to the 2010 Stock Incentive Plan of RealD Inc. |
• | Registration Statement (Form S-8 No. 333-181816) pertaining to the 2010 Stock Incentive Plan of RealD Inc. |
• | Registration Statement (Form S-8 No. 333-187823) pertaining to the 2010 Stock Incentive Plan of RealD Inc. |
• | Registration Statement (Form S-8 No. 333-196502) pertaining to the 2010 Stock Incentive Plan of RealD Inc. |
• | Registration Statement (Form S-8 No. 333-204890) pertaining to the 2010 Stock Incentive Plan of RealD Inc. |
of our reports dated June 11, 2015, with respect to the consolidated financial statements and schedule of RealD Inc., and the effectiveness of internal control over financial reporting of RealD Inc., included in this Annual Report (Form 10-K) for the year ended March 31, 2015.
/s/ Ernst & Young LLP | ||
Los Angeles, California
June 11, 2015
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael V. Lewis, certify that:
1. | I have reviewed this Annual Report on Form 10-K of RealD Inc. for the fiscal year ended March 31, 2015; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Dated: June 11, 2015
/s/ MICHAEL V. LEWIS | |
Michael V. Lewis Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrew A. Skarupa, certify that:
1. | I have reviewed this Annual Report on Form 10-K of RealD Inc. for the fiscal year ended March 31, 2015; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Dated: June 11, 2015
/s/ ANDREW A. SKARUPA | |
Andrew A. Skarupa Chief Financial Officer (Principal Financial Officer) | |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of RealD Inc. (the "Company") on Form 10-K for the fiscal year ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael V. Lewis, Chief Executive Officer of the Company and Chairman of the Board of Directors, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ MICHAEL V. LEWIS | |||
Michael V. Lewis Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | |||
June 11, 2015 | |||
* | This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. | ||
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of RealD Inc. (the "Company") on Form 10-K for the fiscal year ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Andrew A. Skarupa, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ ANDREW A. SKARUPA | |||
Andrew A. Skarupa Chief Financial Officer (Principal Financial Officer) | |||
June 11, 2015 | |||
* | This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. | ||
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