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- 08-04-2003, 11:25 PM #1
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ETC sues Disney for breach of ride contract
by Peter Key (Philidelphia Business Journal)
Aug. 4 — SOUTHAMPTON -- Environmental Tectonics Corp. is biting the four-fingered, gloved hand that feeds it.
The Montgomery County developer of flight-training systems and theme-park rides has sued its largest customer, the Walt Disney Co., and three Disney subsidiaries, over a ride called "Mission: Space."
In the lawsuit, ETC seeks damages of more than $15 million for Disney's alleged failure to pay it all it is owed for its work on the ride, which is scheduled to open officially on Aug. 15 at Walt Disney World's Epcot Center.
ETC also seeks to have Disney include it in the safety testing of the ride.
Additionally, it wants a judgment affirming its right to be the designer and builder of similar rides for Disney. In the suit, ETC says it has heard that Disney is considering building a ride similar to Mission: Space in its Tokyo theme park.
ETC also wants a judgment affirming its rights to the technology that went into Mission: Space so it can build similar rides for others, provided they aren't placed within 100 miles of a Disney theme park.
The lawsuit was filed by Entertainment Technology Corp., ETC's ride-building subsidiary, in U.S. District Court for the Eastern District of Pennsylvania.
In an e-mail, John W. Spelich, a Disney vice president for corporate communications, said his company has complied fully with its obligations to ETC under their contracts. Additionally, he said, "ETC failed to perform under its contract with us and we therefore have substantial counterclaims against ETC for the expenses and delays we have incurred."
As for the safety testing, Spelich said, Mission: Space has "successfully passed all of Disney's state-of-the-art safety procedures as well as reviews by leading independent experts. ETC's attempt to play the safety card as means of trying to generate leverage for a simple, straightforward contract dispute is both cynical and nonsensical."
Cliff Russell, ETC's general counsel, refused to talk about the suit, saying ETC will let the documents it has filed and will file in connection with it "speak for themselves."
The lawsuit brings out into the open what had been a secretive relationship between ETC and Disney.
ETC has been required to say in its annual filings with the Securities and Exchange Commission that it does business with Disney because Disney has provided such a large part of its revenue. But it has never referred to Disney in its public statements, nor has Disney publicly acknowledged that ETC has done work for it.
The relationship between the two companies has been so close, however, that Disney "imagineers" designed the stylized "ETC" logo for ETC's Entertainment Technology Corp. subsidiary.
ETC's specialty has long been building flight simulators that use centrifuges, which work like a clothes driver that spins to remove moisture, to reproduce the effects of gravity on pilots and astronauts. It also makes hyperbaric chambers, which have various therapeutic applications, but are best known for being used to relieve deep-sea divers of the bends.
In the mid-1990s, ETC was approached about using its simulation technology to build rides that would provide a thrilling experience without making people sick. After it made a couple, it thought the field had potential and created Entertainment Technology to make rides.
Mission: Space, which uses a four-armed centrifuge and computer graphics to simulate a flight to Mars and back, is the latest of at least five rides that ETC has built for Disney. It has gotten good reviews on Web sites and from the media.
If, by filing the lawsuit, ETC has made Mission: Space the last ride it builds for Disney, it could regret the maneuver. Disney provided ETC with about $17.3 million, or 40 percent, of its revenue in its 2003 fiscal year, which ended Feb. 28.
According to ETC, however, Disney's breach of their Mission: Space contract hurt its results for the fourth quarter of its 2003 fiscal year and the first quarter of its 2004 fiscal year. The company only earned $70,000, or 1 cent per fully diluted share, on revenue of $6.1 million in its first quarter. Those figures are down from earnings of $585,000, or 8 cents per share, on revenue of $11.2 million in the comparable period a year earlier.
In its lawsuit, ETC alleges that in November 2001, it and Disney modified their original contract to try to resolve some disputes. Among other things, ETC contends that it and Disney changed the contract from a "firm fixed price" contract worth roughly $25.7 million to a "time and materials" contract under which ETC was to receive the costs of the purchases it made in designing and building Mission: Space, a 36 percent mark up on those costs for general and administrative expenses and a profit allocation. ETC and Disney also changed their exclusivity rights regarding the ride, according to the suit.
Last August, ETC says in the suit, it told Disney that the amount it would be due under the revised contract was $44.1 million, due mostly to design changes Disney made to the ride. Afterwards, ETC alleges, Disney changed the scope of the work ETC was to perform under the contract to cut how much Disney was required to pay it for profit and general-and-administrative expenses.
In another section of the suit, ETC alleges that Disney has refused both to allow it to participate in the safety testing of Mission: Space and to provide it with data to assure that the ride is safe. Its role in testing the safety of the ride, it states, was spelled out in its initial contract with Disney. In fact, ETC states, "the chief executive officer of The Walt Disney Co., Michael Eisner, informed ETC that, rather than have the work done 'in house' at Disney by its 'imagineers,' Disney specifically wanted ETC to build the ride due to its experience with centrifuge systems."
"If ETC is prevented from using its years of experience with human centrifuge systems to participate in the safety testing and analysis (of the ride) ... then there are increased risks of injury to the public at large, and the associated increased risk of irreparable damage to ETC's reputation," the company states in the suit.
The biggest beef ETC has with Disney, however, may be over the rights to the technology used in Mission: Space.
"Upon information and belief," ETC states in the suit, "Disney is considering building a ride system based on a multi-arm centrifuge for use in its Tokyo theme park without contracting with ETC to design, fabricate, construct and deliver such a ride system." That, ETC alleges, would violate the contract between it and Disney concerning Mission: Space.
ETC also alleges that Disney violated their contract by putting the following statement in its annual report: "In consultation with former NASA advisers, astronauts and scientists, Imagineers developed Mission: Space with next-generation technologies featuring high-resolution computer-generated imagery combined with advanced audio and optics and a proprietary ride system."
Disney, ETC says, is the proprietary owner only of the aspects of Mission: Space that ETC created specifically for the ride. ETC maintains it retains rights to all aspects of the ride it had before Disney contracted it to build the ride, including the technology to build multi-arm centrifuge rides.
As a result, ETC states, its contract with Disney concerning Mission: Space allows it to sell a ride based on a multi-arm centrifuge to anyone, provided the ride isn't installed within 100 miles of a Disney theme park. The contract also prohibits Disney from building any ride based on a multi-arm centrifuge.
Source: MSNBC Online
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- 08-05-2003, 02:41 PM #2
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